Issues

In 2006, the Texas Legislature, with the help of recommendations by the Texas Tax Reform Commission, offered landowners historic property tax relief they have begun to enjoy.  In order to balance such an endeavor, the Legislature revised and restructured the state's franchise tax, closed loopholes and changed the manner in which the tax is calculated.  The revisions determined that most partnerships, associations, business trusts, limited liability companies and corporations must pay a tax based on total revenue, less the taxpayer's choice of either cost of goods sold or compensation.  General partnerships of natural persons are exempt from this provision.

The new statute closed loopholes and brought in businesses who had for years avoided paying any tax to the state, and in fact, still are against contributing their share.  These corrections need to be codified to ensure that all non-exempt businesses share in the burden of paying the business tax and help to keep property taxes at a low rate for homeowners and businesses alike.

The revised franchise tax becomes effective January 1, 2008 and collection begins later that year in May.  However since 2006, the state and stakeholders have been reviewing the law adopted and have identified a number of issues that need to be corrected, clarified and revised. 

As filed, House Bill 3928 sets forth to make these technical and necessary changes to ensure homeowners continue to receive their deserved property tax relief.

The bill doubles the small business exemption to $600,000, meaning the number of small businesses being taxed would decrease thus keeping our small business base viable in Texas. 

In the bill, the partnership re-organization loophole is closed, otherwise revenues to the Property Tax Relief Fund would decrease, resulting in less property tax for homeowners.

HB 3928 corrects the line number references to federal partnership forms and saves businesses from a potential double-tax on partners' payments.  In addition the bill corrected the line number references to federal partnership forms so that real estate partnerships are taxed the same way as are real estate corporations.

The bill will help clarify that costs incurred within a related corporate group are deductible as cost of goods sold.   If not corrected, costs of goods sold deductions would be reduced, resulting in unintended higher taxes for goods-producing industries.

Questions had been raised whether limited liability partnerships are taxable under the revised law, this bill clarifies that they are in fact taxable, as are all other forms of business with limited liability further closing the loophole on businesses trying to avoid paying their fair share of taxes.

The bill eliminates all questions with regard to revenue reporting by clarifying that a taxpayer's reporting of revenue must be consistent with methods permitted for federal reporting.

HB 3928 fixes the net operating loss (NOL) credit carry-forward and makes sure that securities sales apportionment is consistent with historical methods.  The bill further simplifies the passive entity exemption so that family limited partnerships, passive investment partnerships and passive trusts are exempt in the same way that other passive entities are.

With these and other corrections put into statute, Texans will be able to continue to enjoy the property tax relief lawmakers promised and all businesses can equally share in the burden of paying the revised business tax.

The bill remains, as was House Bill 3 from the 79th Legislature, a revenue neutral for the future biennia, meaning there are no gains or losses attributed to these corrections to the statute.

Amendments and changes during the debate are entirely possible and may modify sections of the bill, however the intent of the Texas Legislature and Texas Tax Reform Commission will remain true, keeping Texas property taxes low and spreading out the business tax responsibility.