Saturday, August 13, 2011

The Texas Franchise Tax Cost-Recovery Fee Is Not A Tax

With the exception of sole proprietorship businesses, just about all types of companies doing business in Texas must pay a franchise tax. While commonly referred to as the “margin” tax, the formal name of Texas’ business tax is still the Texas Franchise Tax—a tax that Texas has levied in some form since the 1800s. The tax is typically assessed in return for the “privilege” of doing business in a state, similar to a fee (in fact, the U.S. Bureau of the Census in its recap of state finances classifies Texas’ franchise tax as a fee). As a part of its privilege, the owners of the business receive liability protections under state law—the business is a legal entity separate and apart from them.

Throughout most of the 20th Century, the franchise tax was calculated based on each corporation’s net taxable capital—total assets less debt. With the advent of modern accounting principles, the state’s definition of “debt” came under fire in the courts resulting in huge amounts of tax refunds in the 1980s. In 1991, the tax was rewritten to apply to “earned surplus”—essentially defined as corporate profits plus compensation paid to officers and directors. The taxable capital calculation was retained, but for all intents and purposes was relegated to being an alternative minimum tax.

In 2006, lawmakers enacted a sweeping overhaul of the franchise tax as part of their plan to change the way the state funds public school districts. School maintenance and operations property taxes were reduced, while the state’s franchise tax was revamped to replace those direct school property tax revenues. The state also contributed dollars from "excess" general revenues so the overall reforms appeared to be a net property tax cut, but property taxes soon returned to their upward trend. The franchise tax reform was in fact a massive tax cut for corporations doing business in Texas.

In addition to still paying higher property taxes, in the long run, businesses also pass their franchise tax cost on to their Texas customers.

Time Warner Cable is notifying its North Texas customers in monthly statements that a state Cost-Recovery Fee is being added to their monthly billing statements:
Notice on the TWC website: "Effective Friday, August 19, 2011, Time Warner Cable will begin collecting a new fee called State Cost-Recovery Fee to recover a portion of the costs imposed by the State of Texas on the company.

The State Cost-Recovery Fee is not a tax. While TWC is not required to recover these costs by law, we are allowed to recover them as a cost of doing business.
According to a State of Texas Comptroller notice, Texas businesses may charge customers a cost-recovery" fee in order to recoup the Texas franchise tax the State of Texas collects from businesses owners. While businesses who charge customers a Cost-Recovery fee must be careful to use specific "recovery fee" wording, so as to not imply the charge is a direct state tax on consumers, they are, in effect, passing along the Texas franchise tax the state collects from them.

Many companies simply work the cost of the Texas franchise tax into product margins, but the Texas state comptroller says a specific recovery fee may be charged with the explicit purpose of recovering the tax expense.
Comptroller website: A company choosing to bill customers a Recovery Charge may explain to its customers that the charge is made in order to recoup money paid by the company for taxes imposed on it. The company may not, however, represent the charge as a tax imposed directly on the customer. To this end, the Recovery Charge must not appear in the "Government Fees and Taxes" (or similar section) of the customer's bill, invoice or contract. Further, the company should disclose that the Recovery Charge is not a tax the company is required to collect from its customers by law.
The Texas franchise tax applies to all business entities except sole proprietorships and general partnerships. The rate is between 0.5 percent and 1 percent of revenues.
Education funding has been in a financial hole since the legislature restructured the tax system in 2006. They lowered property taxes, historically used to pay for public education, and added a revamped business franchise tax that, along with a hike in cigarette taxes, was to account for the difference. But the franchise tax has dramatically underperformed resulting in deep cuts in education spending.

On June 28, 2011 Gov. Perry signed a $172 billion budget passed by the super Republican majority Texas House and Senate. The budget signed by Gov. Perry cuts $15 billion from the level of spending last authorized in the 2009-11 state budget. The largest individual cut was to public education, which lost over $4 billion over the biennium. more...

No comments:

Post a Comment