Petition for Writ of Mandamus - Filed - Supreme Court of Texas

Texas Comptroller of Public Accounts
May 11,2012
Page 2
The Texas franchise tax is a tax on the value of the privilege of doing business in Texas
(the "Privilege") and is intended to exact a tax commensurate with the value of the Privilege.
Bullock v. Nat'l Bancshares Corp., 584 S.W.2d 268, 270 (Tex. 1979); Gen. Dynamics Corp. v.
Bullock, 547 S.W.2d 255, 257 (Tex. 1976). The franchise tax is imposed on entities that are
created by state law and that enjoy the Privilege, such as corporations and limited partnerships,
and is not imposed on entities that are not creatures of state law and that do not enjoy the
Privilege, such as sole proprietorships and general partnerships. See TEX. TAX CODE ANN. §§
171.0002 and 171.001(a). The State of Texas will revoke the Privilege from a state law entity
that does not pay the franchise tax. Id. §§ 171.251-.2515 and 171.301-.3015.
Because the franchise tax is imposed in exchange for the Privilege and is intended to be
commensurate with the value of the Privilege, the Equal and Uniform Clause requires any tax
classifications within the franchise tax to be reasonably related to that value, and not merely to
any conceivable state purpose. In order for the tax to be commensurate with the value of the
Privilege, the value must generally be ascertained by the same standard for all taxpayers. See
Bullock v. Sage Energy Co., 728 S.W.2d 465, 468 (Tex. App.—Austin 1987, writ ref'd n.r.e.)
(citing Lively v. Mo., K & T Ry. Co. of Texas, 120 S.W. 852, 856 (Tex. 1909)). Any
classifications among taxpayers must reasonably relate to the value of the Privilege.
B. Classifications within the Margin Tax calculation do not reasonably relate
to the value of the Privilege.
The calculations of total revenue, cost of goods sold ("COGS"), and compensation, the
application of the COGS and compensation deductions, and the determination of the tax rate,
contain classifications that bear no relationship to the value of the Privilege exercised and,
accordingly, are unreasonable, arbitrary, and capricious. The Margin Tax calculation begins
with a baseline concocted by the Legislature called "Total Revenue." TEX. TAX CODE ANN. §
171.101(a), The calculation of Total Revenue begins with the gross income of all taxpayers
(this is equal and uniform), but then allows only certain income and expense deductions to
some taxpayers engaged in certain lines of business (this is neither equal nor uniform). Id. §
171.1011. Section 171,1011 allows deductions for various income or expense items of lending
institutions, legal services providers, pharmacy cooperatives, destination management
companies, staff leasing companies, management companies, health care providers, health
care institutions, and operators of facilities for the federal government that are not available to
all other taxpayers. Id. § 171.1011 (g-1)-(q).
These deductions plainly, randomly, and unreasonably allow certain income and
expense deductions from Total Revenue only to certain taxpayers. While the resulting value for
Total Revenue includes all gross income of some taxpayers, it includes only a portion of gross
income for other taxpayers. Consequently, the calculation of Total Revenue does not actually
determine the amount of gross income that all taxpayers derive from exercising the Privilege
but, instead, departs from such a calculation in an unreasonable, arbitrary, and capricious
manner unrelated to the value of the Privilege.
The calculation of COGS under Section 171.1012 similarly allows certain deductions
only to certain taxpayers. A COGS deduction generally is allowed only to taxpayers that sell
goods, but lending institutions are uniquely allowed to deduct interest expense as COGS and
lessors of motor vehicles, heavy construction equipment, and railcar rolling stock are expressly
allowed to deduct costs associated with the leased property as COGS. Id. § 171.1012(k), (k-1).
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