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

Texas Comptroller of Public Accounts
May 11,2012
Page 4
II.
The Margin Tax Violates the Equal Protection Clause of the United States
Constitution.
The Equal Protection Clause commands that no state shall "deny to any person within its
jurisdiction the equal protection of the laws." U.S. CONST. amend. XIV, § 1. It forbids a state
from treating differently persons who are in all relevant respects alike. Nordlinger v. Hahn, 505
U.S. 1, 10 (1992). With regard to state taxation, the Equal Protection Clause forbids disparate
treatment of taxpayers that has no rational basis or that is palpably arbitrary. Allied Stores of
Ohio v. Bowers, 358 U.S. 522, 527 (1959). Any disparate treatment must rest upon some
ground or difference having a fair and substantial relation to the object of the legislation. Id.
The relationship of the classification to its goal must not be so attenuated as to render the
distinction arbitrary or irrational. Nordlinger, 505 U.S. at 11.
Thus, pursuant to the Equal Protection Clause, the Margin Tax may not treat differently
persons who are in all relevant respects alike. Any classifications imposed by the Margin Tax
must have a rational basis and must be fairly and substantially related to the object of the
tax—to tax the value of the Privilege. See Nat'l Bancshares Corp, 584 S.W.2d at 270; Gen.
Dynamics Corp., 547 S.W.2d at 257-58; Rylander v. Fisher Controls Intl, 45 S.W.3d 291, 293
(Tex. App.—Austin 2001, no pet.).
As detailed above, each step of the Margin Tax calculation is fraught with arbitrary
disparities among similarly-situated taxpayers. First, the calculation of Total Revenue permits
certain arbitrary exclusions for taxpayers in certain industries but not for other taxpayers in other
industries. There does not appear to be any rational basis for treating these taxpayers
differently from one another, and the disparate treatment certainly does not have a fair or
substantial relation to the Privilege being taxed.
Further, the different types of deductions subtracted from Total Revenue—COGS,
compensation, or 30% of Total Revenue—and the uniform deduction requirement for all
taxpayers within a combined group create arbitrary distinctions among taxpayers, and the
differences within the calculations of these deductions exacerbate the disparities between
similarly-situated taxpayers. The COGS deduction allows only certain taxpayers to deduct
certain costs of business. For example, a taxpayer that sells tangible personal property may
deduct the direct costs of acquiring or producing the goods, some indirect costs, and up to 4%
of overhead and administrative costs; however a taxpayer that leases the same tangible
personal property may not deduct any such costs unless one of four narrow exceptions applies.
See id. § 171.1012. Not only are sellers treated differently than lessors, but lessors are treated
differently than similarly-situated lessors via four narrow exceptions for lending institutions,
lessors of motor vehicles, lessors of heavy construction equipment, and lessors of rolling stock.
See id. § 171.1012(k), (k-1).
The calculation of compensation also creates distinctions with no rational basis. For no
apparent reason related to the value of the Privilege, the Margin Tax allows a company to
O - • O • • • TY . • - s pal• o an emp oyee, •u •oes no a ow a semi arty-situated
company to deduct amounts paid to an independent contractor. See id. § 171.1013. It also
arbitrarily distinguishes between employee salaries of $300,000 or less and employee salaries
in excess of $300,000 because the salary amount is unrelated to the value of the Privilege. See
id. § 171.1013(c)
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