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

Texas Comptroller of Public Accounts
May 11, 2012
Page 5
The numerous disparities within the calculation of Margin lead to an arbitrary number,
called Margin, which has no relation to the value of a taxpayer's Privilege. A taxpayer may have
a tax base that is twice that of another taxpayer that receives the same Privilege due to a COGS
deduction or compensation deduction that Is arbitrarily conferred on the latter. This disparate
treatment of similarly-situated taxpayers does not end with the calculation of Margin, but Is
compounded by the arbitrary application of tax rates.
The Margin Tax imposes two tax rates on two classes of taxpayers — 0.5% to
wholesalers and retailers and 1.0% to manufacturers. Id. § 171.002(a), (b). Whether or not a
taxpayer is subject to the higher or lower tax rate depends on the taxpayer's activities
throughout the United States, not just in Texas. Accordingly, a taxpayer such as Nestle who
only wholesales in Texas, but manufactures in other states is treated differently than other
taxpayers who only wholesale in Texas. These taxpayers enjoy the same Privilege in Texas,
but the taxpayer who manufacturers elsewhere is subject to twice the tax rate. There is no
rational basis related to the value of the Privilege for taxing these similarly-situated taxpayers
differently.
The Margin Tax violates the Equal Protection Clause on multiple levels by treating
differently similarly-situated taxpayers in the calculation of the tax base and in the application of
the tax rate. These differences in treatment have no rational basis and are not fairly and
substantially related to the taxation of the value of the privilege of doing business in Texas.
Ill.
The Margin Tax Violates the Due Process Clause of the United States Constitution.
In the context of a state tax, the Due Process Clause of the U.S. Constitution "requires
some definite link, some minimum connection, between a state and the person, property, or
transaction it seeks to tax." Quill Corp. v. North Dakota, 504 U.S. 298, 312 (1992) (quoting
Miller Bros. v. Maryland, 347 U.S. 340, 344-45 (1954)); see U.S. CONsT, Amend XIV, § 1. In the
case of a tax on an activity, there must be a connection to the activity itself, rather than a
connection only to the entity the State seeks to tax. Allied-Signal, Inc. v. Director, Div. of
Taxation, 504 U.S. 768 (1992). The test is whether the taxing power exerted by a state bears
fiscal relation to protection, opportunities, and benefits given by the state. Wisconsin v. J.C.
Penney Co., 311 U.S. 435, 444 (1940); Norfolk & W Ry. v, Mo. State Tax Comm'n, 390 U,S.
317, 326 n.5 (1968). The simple but controlling question is whether the State has given
anything for which It can ask a return, J.C. Penney, 311 U.S. at 444,
The Margin Tax imposes a 0.5% tax on wholesalers and retailers and a 1.0% tax on
manufacturers. Pursuant to the Due Process Clause, this significant difference in tax rate must
be based on a difference in the protections, opportunities, and benefits conferred by Texas on
the entities. In other words, manufacturers must receive greater benefits from Texas than
wholesalers and retailers receive. This is not the case with entities, such as Nestle, that
manufacture outside of Texas, but only wholesale and/or retail within Texas. Such entities do
not receive any additional benefits from Texas with respect to their manufacturing operations.
By taxing these entities based on activities for which Texas confers no benefit, the Margin Tax
violates the Due Process Clause of the United States Constitution,
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