Lawmakers are having to revisit last year’s business tax overhaul to fix multiple errors and potential loopholes. The Legislature adopted the tax bill last spring during a special session to revamp the state’s method of paying for public schools.
The House voted 144-1 in favor of the bill Tuesday. Final approval is expected Wednesday, before the measure is eligible for consideration in the Senate.
As the House began cumbersome debate on the lengthy bill, the presence of state business interests was heavy. The House gallery and nearby hallways were more crowded than usual, abuzz with lobbyists.
Small businesses won a sought-after victory in the House bill, which raised the threshold of taxable revenue from $300,000 to $600,000. Still, small business interests were disappointed that the tax would not be eased in years that businesses are not profitable.
The tax takes effect this year and the first due date is May 2008.
Lawmakers sifted through reams of amendments Tuesday, each arguing for changes in the bill deemed unfair or overly burdensome.
In one change, the House agreed to end a fee that has been appearing on cell phone bills from Sprint Nextel Corp. The fee, called the “Texas Margins Tax Reimbursement,” seeks reimbursement for the business tax from cell phone users.
Texas Attorney General Greg Abbott called the 1 percent fee deceptive and filed a lawsuit against Reston, Va.-based Sprint Nextel. The case is pending.
The measure approved by a 131-14 vote would make such fee collections due to the state in addition to their regular tax liability.
“Back when we passed this tax it was not a consumer tax - you and I didn’t have the guts to pass a consumer tax,” said Rep. John Smithee, R-Amarillo, arguing in favor of the Sprint amendment. “This one company comes along and just unilaterally starts adding on a charge. If you’re the customer and you don’t like it you can’t do anything about it because you can’t get out of contract. All I’m asking you here is to stand up for your constituents.”
Rep. Rene Oliveira, a Brownsville Democrat, argued against the measure because it would apply to all business tax payers, not just one phone company.
Smithee insisted on treating all taxpayers the same and noted that he was not aware of any other company in the state that had been passing the tax on to consumers.
Businesses will be taxed at 1 percent - 0.5 percent for retailers - of gross receipts. Companies can deduct for cost of goods or employee benefits like salary and health care. Sole proprietors and general partnerships are exempt. Companies with annual gross receipts of $300,000 or less also are exempt.
Most experts say the tax will favor capital intensive industries, or those with a lot of land and equipment such as the oil and gas industry. Service-oriented businesses, like accounting and law firms, will have a harder time.
Lawmakers spent years trying to fix the loophole-ridden franchise tax. They stumbled over how to structure a new tax within legal constraints that would apply equally to different business structures. And business-friendly Republicans were hesitant to levy a new tax that could be harmful to job creation and economic growth.
It took three years and a court order before they finally passed the franchise tax last May.
Among the errors that needed to be fixed in the tax code:
- Lawmakers inadvertently gave a huge tax break to certain real estate investment companies because of a typo in the bill that misidentifies a line on federal tax forms.
- Credits that businesses were promised under the old tax system for years in which they operated in the red. The credits were initially intended to be spread out over 10 years, but writing of the new law was flawed.
