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Texas Margin Tax: Unitary Groups Providing Services and Goods Bear a Heavy Burden in Tough Economic Times


In 2006, the Texas legislature enacted the revised Texas franchise tax (the Margin Tax) to broaden the franchise tax base and to reduce local property tax rates. In today's economic environment, when so many taxpayers are in a taxable loss position determined through traditional net income principles, the effects of a gross-receipts-based tax -- such as the Margin Tax -- that generally ignores the profitability of a business are especially egregious. Our US member investigate this in detail in their latest newsletter.

Many Texas franchise taxpayers that previously paid little or no tax under the old franchise tax regime are, in some cases, paying millions of dollars in Margin Tax. Unitary taxpayers engaged in mixed services and goods businesses have been particularly hard hit by the Margin Tax because of the deductions, or lack thereof, available to them under the "taxable margin" calculation, upon which the Margin Tax is based. "Taxable margin" equals the lesser of:

  1. 70 percent of the entity's total revenue, or
  2. 100 percent of the entity's total revenue less the entity's cost of goods sold or compensation.

In the context of a unitary group, only one of the taxable margin deductions (COGS, W-2 compensation or a flat 30 percent) may be used for the entire group regardless of whether or not it may be applicable to and used by each member of the group. This limitation could exacerbate the effects of the Margin Tax given the current economic environment. Taxand US focus their article on the unitary taxpayers engaged in mixed services and goods businesses and their options to try to mitigate the Margin Tax.

Taxand's Take

"Mixed bag" taxpayers are in a tough position when it comes to calculating their taxable margin. The ability to deduct on a company-by-company or service-line-by-service-line basis or to file a separate combined return based on business type would greatly assist such taxpayers. It is unclear why Texas has not followed the lead of other unitary states and adopted these filing options for unitary groups, but it seems as though such an election would make for a more equitable tax regime. Given the current economic environment, one would hope that Texas would take note of the inequities created by the taxable margin calculation -- taxpayers certainly have. Many tax directors are currently under great pressure to reduce this tax, as it is often the largest sum paid to any tax jurisdiction by a loss corporation. Despite all of these facts, there is currently no indication that the Texas legislature is making any effort to correct the problem.

Read the full newsletter from Alvarez & Marsal Taxand LLC, our US member.

Your Taxand contact for further queries is:
Mike Alexander
T. +1 713-547-3676

Taxand's Take Author