Texas Legislature lifts some 'margin tax' burden off owners

Herald/Steven Doll - Ryan Parker, associate at Fort Hood Paint & Body, works on a vehicle in the shop Wednesday afternoon. The Legislature’s revision of the franchise tax will help the local business, which went from not having to pay a franchise tax to having to pay $1,731 for 2009.

By Don Bolding

Killeen Daily Herald

Small-business owners are breathing a little easier with some of the burden from the notorious "margin tax," or revised franchise tax, lifted for a couple of years.

The margin tax is based on gross profits, so that even a business that is losing money on its net proceeds might still owe tax. Sole ownerships are exempt, and some small-business owners were thinking of dropping corporate status to escape it.

The Legislature's goal in the 2006 revision was to close loopholes in the franchise tax, equalize the burden among large and small businesses and enable lowering of property taxes while maintaining school revenues. One aim was to bring out-of-state corporations into the taxpaying fold. But since the base for computing the tax is now gross profits, the bill to many small businesses went up by thousands of dollars, and some found themselves with a tax bill for the first time.

Further, the tax is now so complex that accountants' fees often doubled, said David J. Pany, owner of Killeen Propane & Hardware.

"The new law doesn't affect me, since my gross is above $1 million," he said. "But there were a lot of smaller operations that were hit hard. It's good that they have some relief now, but I wouldn't be surprised if they make it up with a bigger bite on the small businesses that still have to pay."

It will help Fort Hood Paint & Body, owned by Jason and Bonnie Hanchey, who incorporated the business in 2005.

"We're going through hard times right now, and we went from not having to pay a franchise tax to $1,731 for 2009. It's like salt in a wound. You know that when you have a complaint with government, the answer is to call your representative in Congress or the Legislature, but we don't have time to get things organized and do that. We're taking care of business, all day, every day. I have so much on my plate that all I could do was go ahead and pay it. I didn't think I could do anything about it and then learned what NFIB was (the National Federation of Independent Business), and we supported it."

NFIB and its allies went into the last legislative session with six goals to weaken the tax as passed by the Legislature in 2006 and only scored one hit.

Gov. Rick Perry recently signed House Bill 4765 to exempt businesses with revenues up to $1 million from the previous cap of $300,000, a move expected to aid about 40,000 small businesses in the state. But under the act, the cap will go back to $600,000 in 2010 and revert to $300,000 in 2012.

"Right now, we're just happy to get this much done in the middle of a recession," said communications director Laura Stromberg of NFIB/Texas in Austin. "But we're going to keep fighting to try to get all of our original agenda accomplished."

NFIB forged an alliance of small-business trade associations and set an agenda including raising the cap to $1 million and to:

Lowering the tax rate by 50 percent for businesses with under $20 million in gross receipts.

Limiting a business' total franchise tax bite to no more than 100 percent of its historic high under the old rules.

Requiring a two-thirds vote of the Legislature before the margins tax can be increased.

Exempting small businesses that are losing money or are marginally profitable.

Allowing deductions for the cost of employment of all contract labor.

As the battle raged, the coalition dropped all but the last two objectives and the one that made it through, for the time being. But they're not finished.

The current stopgap measure won't make a great deal of difference. State Comptroller Susan Combs had estimated the margin tax would bring the state about $3 billion; public information officer R.J. DeSilva quoted estimates that the new law will only lose about $172 million. The Legislature increased taxes on smokeless tobacco to make up for part of the loss.

An estimated 40,000 Texas businesses will be free of the tax next year with the $1 million cap. DeSilva said these include 850 in Bell County, 85 in Coryell County and 90 in Lampasas County.

Contact Don Bolding at dbolding@kdhnews.com or (254) 501-7557.

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