TTARA Update from the Tax Front
Texas Supreme Court: Franchise Tax Does Not Violate Bullock Amendment
The Supreme Court today released its highly-anticipated decision, ruling that the Texas
franchise, or “margin,” tax does not does not violate the Texas Constitution’s so-called “Bullock
Amendment” that requires prior voter approval of “a tax on the net incomes of natural
persons.” Allcat Claims Service, L.P., and John Weakly, one of its individual partners, as
authorized by statute, had filed on July 29 an original petition with the Court asserting that tax
was effectively a personal income tax as it applied to the income of partnerships owned by
natural persons.
In an opinion authored by Justice Johnson, the Court ruled that the franchise tax is a tax on
business entities, not on natural persons, and consequently that the public referendum mandated
by the “Bullock Amendment” does not apply.
A dissenting opinion was offered by Justices Willet and Lehrmann, who disagreed with the
court’s decision to accept jurisdiction in the case.
The much needed clarity and guidance provided by the decision affords lawmakers, should they
decide to do so, considerable latitude in crafting revisions to address continuing complaints about
the controversial tax. Making the tax more dependent on business profits is now one allowable
legislative option that could be considered in the 2013 regular session.
The court’s full decision is listed below:
ORDERS AND OPINION ISSUED NOVEMBER 28, 2011
LINKS TO FULL-TEXT OPINIONS FOLLOW SUMMARIES.
NOTE: Summaries are prepared by the Court’s staff attorney for public information and
reflect his judgment alone on facts and legal issues. These summaries are not part of the
Court’s opinion in the case. Links to opinions are in Adobe's PDF format (duplication of the
document). Download a free Adobe Reader.
NOVEMBER 28 ORDERS (in HTML)
OPINION
11-0589
Allcat Claims Service L.P. and John Weakly
v. Susan Combs, Texas Comptroller of Public Accounts, and Greg Abbott, Texas Attorney
General
Direct petition to the Texas Supreme Court
For plaintiffs: James F. Martens, Austin
For defendants: Danica Milios, Austin
For amicus curiae businesses: Christopher S. Johns, Austin
MANDAMUS RELIEF DENIED, AS-APPLIED CHALLENGE AND ATTORNEYS FEES
REQUEST DISMISSED,
opinion by Justice Johnson:
The principal issues are (1) whether the franchise tax on limited partnerships’ income is
an unconstitutional personal-income tax; (2) if not, whether the state comptroller’s application of
the tax violates the state constitution’s mandate that taxes be equal and uniform; and (3) whether
the Court has jurisdiction to decide the equal-and-uniform constitutional challenge. In its
challenge, original and exclusive in this Court by statute, Allcat seeks a judgment declaring the
tax unconstitutional on its face or as it has been applied to the company and seeks attorneys
fees. Legislators approved the franchise tax on limited partnerships in 2006 as it revised the
state’s public-school financing law after the Court held the school-finance system
unconstitutional the year before. Allcat argues that taxing limited-partnership income violates the
constitutional prohibition on a personal-income tax without voters’ approval because such a tax
actually is on income distributed to partners and not on an entity distinct from its partners. If the
franchise tax on limited partnerships is not unconstitutional for that reason, Allcat contends, the
comptroller has interpreted in a way that treats Allcat differently from other taxpayers in similar
situations. This Court has original jurisdiction to decide the question of how the tax has been
applied, Allcat argues, citing Texas Government Code section 22.002(c). The comptroller
responds that Texas law recognizes limited partnerships as entities and that taxing the limited
partnership’s margin is a tax on the business entity, not the partners’ shares of its income. As to
the challenge to the comptroller’s interpretation and how it applies to Allcat, the comptroller
contends that goes beyond the Legislature’s decision to give the Supreme Court exclusive
jurisdiction over constitutional challenges to the margin tax itself.
The Supreme Court HOLDS that (1) the margin tax on limited partnerships does not
violate the constitutional prohibition on personal income taxes without voter approval because
Texas recognizes the entity partnership theory and (2) the Court lacks jurisdiction to decide the
as-applied challenge to the comptroller’s tax calculation. The provision providing exclusive
jurisdiction in the Court for challenges against the franchise-tax extension to limited partnerships
serves as specific, limited exception to the generalized Tax Code provisions that confer exclusive
jurisdiction over suits such as Allcat’s on Travis County district courts. That provision does not
violate Texas Constitution Article V, Section 3(a) and it gives this Court original, exclusive
jurisdiction to consider the facial constitutional challenges to determine whether mandamus
should issue directing the comptroller to refund taxes that Allcat paid under protest. Under Texas
law the entity theory applies to partnership income and profits. Individual partners do not own
any of either while they remain in the partnership’s hands and have not been distributed to the
partners. Although a partner’s interest in the partnership represents the right to receive the
partner’s partnership-profits share when they are distributed, it does not follow that for Texas
franchise-tax purposes such right constitutes a partner’s “share” of any partnership income or
profits while the partnership retains the income and profits without having distributed any of
them to the partner. The Bullock Amendment – the constitutional restriction on taxing personal
income without voters’ approval – does not preclude taxing business entities for the privilege of
doing business in Texas and their advantage in limiting business owners’ liability by means of
the limited-partnership structure.
As-applied challenge. Assuming, without deciding, that Section 3(a) authorizes the
Legislature to confer original jurisdiction on the Court for an as-applied challenge, the provision
allowing constitutional challenge to the franchise tax only confers original jurisdiction over
challenges to the statute’s constitutionality. It does not authorize the Court to exercise original
jurisdiction over challenges to how the comptroller assesses, enforces or collects the franchise
tax. Even if Government Code section 22.002(c) empowered the Court to exercise original
jurisdiction over Allcat’s as-applied challenge, the more detailed, specific construct of the Tax
Code would apply over section 22.002(c)’s general provisions and limitations.
Opinion
Briefs
Justice Willett CONCURRING IN PART and DISSENTING IN PART, joined by Justice
Lehrmann:
Today’s decision may well be the Court’s most consequential this term, not because of
the dollar amounts at stake, but because of the constitutional principles at stake—and the
restraint the Court fails, regrettably, to exercise. With little fanfare, and rushed by an arguably
unconstitutional “deadline,” the Court expands mandamus limits far beyond constitutional limits.
Along the way, the Court redefines one of mandamus’s two elements, making it far easier for
parties to assert mandamus jurisdiction. Litigants will be able to attack a statute’s
constitutionality via mandamus, a remedy once honestly could be described as “extraordinary.”
Now any time the Legislature desires a quick answer, it can leapfrog lower-court review
altogether and declare virtually any case within this Court’s limited original jurisdiction. The
Court lacks exclusive original mandamus jurisdiction over this case. Yet the Court asserts
exclusive original mandamus jurisdiction even though no statute grants it such jurisdiction; the
Constitution expressly requires such a statute; and other statutes explicitly forbid mandamus
relief in taxpayer suits like this. More disconcerting, the Court then declares mandamus relief
appropriate even though no “abuse of discretion” exists for it to correct nor any “ministerial
duty” for it to enforce.
Willett dissent
§ 22.002. WRIT POWER.
(c) Only the supreme court has the authority to issue a writ of mandamus or injunction,
or any other mandatory or compulsory writ or process, against any of the officers of the
executive departments of the government of this state to order or compel the performance of a
judicial, ministerial, or discretionary act or duty that, by state law, the officer or officers are
authorized to perform.