An Income Tax by Any Other Name is Still an Income Tax: The Constitutionality of the Texas 'Margin' Tax as Applied to Partnerships and Other Unincorporated Associations

Abstract

On January 1, 2008, the business landscape changed dramatically for tens of thousands of Texas-based businesses. This change was the result of legislation, commonly referred to as House Bill 3 (“H.B. 3”), which made significant revisions to the Texas franchise tax. The tax as revised is still referred to in the Texas Tax Code as the “franchise tax,” though it is commonly called the “margin tax” for reasons discussed below. As such, this article will refer to the revised franchise tax as the “margin tax.” The legislature expanded the scope of the previous franchise tax to include entities that had never before been subject to the tax, and it made significant alterations with respect to how the tax is calculated. Simply put, the new law changed both the “who” and the “how” of the Texas franchise tax. In doing so without approval by a statewide referendum, the legislature ran afoul of the Texas Constitution’s proscription of an income tax on an individual’s share of partnership and unincorporated association income.

Keywords: margin tax, franchise tax