Court: Business Franchise Tax Isn't an Income Tax

Texas Supreme Court justices listen to the State of the Judiciary speech on February 23, 2011.
Texas Supreme Court justices listen to the State of the Judiciary speech on February 23, 2011.

The Texas Supreme Court turned back a challenge to the state's primary business tax, saying it doesn't violate a constitutional ban on personal income taxes.

The Constitution allows personal income taxes only when if voters approve. Lawmakers didn't seek voter approval when they revised the franchise tax in 2006, and Allcat Claims Service LLP and a limited partner there, John Weakly, sued for a refund from the state, calling it an illegal personal income tax and saying that it wasn't applied in an equal and uniform way. In the majority opinion, written by Justice Phil Johnson, the court answered one of those questions:

"We hold that: (1) the tax is not a tax imposed on the net incomes of the individual partners, thus it does not facially violate Article VIII, Section 24; and (2) we do not have jurisdiction to consider the equal and uniform challenge."

Two judges — Don Willett and Debra Lehrmann — dissented, saying the high court should have sent the entire case to lower courts instead of accepting the constitutional question.

The challenge on how the tax is administered is left to the lower courts, but according to the Supreme Court of Texas, the franchise tax doesn't violate the ban on personal income taxes.

 

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