Special Alert: 2003 Legislative Tracking Center for Business Owners

The key to understanding the 2003 legislative session lies in the context of its make-up and the budget deficit, projected at nearly $10 billion. The deficit is the tail wagging the legislative dog, and any bill that will affect the budget will be scrutinized carefully. Bills that will cost the state money are avoided like the plague, while bills that are revenue-neutral don’t have that strike against them. You’d think bills that increase revenue would be all the rage, but since Republicans control the House and Senate for the first time nearly since Santa Anna’s defeat, they don’t want to be known for new taxes and such, so these bills are very touchy. The focus is on cutting what’s already there, not generating more revenue, necessarily, although all bets are off when it comes to the Texas franchise tax. And that’s probably the best place to start our review.

Franchise Tax. The end-all-be-all of bills for business owners this session are the franchise tax bills. As you know, the franchise tax is Texas’ business income tax. It applies to corporations and limited liability companies, but not limited partnerships. Due to the budget crisis, the whole franchise tax issue is hotter than it has ever been.

There are at least 3 franchise tax bills that seek to expand the franchise tax to other entities. HB 3146 is the most sweeping, by extending it to any entity that has limited liability. Occupying the middle ground is HB 1030, which extends it to as many trusts and partnerships as the Texas Constitution allows.

And then you have the more limited HB 694. Companies like Dell Computer, SBC and some other very large corporations, have organized entities in Delaware and other states with little to no income/franchise tax, then formed limited partnerships in Texas so that they aren’t subject to Texas franchise tax. Whatever earnings are attributed to Texas, being earned by a limited partnership, are not subjected to Texas franchise taxation. This is the so-called “Delaware loophole,” and it is not a complimentary name. HB 694 closes the Delaware loophole, extending the franchise tax to these sorts of entities. Governor Perry is on record as supporting this bill. I guess “no new taxes” only goes so far, and apparently Mr. Dell hasn’t invested enough earnings in Texas politics. It is projected that this bill would raise $166 million in fiscal year 2004, and even more in subsequent years.

This last bill seems to be the front-runner of these three options, most likely to pass, although as you can imagine there’s a lot of money being invested in lobbyists to prevent passage of any of these bills, so the outcome is anything but certain.

In reviewing franchise tax bills, the Texas Constitution must be kept in mind, which provides in relevant part:

A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person’s share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters voting in a statewide referendum held on the question of imposing the tax.....Article 8, Section 24(a)

The argument is that Dell Computers is not a “natural person” (which means an individual, as opposed to an entity, like a corporation, or LLC), and so its income may be taxed without violating our Constitution. I think this provision dooms HB 3146, and only saves HB 1030 because HB 1030 itself says, basically, it applies to every entity OTHER than those covered by Article 8, Section 24(a).

The Texas Comptroller is of the opinion that it can effect the result desired by HB694 (the Delaware Loophole bill) on its own, but it would prefer that the legislature do it via this bill for added credibility. As a result, even if the legislature does not pass HB 694, look for the franchise tax to be extended to at least some extent administratively.

In the meantime, in light of the Texas Constitution, irrespective of which of these bills pass, it appears that Texas individuals can continue to receive income from limited partnerships without that income being subjected to an income tax, until the voters of this state change the Constitution. And so the question is, if you own an entity that pays franchise tax, why are you paying what is basically a voluntary tax? Consider converting or otherwise changing your entity from a corporation or limited liability company to a limited partnership. You have the same income, same assets, same employees, maybe even the same EIN, but you eliminate your franchise taxes. Call us (972-385-9947) or visit with your CPA to learn more about this option.

Tort Reform. HB 4 is a huge bill. And I’ll warn you it’s long to read, and takes even more time to understand. In fact, some experts are still struggling to grasp the fullness of its meaning. It effects tort reform, limits the availability of class actions, changes the proportionate responsibility laws, addresses products liability, and changes post judgment interest. If you are interested in tort reform, read this bill. It is being heavily lobbied, it has already passed the House, and has a good chance of passing the Senate as well. This was a key part of the Gov’s election campaign, so if the legislature passes it, you can be sure the Gov will most likely sign it into law.

Business Organizations Code. HB 1156 proposes to enact a new “business organizations code” and replace the various codes we now have, one for corporations, one for LLCs, one for limited partnerships, etc., into a more cohesive, comprehensive, better organized code. It’s the Container Store of business codes. The only concern I have is that with so much reorganization, there’s bound to be some substantive change. We’ll have to watch this one closely and if it passes, you can look for an article on what changes it effects. If you want a preview, and have a few hours or maybe days to spare, you can read the whole thing now.

Employment Discrimination. As if there wasn’t enough federal law protection, HB 1244 prohibits employers from discriminating among employees on the basis of race, color, disability, religion, sex, national origin, or age by paying wages to an employee at a rate less than the rate paid to an employee who is not a member of a protected class for work in an equivalent job. HB 1524 enacts the “don’t ask, don’t tell” policy on sexual orientation. Yes, Bill Clinton must be in the house.

Insurance. You may recall the recent stink about employers who insured many of their employees, even entry-level position employees, and even for years after the employee left the employer. HB 978 seeks to limit the persons whose life a business can insure. If this passes and your business wants to insure someone’s life, you will need to make a call to your local lawyer to ensure compliance with this law. In some instances there’s an absolute prohibition, in some instances consent is required, and in other circumstances the practice is allowed to continue.

UCC. The Uniform Commercial Code applies to all sales contracts of products, and banking services, and lending. HB 1394 proposes a series of changes to the UCC which includes elevating the priority of the UCC, making it not so easy to change by agreement. If you sell anything, the UCC may apply. If so, it is critical that you understand how it applies, as it may add legal liabilities and standards that must be met. This is especially true in the area of representations and warranties made by the seller. The good news is that in many instances the parties to a contract can agree to supercede the UCC, at least under current law. Please contact our office or your local friendly contracts lawyer if you have a question whether the UCC applies to you, and if so, how. The agreement you think you have may not be the agreement you really have. It may take a written contract to get you where you think you should be.

Most of the business-related bills are in the “Miscellaneous” category of our 2003 Legislative Tracking Center page, at www.mctexlaw.com/2003legislation.asp. Of course, franchise tax bills are special enough to justify their own category. Also, click over to the Special Alert: 2003 Legislative Tracking Center for Real Estate for additional legislative news on real estate-related bills we are watching. Our website is updated throughout the week; we keep it as real-time current as possible, so bookmark that page and check back often for those updates.

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