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.