85th Texas Legislative Session – Texas Franchise (Margin) Tax Bills Enacted

The 85th Texas legislative session has ended with very few changes to the Margin Tax laws. There were 60 Margin Tax bills introduced; 55 failed, and five were signed into law.    

Margin Tax Bills Signed into Law

House Bill 4002 – Comptroller Technical Correction

On June 1, 2017, the Texas Governor signed House Bill 4002, amending Texas Tax Code § 171.1012(a)(2), relating to the definition of “production” used in determining the cost of goods sold (COGS) deduction for Margin Tax purposes. The new law, effective September 1, 2017, removes the term “installation” from the list of activities that qualify as “production.” This new law is in response to the recent Autohaus court cases where the Texas Comptroller disallowed the inclusion of labor costs incurred as part of repair work to install automotive parts on customer-owned vehicles in its Margin Tax COGS deduction.

House Bill 2126

On May 29, 2017, the Texas Governor signed House Bill 2126, amending Texas Tax Code § 171.002(c), regarding the Margin Tax rate applicable to certain taxable entities that sell telephone prepaid calling cards. The new law, effective for Margin Tax reports originally due on or after January 1, 2018, added subsection (c-2) which states “the provision of telecommunications services does not include selling telephone prepaid calling cards.” Therefore, companies who are in the business of selling pre-paid calling cards may qualify for the reduced, wholesale/retail tax rate with regard to the Margin Tax.  

House Bill 3992

On June 15, 2017, the Texas Governor signed House Bill 3992, amending Texas Tax Code § 171.071, relating to a Margin Tax exemption for certain cooperatives with a member that has farmer-fruit grower members. The new law, effective immediately, clarifies existing law stating that a cooperative is exempt from Margin Tax if:

• A cooperative is a farmers’ cooperative society incorporated under Chapter 51, Agriculture Code, OR
• A cooperative whose single member is a farmers’ cooperative described in Section 521(b)(1), Internal Revenue Code, that has at least 500 farmer-fruit grower members

Senate Bill 550

On May 4, 2017, the Texas Governor signed Senate Bill 550, amending Texas Tax Code § 171.908, relating to the sale or assignment of tax credits for the certified rehabilitation of certified historic structures. The new law, effective immediately, extends the current Margin Tax credit for investments in the rehabilitation of certified historic structures to the insurance premiums tax. 

House Bill 1003

On June 14, 2017, the Texas Governor signed House Bill 1003, amending Texas Tax Code § 171.901(4), related to the current Margin Tax credit for investments in the rehabilitation of historic structures. The new law, effective immediately, extends the existing Margin Tax for investments in the rehabilitation of historic structures made by an institution of higher education or university system as defined by Section 61.003 of the Education Code. 

Important Bills that Failed

House Bill 28 and Senate Bill 17

Currently, the Margin Tax generates approximately 10% of revenue collected by the Comptroller. Two bills that were introduced in this session, addressing the repeal of the Margin Tax, but failed, were House Bill 28 and Senate Bill 17.  

House Bill 28 and Senate Bill 17 both relied on future revenue growth to reduce the rates of the Margin Tax, and neither would have impacted rates until 2020, at the earliest. These bills failed because the legislature did not have the funds to begin elimination of the Margin Tax. It is likely that the elimination of the Margin Tax will be addressed in 2019.  

For questions about these law changes or other state and local tax matters, please contact us.