Texas Supreme Court Upholds Franchise Tax

An update for those following the various cases challenging the Texas franchise tax which are now making their way through the Texas court system:

According to the Austin American-Statesman, the Texas Supreme Court ruled on Monday in the case brought by Boerne-based Allcat Claims Service LP. The court’s decision was that the state’s franchise tax does not violate the Texas constitution, which maintains that the state may not institute a personal income tax without voter approval. (Allcat had claimed that the franchise tax levied on the business reduced the income of the business’s individual partners and thus constituted an income tax).

Another challenge to the franchise tax was filed by Nestle USA Inc. and will not be affected by the court’s Monday decision. We will continue to follow these developments with interest.

 

Punitive Taxing on the Cloud Helps Texas Shoot Itself in the Foot

CFO.com reported last week on the trend among the states to widen their definitions of nexus to include cloud computing services. As we’ve noted with respect to the so-called “Amazon tax” laws that have been recently created (or are under consideration) in many states, this tendency to try to capture more tax revenue by defining physical presence in ever-expanding terms represents an increasingly desperate grab for revenue by states that are currently over $4 trillion in debt.

In terms of cloud computing services, which are, as described by CFO.com, “sold to customers who may access them anywhere from servers located who-knows-where by companies that may be headquartered anyplace,” the taxes that have been legislated by a handful of states seem to presage a monumentally confusing and costly situation for cloud service providers. As detailed in the article, the laws from state to state determine taxability for cloud services in many different ways, making it increasingly difficult for service providers to determine when taxes should be applied to a transaction and when they should not.