On may 15, most businesses in the state will start paying the Texas Margin Tax—a new tax that effectively replaces the old franchise tax. The margin tax, which is based on a lower rate and will apply to many limited partnerships that were exempt from the franchise tax, was passed by the Legislature in 2006 in response to the Robin Hood school-finance mess. Barton helped craft the new tax as tax director of the Texas Tax Reform Commission. He was interviewed by Executive Editor Glenn Hunter.
Q: When companies realize that they owe this new tax—based on 2007 revenue—do you think some will be in for a shock?
A: Yes. I’m not sure how many, especially small businesses, really understand the impact yet. Some may be paying more than they paid before. In some instances, under the franchise tax, they could control the amount of taxes they paid; others weren’t in the system at all, so now they’ll be paying for the first time and will see their tax bills jump.
Q: Are fewer limited partnerships being created as a result of this new tax?
A: I can’t say that fewer are being created. But for a number of partnerships—such as those in the service and retail sectors—there’s no longer any advantage to being a limited partnership over a limited liability company from a Texas tax standpoint. So some are looking at collapsing their LP structure. For other types of businesses, such as real estate partnerships, there’s still going to be some potential advantage to operating as an LP.
Q: Do you expect companies to pass the cost of the new tax on to their customers?
A: All new costs either get passed on to the customer, or the business ends up dealing with them through cost-cutting or lower profits. It all depends on the company’s competitive environment.