May 19, 2006
New Tax is Back Door Attack on Advertising Costs
Texas Governor Rick Perry yesterday signed the new business gross receipts tax bill that was passed during the special session on school finance reform. The final version of that bill, HB3, is available here.
ANA is concerned that one provision in this new law discriminates against business advertising costs. There will very likely be legislation considered in the regular session of the Texas Legislature next January to “clean up” a number of provisions in the new gross receipts tax. We are consulting with member companies and local industry groups to determine how best to proceed on this matter. We would appreciate your input on the impact of the new gross receipts tax on your company.
Background
School finance issues and local property taxes have been very contentious for several years in Texas. The Texas Supreme Court ruled last year that the current funding system is unconstitutional and set a deadline of June 1, 2006 for revising it. The Texas Legislature was unable to reach agreement on a new finance system during two special sessions last year. Governor Perry appointed a commission of 24 business leaders to hold hearings across the state and develop a new school finance law.
In March, the Texas Tax Reform Commission proposed a package of bills, including a proposal to replace the state’s business franchise tax with a new gross receipts tax. The legislature began a special session on April 17th and the Governor’s proposed tax was introduced in the House as HB3.
HB3 is a very complex bill that could have very different implications for different companies. In fact, a number of companies and business groups endorsed HB3 because of the trade-off for reduced property taxes. Generally speaking, the new tax would be based on a company’s total revenue, with deductions for either the cost of employee salaries and benefits or the costs of goods sold. The tax rate will be one percent for most businesses and one-half percent for retailers and wholesalers.
We are concerned about one specific provision of HB3 that could become a back-door tax on advertising. Under the bill, a company that elects to subtract the cost of goods sold for the purpose of computing its tax liability can include a number of direct costs, including labor costs, cost of materials, handling costs, research and design costs and much more. However, the bill specifically precludes all selling costs and advertising costs as part of the calculation of cost of goods sold.
HB3 passed the House on April 24th by a 80-68 vote.
ANA hired a local lobbyist in Austin and worked with the Texas broadcasters, newspaper publishers and other industry groups to try to get the advertising provision removed from HB3 in the Senate. We provided testimony to the Senate Finance Committee on the negative impact of the advertising provision in HB3 and that testimony was well received. However, as a result of dwindling support for the bill in the House, there was considerable pressure from the Governor’s office for the Senate to pass HB3 without any amendments in order to avoid the need for a conference committee.
After considerable debate, the Senate ultimately passed HB3 with no amendments on May 2nd, by a vote of 16 to 14. During Senate deliberations, there were indications from the Governor and the leadership of both houses that there would be legislation needed in the regular session next January to “clean up” a number of problems with HB3. Also, the new tax does not take effect until 2007 and will not be collected until 2008.
While HB3 is not a direct tax on advertising, we are concerned about any tax policy that devalues marketing costs as ordinary and necessary business costs for a company. In addition, there is always the danger that once this approach is accepted, the legislature will ratchet up the rates whenever it needs additional revenue.
We will continue to work with our lobbyist in Austin to evaluate the prospects for getting the advertising provisions of HB3 removed during the next session in January. In the meantime, we need your input on how HB3, and in particular the advertising provision of that bill, impacts your company and how we should proceed.
Please contact Keith Scarborough, Vice President for State Government Relations in ANA’s Washington, D.C. office at kscarborough@ana.net or (202) 296-1883 to give us your company’s perspective on this new tax.