April 21, 2006
On Monday, the Texas Legislature began another special session to attempt to resolve school finance issues. One important part of that debate is a proposal by Governor Rick Perry to make significant changes in the state's franchise tax in the form of a new gross receipts base. The Governor's proposal was introduced in the House as HB3. The House Ways and Means Committee passed the bill yesterday on a 7-1 vote and the bill is likely to go to the House floor next week. A copy of that bill is available here.
HB3 is a very complex bill that could have very different implications for different companies. 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 production and manufacturing costs. The tax rate would 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.
Here is a memo from our tax lobbyist explaining the problems we see with this approach. While the bill 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 need your input and the input of your company's corporate tax professionals on how this proposal impacts your company and how we should proceed.
Please contact Dan Jaffe (djaffe@ana.net) or Keith Scarborough (kscarborough@ana.net) in ANA's Washington, DC office at (202) 296-1883 to give us your company's perspective on this proposal.
Thanks very much for your assistance.