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Texas Supreme Court Hears Challenge to Margin Tax

2 min readBy: Joseph Bishop-Henchman

Gross receipts taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es like the Texas margin tax are almost universally reviled by public finance experts as problematic to administer and economically destructive. By taxing every transaction, especially non-final transactions, distortions appear as taxes are imposed on taxes. For instance, a shovel produced by one giant conglomerate is taxed far less than one that involved different manufacturers, wholesalers, and retailers.

States with these taxes attempt to deal with this “pyramiding” by imposing different tax rates on different industries. Washington State, for example, has a variety of different rates for its “B&O” gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. : 0.484% for manufacturers (unless they’re making semiconductors, in which case it’s 0.275%, or airplanes, in which case it’s 0.2904%), 0.3424% for timber processing, 0.471% for retailers, 0.130% for horse racing, 3.3% for garbage disposal, 0.275% for travel agents, 1.5% for hospitals, 0% for crabbing, and so forth.

Texas was rather straightforward with the rates (they did their goofy stuff with the tax base), adopting just two: 1 percent, except for retailers and wholesalers, who pay 0.5 percent. Food company Nestle USA and two other companies filed a lawsuit last year, claiming that the differential taxation violates a Texas Constitution provision requiring that state taxes be uniform. Nestle’s beef is a unique one: the company has primarily wholesale operations in Texas, but is treated as a non-wholesaler by the margin tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on its worldwide activity. The state argues that it has wide discretion in how it classifies taxpayers into categories. The Texas Supreme Court heard arguments in that case last week.

In June, the U.S. Supreme Court ruled 6-3 in Armour v. City of Indianapolis that an Indianapolis policy to refund a canceled tax to some taxpayers but not others is valid because the city is given wide latitude to define tax categories, and uniformity need only exist within those categories. We had urged the Court to go the opposite way, and we noted: “The opinion unfortunately gives states wide latitude to adopt unequal tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. policies, even where there is a strong perception of unfairness and arbitrariness.” The Texas case may be a matter of whether Texas views its Constitution’s uniformity clause as stronger than Indiana views theirs.

The Texas case is In re Nestle USA, Inc., No. 12-0518.