Texas Tax StructureCurrent Policy and Future Trends

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					    Texas Taxpayers and Research Association   January 2011




            An Overview of Taxes in
                    Texas

                Texas Taxpayers and Research
                         Association



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    Texas Taxpayers and Research Association                         January 2011



     The Taxes Texans Pay, 2008
           $ Billions
    $250
                                    $236 billion
                         Other

    $200                Corporate
                                                           Total Taxes:
                                                           $319 billion
    $150                 Payroll



    $100
                         Personal
                          Income
                                             $41 billion             $42 billion
     $50

                                                                          Property
                                                   Sales
      $0
                        Federal                    State                  Local

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    Texas Taxpayers and Research Association   January 2011



                Editorial Comment #1
 Simple “per capita” comparisons have no
 validity because “capitas” don’t pay taxes--
 businesses and individuals pay taxes and
 have dramatically different burdens.

 An accurate overview of a tax system must
 evaluate these burdens separately.


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    Texas Taxpayers and Research Association   January 2011



                Editorial Comment #2
 • The impact figures presented here look at
   initial incidence only—i.e. who writes the
   check for the tax.
 • The results of tax incidence studies are
   driven by their assumptions about how
   taxes on businesses are passed on to
   individuals through:
           1) pricing of the product or service,
           2) payroll and hiring decisions, and
           3) return on investment.
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    Texas Taxpayers and Research Association   January 2011




                  Texas is a ___
                    tax state.




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    Texas Taxpayers and Research Association   January 2011




  If you are an individual,

                  Texas is a low
                    tax state.
        Texas ranks 48th among the states in
        terms of taxes paid by individuals
        relative to personal income.
        Council on State Taxaxtion, 2009.
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    Texas Taxpayers and Research Association   January 2011




  If you are a business,

                  Texas is a high
                    tax state.
        Texas ranks 18th among the states in
        terms of taxes paid by businesses
        relative to gross product.
        Council on State Taxation, 2009.
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    Texas Taxpayers and Research Association         January 2011



       Taxes and Who Pays Them
    Tax                               Individuals   Businesses

    Property Tax
                                               √          √
    Sales Tax
                                               √          √
    Franchise/Corporate
    Tax                                                   √
    Personal Income Tax
                                               √
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    Texas Taxpayers and Research Association         January 2011



       Taxes and Who Pays Them
    Tax                               Individuals   Businesses

    Property Tax
                                               √          √
    Sales Tax
                                               √          √
    Franchise/Corporate
    Tax                                                   √

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    Texas Taxpayers and Research Association   January 2011



                Texas Tax Rankings
 • Texas’ tax burden on individuals ranks
   48th--37 percent below the national
   average.
 • Texas’ tax burden on business ranks 18th
   among the states--8 percent above the
   national average.
 • 61% of Texas’ state and local taxes are
   paid by businesses--only 5 states are
   higher.

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    Texas Taxpayers and Research Association   January 2011



    Texas’ Lack of an Income Tax
   Combined with other factors:

   • Provides a better climate for new
     business incubation
   • Makes us an attractive location for
     corporate headquarters
   • Makes us a popular retirement haven
   • Means that we rely more heavily on sales
     and property taxes
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    Texas Taxpayers and Research Association   January 2011


    Texas’ Reliance on Sales and
           Property Taxes
 • Heavily ties our tax system to the production and
   sale of ―goods,‖ placing a high tax burden on
   capital-intensive businesses
 • Results in a relatively ―light‖ tax burden on
   service businesses, which tend to be less
   impacted by sales and property taxes.
 • Means our tax system is ―regressive,‖ i.e. lower
   income families see higher effective tax rates
   than those with upper incomes
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    Texas Taxpayers and Research Association                                                      January 2011



    Tax Burden Relative to Output
   9%
                                                Other Taxes
   8%
                                                Franchise Tax
   7%                                           Sales Taxes
                                                Property Taxes                  All Business Average: 4.6%
   6%

   5%

   4%

   3%

   2%

   1%

   0%
         ri.




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    Texas Taxpayers and Research Association                                                 January 2011



                 Tax Burden Per Employee
         $ Thousands
  $60

                                               Other Taxes
  $50
                                               Franchise Taxes
                                               Sales Taxes
  $40
                                               Property Taxes

  $30


  $20
                                                                             All Industry Average: $5,557

  $10


   $0




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www.ttara.org                                                                                          (512) 472-8838
    Texas Taxpayers and Research Association                     January 2011



 Texas Taxes Relative to Income
           Percent of Personal Income
    10%
      9%
      8%
      7%
      6%
      5%
      4%
      3%
      2%
      1%
      0%
                Lowest     Low Quintile   Middle     High Quintile   Highest
                Quintile                  Quintile                   Quintile
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    Texas Taxpayers and Research Association                  January 2011



      Taxes Paid by Income Group
                                         Lowest Quintile
                                              9%

                                                     Low Quintile
                                                        12%

     Highest Quintile
          40%


                                                        Middle Quintile
                                                             16%




                                     High Quintile
                                         23%

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    Texas Taxpayers and Research Association      January 2011




                   Property Tax Basics

                         George Christian
                Texas Taxpayers and Research Association
                          gchristian@ttara.org




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     Texas Taxpayers and Research Association                                                    January 2011

                Texas Property Tax at a Glance

 •    2008 total property tax levy: $39 billion
 •    2010 estimated total levy: $42 billion
 •    Annual rate of growth in total levy 1989-2008: 6.4%
 •    Share of total state and local taxes: 45%
 •    School district share of total levy: 55%
 •    Number of taxing units: 3,942
 •    Number of appraisal districts: 253
 •    Number of parcels: 17 million
 •    Total property value: $1.9 trillion
 •    Cost of administration: $351 million
      Source: Comptroller of Public Accounts, 2008 Annual Property Tax Report, Revised Edition


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    Texas Taxpayers and Research Association                              January 2011


                Local Government Share of Property Tax Levy


                                                      Special Districts
                                           Counties
                                                           13%
                                             16%




                                  Cities
                                  16%




                                                          School Districts
     Source: Comptroller of Public Accounts,                  55%
     Annual Property Tax Report, 2009




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    Texas Taxpayers and Research Association                                             January 2011
       2009 Exemptions (Excluding Productivity Valuation)
                    $235.95 Billion (Value)
 Residential                                                                          Billions $       % of Total
   $15,000 Homestead                                                                    $ 74.22           31.5%
   Over 65 Freeze Loss                                                                    48.47           20.5%
   Local Option % Homestead                                                               34.39           14.6%
   10% Residential Value Cap                                                              14.79            6.3%
   $10,000 Over 65 Homestead                                                              13.96            5.9%
   Local Option Over 65 or Disabled                                                        7.31            3.1%
   Veteran/Surviving Spouse Homestead                                                      4.07            1.7%
   Historical Home Designations                                                            0.29            0.1%
                                                                                       $197.50            83.7%
 Business
   Freeport Exemption                                                                   $ 23.20            9.8%
   Pollution Control Exemption                                                             9.11            3.9%
   TX Economic Dev Act (Chapter 313)                                                       5.30            2.3%
   Low Income Housing                                                                      0.27            0.1%
   Tax Abatements                                                                          0.28            0.1%
   Solar and Other                                                                         0.29            0.1%
                                                                                         $38.45           16.3%

 Total                                                                                $235.95          100.0%
           Agriculture Productivity Value Loss = $200.37 billion
  Data Source: 2009 ISD Self Report, Comptroller’s Property Tax Assistance Division

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    Texas Taxpayers and Research Association                January 2011



          Property Tax Comparison
                                        Texas       All States
                                                                 Texas
   Type of Property                     Effective   Average
                                                                 Rank
                                        Tax Rate    Tax Rate

   Urban Homestead,
                                        1.88%       1.27%        10
   Median Value

   Industrial Property                  2.52%       1.56%        3




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    Texas Taxpayers and Research Association                            January 2011

                   Legal Framework for Property Appraisal


                                                               Texas Tax Code: assigns
                                                               responsibility for identifying
   Texas Constitution,
                                                               taxable property and
   Article VIII, Sec. 1(b):
                                                               establishing its market value
   All real or personal
                                                               to central appraisal districts
   property, unless
                                                               (CADs) established in each county
   constitutionally exempt,
                                                               (unless consolidated by
   shall be taxed in
                                                               agreement)
   proportion to its value
   (“market value”
   Standard)                  Art. VIII, Sec. 23(b):
                              Legislature by general law
                              shall prescribe administrative   Local taxing units (school districts,
                              and judicial enforcement of      cities, counties) that levy taxes
                              Uniform standards and            within CAD boundaries finance
                              procedures                       the administrative costs of the
                                                               CAD and appoint the CAD board
                                                               of directors
   Art. VIII, Sec. 1(a):
   taxation shall be equal
   and uniform
   (no “split roll” or
   “assessment ratios”
   without constitutional
   amendment)                                                  CAD board hires the chief appraiser,
                                                               the “CEO” of the CAD (must be
                                                               certified appraisal professional)




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    Texas Taxpayers and Research Association                                     January 2011

                              Phase I: The Appraisal Process


                         253 CADs
                                                                         May 1: appraisal notices sent to
                                                                         owners of all other types of property

        Real                 January 1      Tangible personal property
      property            Assessment date   held for the production
                           “market value”   of income



    1. Real property                                                      April 1: appraisal notices sent to
    records                                                               Single-family residence homestead
                                            1. Rendition statements       owners
    2. Appraisal rolls from                 (due April 15)
    prior years                             2. Physical inspection
    3. Physical inspection




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    Texas Taxpayers and Research Association                     January 2011


              Phase I (continued): Property Value Study

                                   Comptroller of
                                  Public Accounts
     Taxable value of all                                       Taxable value of each
     property in each                                           category of property in
     school district                                            each school district




                                  Annual Property Value
                                          Study
                            (Sec. 403.301, Government Code;
                                  Sec. 5.102, Tax Code)

     Appraisal district
     methods and
                                                                Appraisal district value
     procedures review
                                                                accepted if within 5%
     once every two              “To ensure equity among        of “state” value
     years                  taxpayers in the burden of school
                             district taxes and among school
                                districts in the payment of
                                   state financial aid for
                                     public education.”




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    Texas Taxpayers and Research Association                                          January 2011

      Phase II: Determination of Property Value and Dispute Resolution


                                             Informal negotiation                         June 2 (or 30 days after
       May 15: Chief appraiser               to resolve disputes                          appraisal notice received):
       submits appraisal
                                                                                          taxpayer or taxing unit may
       records to the ARB
                                                                                          file protest with the ARB




                                      Appraisal Review Boards
                                              (ARBs)
                                           ___________

                                        citizen panel selected
                                             by CAD board



         Non-binding arbitration
         with consent of chief            May, June, July: ARB
         appraiser and property           hearings and protest
         owner                            determinations                          July 20: ARB approves
                                                                                  appraisal records (unless 5%
                                                                                  total value remains under
                                                                                  protest)


                                   Property owner may appeal ARB determination
                                   to district court or to binding arbitration    CAD board may postpone
                                   (single-family residences or properties with   deadline for approving records
                                   value of less than $1 million)                 until September 2 (in counties
                                                                                  with 1 million or more)




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     Texas Taxpayers and Research Association                                                                   January 2011

                            Phase III: Assessment and Collection


 July 25: Chief appraiser               The effective tax rate:
 certifies the appraisal                (last year’s levy – lost
 roll to each taxing                    property levy/current
 unit                                   total value – new
                                        property value)*




 August 1: Tax assessor
                                          The rollback tax rate:                              October 1:
 for each taxing unit
                                          (effective M&O tax           September 29:          Tax assessor               February 1:
 submits the tax roll
                                          rate x 1.08) + current       Taxing unit must       mails tax bills            Delinquency
 and estimated collec-
                                          debt rate*                   adopt tax rate         to property                date
 tion rate to the
                                                                                              owners
 governing body




                                          1. Unencumbered fund
 August 7: Taxing                         balances;                                                                          Foreclosure
                                                                                      Tax lien            Penalty
 unit must calculate                      2. Debt obligations;                                                               suit (county
                                                                                      attaches to         and interest
 and publish:                             3. Increase or decrease                                                            attorney or
                                                                                      property            accrues
                                          in levy over prior year                                                            private firm)




      *For school finance purposes, school districts have different requirements
      for calculating their effective and rollback tax rates.




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    Texas Taxpayers and Research Association      January 2011




                Sales & Use Tax Basics

                           John Kennedy
                Texas Taxpayers and Research Association
                          jkennedy@ttara.org




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    Texas Taxpayers and Research Association   January 2011



                   Sales Tax Design
 • Tax on final sale or use of good or service
 • Liability of purchaser or user
 • Collected and remitted by seller engaged
   in business in taxing jurisdiction




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    Texas Taxpayers and Research Association   January 2011



                            Tax Rates

 • State – 6.25%
 • Local – 1,473 – maximum 2%
 • Local taxing jurisdictions
      – Cities – 1,142 (.25%-2%)
      – Counties – 123 (.5%-1.5%)
      – Transit Authorities – 10 (.25%-1%)
      – Special Purpose Districts – 198 (.125%-2%)


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     Texas Taxpayers and Research Association   January 2011



  Special Purpose Districts-SPDs
 •    Hospital – 8
 •    Health Services – 12
 •    Emergency Services – 47
 •    Crime Control – 63
 •    Fire Control – 4
 •    Library – 14
 •    Development–Improvement–Management
      – 50

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    Texas Taxpayers and Research Association    January 2011

         Sales Tax Rates Comparison
                              January 1, 2011

                                        Max
                State Texas Local Texas Total Texas
                %Rate Rank % Rate Rank %Rate Rank
  Texas          6.25  11 T 2.00   24 T  8.25   19
  Highest        7.25        8.00       12.00
  Lowest         2.90        0.25        4.50




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    Texas Taxpayers and Research Association   January 2011



                            Tax Base
 • Tangible personal property unless
   exempted
 • Listed services
 • State & Local Same – limited exceptions
      – Residential utilities
      – Long distance calls




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    Texas Taxpayers and Research Association   January 2011




   Exemption & Exclusion Policies
    •   Avoid economic distortions
    •   Avoid adverse economic consequences
    •   Avoid adverse fiscal impact on individuals
    •   Facilitate efficient administration/compliance
    •   Create stable revenue stream consistent
        with sound tax policy



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    Texas Taxpayers and Research Association           January 2011



                  Value of Exemptions
                                   (2011)

   Exemptions Total                            $26.0 B
   • Manufacturing                             $12.5
        – Raw Materials                         10.7
   • Taxed by other law                         $8.6
        – Insurance Premiums                     3.9
        – Motor vehicles                         2.2
        – Gasoline & diesel                      1.8


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    Texas Taxpayers and Research Association           January 2011



                  Value of Exemptions
                                   (2011)

    Exemptions Total                           $26.0 B
    • Consumer Items                            $3.4
         – Groceries                             1.5
         – Residential utilities                 0.9
         – Drugs                                 0.7
    • Agricultural                              $0.4
         – Feed, seed & fertilizer                .3


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    Texas Taxpayers and Research Association   January 2011



                  Value of Exemptions
                                   (2011)
  Exemptions Total                             $26.0 B
  • Governments & non-profits                    0.4
  • Newspapers, magazines, internet              0.1
  • Everything else                              0.7




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    Texas Taxpayers and Research Association   January 2011



          Value of Services Exclusions
                                   (2011)
   Services Total-                             $5.9 B
  • Interstate competitiveness issues          $2.0
     – Legal                                    0.5
     – Architectural & engineering              0.4
     – Accounting & auditing                    0.2
  • Health care                                $1.8
     – Doctors                                  0.9
     – Dentists                                 0.3

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    Texas Taxpayers and Research Association   January 2011



          Value of Services Exclusions
                                   (2011)
     Services Total -                          $5.9 B
     • Housing costs                           $0.7
          – Residential construction            0.4
          – Residential repair & remodeling     0.1
          – Real estate brokerage & agency      0.2
     • Cost of living                          $0.8
          – Auto repair                         0.3
          – Child day care                      0.2
     • Cost of doing business                  $0.7
          – Freight hauling                     0.3
          – Nonresidential construction         0.2

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    Texas Taxpayers and Research Association   January 2011



                              Holidays
 • Back-to-school
      – Third Friday-Sunday in August for clothing,
        footwear, backpacks & school supplies less
        than $100
 • Energy Star
      – Last Saturday-Monday in May for certain
        energy-efficient products




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    Texas Taxpayers and Research Association   January 2011



                             Sourcing

 • State – destination
      – Goods – possession taken
      – Services – benefit received
 • Local – origin
      – Goods – seller’s place of business
      – Services – seller’s place of business




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    Texas Taxpayers and Research Association   January 2011



                   Place of Business

 • Three or more sales during year
 • Multiple places of business
      – Location where order first received if placed in
        person by purchaser
      – Otherwise location from which order is
        shipped




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    Texas Taxpayers and Research Association   January 2011



           Sourcing Interstate Sales
 • Quill v. North Dakota (1992)
      – Substantial physical presence
 • Streamlined Sales Tax Project
 • Presence by agent
      – Scripto v. Carson (1960)




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    Texas Taxpayers and Research Association   January 2011



                Engaged in Business
 • Physical location
 • Representative selling, delivering or taking
   orders for taxable items
 • Texas franchisee or licensee making sales
 • Trade show participant making sales
 • Deriving income from leasing tangible
   personal property
 • Providing taxable services or repairs

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     Texas Taxpayers and Research Association   January 2011



                Returns/Remittances

 •    Both state and local taxes remitted
 •    Due 20th of month after end of filing period
 •    Annual – less than $1,000 a year
 •    Quarterly – less than $1,500 per quarter
 •    Monthly – $1,500 or more per quarter
 •    Direct pay permits
       – $800,000 or more of annual taxable
         purchases for own use
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    Texas Taxpayers and Research Association   January 2011



                            Discounts
 • Timely Filer - 0.5%
 • Prepayment – 1.25%
      – Must remit at least 90% of estimated liability
      – Due 15th of preceding month
      – Due 15th of second month of preceding
        quarter




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    Texas Taxpayers and Research Association      January 2011




                  Franchise Tax Basics

                            Dale Craymer
                Texas Taxpayers and Research Association
                          dcraymer@ttara.org




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    Texas Taxpayers and Research Association   January 2011


                     Who Pays the
                Franchise (Margin) Tax?
  • Corporations (for profit)
  • Limited Liability Companies
  • Partnerships
  • Business trusts
  • Any other registered legal entity enjoying
    liability protection under state law

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    Texas Taxpayers and Research Association        January 2011



         Calculating the Margin Tax
   Begin with:        Total Revenues
    Subtract:         The Greater of:
                      • Cost of Goods Sold (state definition)
                      • Compensation
                      • 30% of Total Revenues
      Equals:         Gross Margin
   Multiply by:       Percent of Gross Receipts in Texas
      Equals:         Net Taxable Texas Margin
   Multiply by:       Tax Rate (0.5% or 1.0%)
      Equals:         Gross Texas Margin Tax


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    Texas Taxpayers and Research Association   January 2011



                 Cost of Goods Sold

 • Direct cost of acquiring or producing
   goods sold in the ordinary course of
   business
 • A ―good‖ is real or tangible personal
   property that can be seen, weighed,
   measured, felt, or touched or that is
   perceptible to the senses in any way


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    Texas Taxpayers and Research Association   January 2011



                 Cost of Goods Sold

 • The margin tax definition is very specific
   and does not entirely match the definition
   of ―cost of goods sold‖ used by the Internal
   Revenue Service




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    Texas Taxpayers and Research Association   January 2011



           ―Compensation‖ includes

 • Up to $300,000 of cash compensation to
   an employee (W-2) or partner (Form 1065)
   indexed to inflation
 • Cost of ―leased‖ employees
 • Cost of all benefits, including worker’s
   compensation, health benefits, &
   retirement contributions, to the extent
   deductible for federal tax purposes

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    Texas Taxpayers and Research Association   January 2011


    Compensation does NOT include

 • Payments to independent contractors
   (Form 1099)
 • Wages paid to undocumented workers
   (not lawfully authorized to be in the U.S.)
 • Employer’s Social security and Medicare
   contributions
 • Employer’s unemployment compensation
   taxes

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    Texas Taxpayers and Research Association          January 2011



                      Apportionment

            Receipts from                      Receipts from
             Business in                         Business
               Texas                            Everywhere

        • A receipt from the sale of a good is generally
          sourced to the location the customer takes
          possession of the good.
        • A receipt from providing a service is sourced to
          where the service is performed

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    Texas Taxpayers and Research Association   January 2011



                    Margin Tax Rate
    Wholesalers/Retailers                       0.5%
    All Others                                  1.0%

    • An entity qualifies for the 0.5% rate if more
      than half of their receipts is from wholesale or
      retail trade, and
    • Less than 50% of their wholesale/retail receipts
      are from the sale of products they do not
      produce, and
    • They do not provide retail or wholesale utilities.

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    Texas Taxpayers and Research Association       January 2011


                ―Cost of Goods‖ Sold or
                   ―Compensation‖
     Cost of Goods Sold                 Compensation
     •Manufacturers      • Services, including
     •Wholesale Trade      hospitals, doctors,
     •Retail Trade         attorneys, and other
                           professionals
     •Utilities
     •Oil and Gas
     •Construction
     •Banks
     •Farming & Ranching
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    Texas Taxpayers and Research Association   January 2011



         Small Business Provisions

 • Taxpayers with under $1 million in annual
   receipts are exempt
 • Taxpayers with under $10 million in
   receipts may opt for the ―EZ‖ computation
   of 0.575 percent of Texas revenue and
   avoid all other calculations




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    Texas Taxpayers and Research Association          January 2011


                Franchise Tax Revenue
         $ billions                2000-2010
  $5.0


                  Additional Income from Margin Tax
  $4.0
                  "Old" Franchise Tax


  $3.0



  $2.0



  $1.0



  $0.0
         2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
www.ttara.org                                              (512) 472-8838
    Texas Taxpayers and Research Association                     January 2011


   How the Franchise Tax Compares
           "Corporate/Business" Tax As Percent of Gross State Product"
    2.0%

    1.8%

    1.6%

    1.4%

    1.2%

    1.0%

    0.8%

    0.6%
                                    Texas
    0.4%

    0.2%

    0.0%
           1            10
                         11             20
                                        21            30
                                                      31            40
                                                                    41                50

www.ttara.org                                                            (512) 472-8838
    Texas Taxpayers and Research Association   January 2011



                               TTARA

   Dale Craymer: State Budget, Franchise Tax
   Bill Allaway: Transportation Finance
   John Kennedy: Sales Tax, Property Tax
   Sheryl Pace: School Finance
   George Christian: Property Tax
   Ryan Ash: Communications


www.ttara.org                                       (512) 472-8838

				
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