Texas Taxpayers May See Relief

by Baker Donelson

A Texas District Court recently interpreted the Texas Tax Code and determined a particular Texas Comptroller's Rule improperly narrows the state statute. The Texas Comptroller's Rule 3.589(c)(2) effectively required taxpayers to take less deductions for franchise tax purposes than they would be allowed to take for federal income tax purposes. 

A Texas taxpayer filed suit against the Texas Comptroller seeking a refund of $30,000 in franchise taxes paid under protest. The taxpayer was alleged to have underpaid taxes because it took deductions for employee benefits, such as parking, occupation taxes and fees related to continuing education. The Texas Comptroller claimed those deductions were improper because Rule 3.589(c)(2) directs certain deductions to be excluded even though a business may take a deduction for the same benefits on its federal income taxes.

Section 171.101(a)(1) of the Texas Tax Code allows a taxpayer to take a deduction for cost of goods sold or compensation. Under a compensation deduction and Section 171.1013(b)(2), the cost of benefits may be deducted to the extent they are also deductible for federal income tax purposes.

Against an argument by the Texas Comptroller, the District Court ruled that these sections of the Texas Tax Code are unambiguous and that Rule 3.589(c)(2) violates the plain meaning of the Tax Code. If this ruling stands, Texas taxpayers may see some relief in the form of additional permitted deductions. The Texas Comptroller may appeal this ruling to the Texas Third Court of Appeals for further consideration.

If you would like to discuss the impact of this ruling on your business, or other Texas state or local tax issues, please contact one of the following attorneys accociated with the Firm's Tax Department:

Houston, Texas
Brad Chambers 713.286.7193 bchambers@bakerdonelson.com

 Nashville, Tennessee

Scott D. Smith 615.726.7391 sdsmith@bakerdonelson.com
Carolyn W. Schott 615.726.7312 cschott@bakerdonelson.com
Daniel A. Stephenson 615.726.5678 dstephenson@bakerdonelson.com
Memphis, Tennessee
William H.D. Fones 901.577.2247 wfones@bakerdonelson.com
Mary Ann Jackson 901.577.8113 mjackson@bakerdonelson.com
Charles E. Pierce 901.577.2164 cpierce@bakerdonelson.com
East Memphis, Tennessee
James "Josh" Hall  901.579.3126 joshhall@bakerdonelson.com
Christopher J. Coats 901.579.3127 ccoats@bakerdonelson.com
Chattanooga, Tennessee
Carl E. Hartley 423.756.2010 chartley@bakerdonelson.com
Virginia C. Love 423.209.4118 vlove@bakerdonelson.com
Sara E. McManus 423.209.4124 smcmanus@bakerdonelson.com
Knoxville, Tennessee
L. Eric Ebbert 865.971.5182 eebbert@bakerdonelson.com
Washington, D.C.
James W. McBride 202.508.3467 jmcbride@bakerdonelson.com
New Orleans, Louisiana
Robert L. Wollfarth 504.566.8623 rwollfarth@bakerdonelson.com
Baton Rouge, Louisiana
Alton "Biff" Bayard 225.381.7019 abayard@bakerdonelson.com

Birmingham, Alabama
Thomas J. Mahoney 205.250.8346 tmahoney@bakerdonelson.com
William R.Sylvester 205.250.8372 bsylvester@bakerdonelson.com
Adam S. Winger 205.250.8381 awinger@bakerdonelson.com
Atlanta, Georgia
Nedom A. Haley 404.221.6505 nhaley@bakerdonelson.com
Michael M. Smith 404.589.3419 mmsmith@bakerdonelson.com
Michael S. Evans 404.221.6517 mevans@bakerdonelson.com
Jackson, Mississippi
Stacy E. Thomas 601.351.2484 sthomas@bakerdonelson.com
Jon D. Seawright 601.351.8921 jseawright@bakerdonelson.com
David P. Webb 601.969.4678 dwebb@bakerdonelson.com
C. Tyler Ball 601.351.8959 tball@bakerdonelson.com
Orlando, Florida
Donald Christopher 407.367.5402 dchristopher@bakerdonelson.com
Richard C. Swank 407.367.5404 rswank@bakerdonelson.com
Marty Hartley 407.367.5427 mhartley@bakerdonelson.com


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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