Home Interiors - more work for the Texas legislature?

• Author: Voth, Gary J.

In Home Interiors & Gifts, Inc. v. Carol Keeton Strayhorn, Comptroller of Pub. Accts. of the State of Texas, Dkt. No. 03-04-00660-CV, 7/28/2005, the Texas Court of Appeals struck down the "throwback provision" as applied to the earned surplus calculation of the Texas franchise tax. The court ruled that the provision violated the judicial doctrine of "internal consistency" and, thus, resulted in an unconstitutional burden on interstate commerce.

Background

Franchise tax: The Texas franchise tax is a "privilege tax" imposed on corporations and limited liability companies that either do business in Texas or are registered to do business there. The tax is comprised of two parts: the capital tax and the earned surplus tax. The tax is calculated on each part; if the earned surplus tax exceeds the capital tax, the excess is added to the capital tax; see TX Tax Code Ann. [subsection] 171.001(a)(1) and 171.002(b).The effect is to pay the greater of the two taxes.

The capital tax is based on the corporation's stated capital and surplus (essentially, its equity) and taxed at 0.25%, while the earned surplus tax rate is 4.5% and is based on the corporation's Federal taxable income (with certain adjustments). Using gross receipts as a single apportionment factor, the corporation's net taxable capital and net taxable earned surplus are then calculated by dividing the gross receipts generated in Texas by worldwide gross receipts.

Throwback provision: Home Interiors addressed the application of the "throwback provision" in determining Texas gross receipts. In general, this provision requires sales of tangible personal property shipped from Texas to out-of-state purchasers to be thrown back to Texas when determining the gross receipts allocated to that state; see TX Tax Code Ann. [section] 171.103(1). Whether a sale is thrown back depends on which portion of the franchise tax is being calculated. For taxable capital purposes, the sales are thrown back if the corporation is not subject to tax in the purchaser's state. For taxable earned surplus purposes, sales are thrown back if the corporation is not subject to any tax on, or measured by, net income, without regard to whether the tax is imposed; see TX Tax Code Ann [section] 171.1032(a)(1).

By enacting the earned surplus throwback provision, Texas intended to tax sales to other states that would otherwise escape tax under P.L. 86-272. Congress enacted P.L. 86-272 to prevent a state from imposing a tax on...