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Franchise Tax

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Wayfair has, for now, answered the question (at least, in part) of whether economic activity creates substantial nexus under the Commerce Clause for purposes of sales and use taxes. However, questions remain regarding whether and to what extent business activity tax nexus standards could be impacted. While states had boldly asserted economic nexus in the business activity tax context pre-Wayfair, the response since has been somewhat muted, until recently. Three states, Pennsylvania, Texas, and Wisconsin, have recently sought to fill in the blanks with regard to business activity tax nexus, with varied and inconsistent results that may raise more questions and concerns than answers.

On June 5, 2019, the Illinois legislature enacted Public Act 101-0009 which includes comprehensive amnesty programs covering taxes administered by both the Illinois Department of Revenue (the “Department”) and the Office of the Secretary of State of Illinois (the “Secretary of State”). Taxes covered by these programs include the corporate and individual income taxes, the Retailers’ Occupation Tax, the Use Tax, and the Illinois franchise tax. The amnesty programs run for the period October 1, 2019 through November 15, 2019, and, under both programs, 100% of penalties and interest will be waived in exchange for payment of any outstanding tax liability due. Unlike previous amnesty programs, taxpayers will not be punished for not participating — that is, Illinois will not impose double penalties and double interest on tax assessments issued after the amnesty period closes.

Pop quiz: when it comes to business earnings, the State of Texas imposes: (a) an income tax; (b) a business activity tax that is not an income tax; or (c) no tax at all. Good news (or bad news)—no matter which answer you chose, you may be right (or wrong).  Right now, the answer appears to be (b), but in a few months we may find out that the answer is actually (a), and barring a change of course by the State Legislature, the answer may be (c) in the near future.  One thing is clear; the Texas Franchise Tax (or “margin tax,” as it is colloquially known), is in a state of flux.

Texas—never known for doing anything on a small-scale—is starting off 2017 with what is likely to be billions of dollars worth of good news for the Comptroller. On January 6, the Third District Court of Appeals released a substituted opinion in American Multi-Cinema Inc. v. Hegar, No. 03-14-00397-CV, a case dealing with the scope of the Texas franchise tax costs of goods sold (“COGS”) deduction.  The Comptroller’s office predicted that the court’s original decision, issued…