Background

On June 14, 2013, Governor Rick Perry signed into law H.B. 500. The bill contains a provision which makes the Margin Tax more fair for pipeline companies by allowing them to subtract as a cost of goods sold the depreciation, operations, and maintenance costs related to the services they provide. The provision is the result of many hours of hard work and negotiation by lobbyists for NAPTP and member companies. Although we continue to believe that PTPs should not be subject to taxes on their revenue, this improvement represents a major victory.

The Texas Margin Tax was enacted in 2006 based on a proposal developed by the Texas Tax Reform Commission chaired by former Comptroller John Sharp. It became effective in 2008. Under the margin tax, all taxable entities other than sole proprietorships are subject to a one-percent franchise tax unless they are primarily engaged in retail or wholesale. Retailers and wholesalers pay a one-half percent franchise fee. The tax is imposed on total revenues minus either cost of goods sold or employee compensation. Despite concerted efforts, the Association was not able to obtain an exemption for PTPs when the law was passed by the legislature.

In 2011, a lawsuit challenging the margin tax was filed with the the Texas Supreme Court. The lawsuit asserted that the tax violates the “Bullock Amendment,” (article 8, section 24(a) of the Texas Constitution) which states that any tax imposed on the net incomes of natural persons, including a person’s share of partnership income, must be approved by a majority of registered voters in a statewide referendum.

Because so many PTPs are based or have operations in Texas, and because the Margin Tax has put a particular burden on companies in the midstream industry, the Association has been involved over the years inefforts to amend to make it work better and more fairly for our members’ industries. For the 2013 legislative session, as in prior years, the Association formed a working group to follow Texas tax reform and to discuss and implement a strategy. Additionally, we retained George Scott Christian to assist with the positioning of the group as discussions move forward. George Scott has worked with the Association and its members for almost a decade and is also counsel to the Texas Taxpayer’s and Research Association. This year the joint effort finally led to a successful conclusion.

For further information on this effort, or to participate in future efforts in Texas, contact Lindsay Sander at [email protected].

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