In re Allcat Claims Service, L.P. and John Weakley, No. 11-0589 (Petition)

Late last week, a Texas business (Allcat Claims Service, L.P.) asked the Texas Supreme Court to declare the Texas business-margins tax (or franchise tax) passed in 2006 to be unconstitutional. The State’s response brief is due August 19th.

The case has a very unusual procedural wrinkle — it is an original proceeding with (by statute) a 120-day clock for the Supreme Court to reach a result.

The substance

Allcat is a limited partnership, and some of its owners in turn are natural persons. (( Human beings. In this context, and un-natural person would be an artificial legal entity such as a corporation, which is treated as a person for some purposes. ))

The core of Allcat’s argument is that the margin tax it was asked to pay is an unconstitutional tax on the income of a natural person (Mr. Weakley). The Texas Constitution has a provision (known as the Bullock Amendment) making it very difficult to impose a personal income tax. It provides that a statute imposing a “tax on the net income of natural persons, including a person’s share of partnership … income” must also provide for a statewide referendum. And it would be an unusual election. To pass, the proposed tax would have to be “approved by a majority of the registered voters” — not merely those who choose to vote. (( The language of the Bullock Amendment: “A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person’s share of partnership and unincorporated association income, must provide that the portion of the law imposing the tax not take effect until approved by a majority of the registered voters in a statewide referendum held on the question of imposing the tax.” )) This law did not provide for such a referendum.

Allcat also argues that the divergent tax rates imposed on different types of businesses violate the Texas Constitution’s requirement for uniform taxation.

The procedural wrinkle: A 120-day clock

The Legislature designed this tax during the special session triggered by the Texas Supreme Court’s most recent decision that struck down Texas’s school-finance system.

The Legislature inserted in House Bill 3 specific instructions about how any constitutional challenge to this new tax system should proceed:

SECTION 24. (a) The supreme court has exclusive and
original jurisdiction over a challenge to the constitutionality of
this Act or any part of this Act and may issue injunctive or
declaratory relief in connection with the challenge.

(b) The supreme court shall rule on a challenge filed under
this section on or before the 120th day after the date the challenge
is filed.

The Supreme Court usually has exclusive jurisdiction over mandamus proceedings against the Comptroller — but a taxpayer’s challenge (like this lawsuit) normally proceeds through an administrative process and then to the district court. This statute accelerates review of a specific class of questions all the way to the Supreme Court. It also imposes a 120-day deadline for when “[t]he supreme court shall rule on [the] challenge,” measured from the filing date.

The filing date was July 29, 2011. The 120-day mark would be reached the Monday after Thanksgiving.

Other resources: A June 16, 2006 post from the Texas State & Local Tax Law Blog mentions both this substantive issue and the potential breadth of this jurisdictional grant.

That post mentions a request for an AG opinion by the Comptroller. In that request, then-Comptroller Strayhorn expresses her view that “the proposed margin tax … would require a referendum” and that “[n]o basis has been provided, and none is apparent, for the disparate treatment of businesses from the standpoint of tax rates.” (page 6) The AG did not issue an opinion; the request was later withdrawn.

Hat tip to William Grimsinger’s post on Tax Blawg – State and Local.