In re Allcat Claims Service, L.P. and John Weakly, No. 11-0589
The Texas Constitution prohibits the Legislature from imposing an income tax unless the voters of the state have approved it through a statewide referendum. Tex. Const. art. VIII, § 24(a).
Allcat argues that the current Texas franchise tax violates this prohibition because it is calculated based on the margins earned by partnerships. Normally, tax challenges must be brought in Travis County district courts. But the bill creating this new franchise tax also contained a provision purporting to vest “original and exclusive jurisdiction” over constitutional challenges in the Supreme Court of Texas. The bill put no time limit on when taxpayers could file suit — this one was brought about five years into the new system — but it gives the Texas Supreme Court only 120 days from when suit is filed to resolve a challenge.
The Texas Supreme Court issued its decision around 4:00 today, the last day by that clock. Here’s what the orders list says about the outcome:
The Court denies Allcat’s requests for relief relating to its facial challenge because the Act [creating the Texas business-margins tax] does not violate Article VIII, Section 24 of the Constitution. The Court dismisses the as-applied challenge and attorney’s fees claim for lack of jurisdiction.
The vote breakdown was either 7-2 or 9-0, depending on how you frame it. The majority upheld the tax on the merits. The dissent would have dismissed the appeal for want of jurisdiction (also leaving the tax in place). The Justices disagreed about why, but none of them would have struck down the margins tax today.
Justice Johnson delivered the majority opinion, joined by Chief Justice Jefferson, Justice Hecht, Justice Wainwright, Justice Medina, Justice Green, and Justice Guzman. Justice Willett delivered an opinion concurring in part and dissenting in part. He was joined by Justice Lehrmann.
Majority: This is not a state income tax, so it did not need to be approved by the voters
The majority concluded that the Texas business-margins tax on partnership income was not a personal-income tax.
In what turned out to be the pivotal analytical step, the Court held that it could interpret the constitutional provision in light of the Texas Legislature’s choice (through separate legislation) to classify partnerships as separate legal entities rather than just shadows of their members. Because a partnership is a separate legal entity, the majority reasoned, the partnership’s income did not yet belong to the partnership’s individual members when the tax was assessed.
Had Texas partnership statutes not adopted that view of partnerships, this case might have turned out differently.
Everyone agrees: The Court lacked jurisdiction to hear the narrower, fact-specific challenges brought by Allcat
The majority concluded that the statute only authorized it to decide the facial constitutionality of the statute. The Court thus refused to reach the taxpayers’ challenges based on other theories, including their argument that the taxes violated the requirement that taxes be equal and uniform.
This could spell some trouble for the taxpayers in Nestle USA, Inc. v. Combs, No. 11-0885, which raises (among other arguments) the same “equal and uniform” issue.
Where the Justices disagree: Does the Court have jurisdiction to even address this question on the merits?
The Court was divided on two questions about its own power, relative to that of the Texas Legislature: (1) did the Legislature have power to confer this type of jurisdiction on the Court? and (2) if so, did it have power to impose a 120-day deadline on the Court to resolve this challenge?
The jurisdictional grant
The Texas Constitution allows the Legislature to expand the Texas Supreme Court’s original jurisdiction to issue certain writs of mandamus.
The majority held that the expansion of jurisdiction here was valid. The dissent would have held that the extra jurisdictional grant in the statute was ineffective because it was not, in either text or substance, about the Court’s traditional mandamus authority.
The dissent notes that the statute did not use the word “mandamus” but instead authorized the Court to “issue injunctive or declaratory relief in connection with the [constitutional] challenge.” Taking a strict view of the statute, the dissent would have held this was an ineffective attempt to confer non-mandamus power, not a grant of mandamus power at all. The majority took the view that, because the Legislature meant to confer some power, it should be construed as mandamus authority to effectuate that intent.
But the dissent’s criticism went beyond word choice. The dissent concluded that the review conducted by the majority broke from normal mandamus practice. Specifically, the dissent contended that there was no “abuse of discretion” or “ministerial duty” involved here — traditionally the first element of mandamus relief. Instead, the dissent saw this proceeding as simply reaching out to decide an interesting and important legal question rather than as deciding whether to issue an extraordinary writ:
Not long ago, one of my colleagues lamented that the Court was dragging Texas into “a whole new world” of mandamus practice. He criticized the Court for stretching the writ’s second element (“no adequate remedy at law”) beyond what he believed our caselaw allowed. Today, the Court turns its sights to mandamus’s first element, and in my view dismantles an important limit on the judiciary’s writ power. I fear that the lure of instant Supreme Court review of select legislation will prove increasingly irresistible.
The majority sought a pragmatic way to accomplish the Legislature’s goals (expedited review) rather than trying to announce a new framework for mandamus practice. With that in mind, I don’t think the dissent really expects a flood of these cases to percolate up from private litigants. But I would not be too surprised if the Legislature embraces this more relaxed view of “mandamus” authority to vest the Court with original review of other questions.
The time limit
The Legislature also set a 120-day clock for the Texas Supreme Court to resolve challenges brought under this special jurisdictional grant. The parties did not challenge the validity of that clock. The majority says that the clock was, accordingly, not at issue.
But there is little doubt that clock motivated the Court’s timing here — the schedule was compressed, and the opinion was issued on the last day of the 120-day period, near the close of business.
The dissent questioned the Legislature’s power to order the Court to act within a strict deadline.
By setting a hard-and-fast deadline for deciding a case, it threatens to interfere with our sworn adjudicatory duties under our Constitution.
Because of the importance of the franchise-tax issue, the dissent argued,
It … demands, and deserves, our most meticulous study. Fast-forwarding and vacuum-packing a multi-billion dollar challenge to a major piece of the Texas tax system does a grave disservice not only to the parties involved, but also to the wider public that deserves methodically researched and reasoned Supreme Court rulings to guide their actions. This case may have been filed 120 days ago, but we heard the parties’ oral arguments only 35 days ago. Allcat might justifiably wonder whether today’s outcome might have been different had the Court taken more time to marinate in these high-stakes questions of law.
In sum, I have reservations over the constitutionality of section 24(b). The Court refrains from addressing the issue, as no party raised it. Perhaps a future case will squarely ask whether the Constitution permits one branch of government to instruct another on core matters in this way.
The majority did not, precisely, defend the clock. It acknowledged that there were separation-of-powers limits on the Legislature’s true power to impose a deadline. Instead, the majority defended the Court’s own choice to comply with the Legislature’s preference for a decision to be made on that clock, even if not strictly required to do so:
We see no valid reason that this Court cannot cooperate with priorities expressed by other branches of government so long as we fulfill our constitutional duties and neither impair our judicial prerogatives and functions, nor impair the rights of the parties.
With a 7-2 vote, and no Justices prepared to strike down the tax, it does not appear that this case was on the verge of turning out differently had the clock been a little longer — or had it been struck down.
But if the internal vote had been 5-4, the Court might have made a different calculation about waiting.
When the Legislature enacts its next big structural-reform legislation — perhaps in response, once again, to pressures (or court orders) about school finance or tax reform — we may see it authorize expedited review in the Texas Supreme Court. Next time, I’d expect to see the bill use the word “mandamus.” And given the Legislature’s continued focus on how quickly the Court resolves cases, I’d also expect to see the Legislature continue to prescribe time limits.