By Don Bolding
Killeen Daily Herald

Small businesses in Texas saw the revised franchise tax, called the "margins tax," coming and sounded the alarm against a money-eating monster.

They still regard it that way, but other monsters have attacked the state and left it still gasping for money.

The Texas chapter of the National Federation of Independent Business, leading the charge to get the tax drastically amended, has formed a Texas Business Tax Coalition, which includes NFIB/Texas, the Independent Electrical Contractors of Texas, the Texas chapter of the Air Conditioning Contractors of America, the Associated Plumbing-Heating-Cooling Contractors of Texas, and the Texas Courier and Logistics Association.

NFIB/Texas information officer Laura Stromberg said at least three other groups are poised to come on board. They want the Legislature convening in January to:

Exempt small businesses that are losing money or are marginally profitable from state tax liability.

Raise the small-business tax exemption from $300,000 to at least $1 million.

Lower the margins tax rate by 50 percent for businesses with under $20 million in gross receipts.

Allow deductions for the cost of employment for all contract labor.

Limit a business' increase under the margins tax to no more than 100 percent of its historic high under the old franchise tax.

Require a two-thirds vote of the Legislature before the margins tax can be increased.

The Legislature enacted the margins tax in 2006 to try to close loopholes in the franchise tax and to enable the lowering of property taxes to provide for school revenues. It went into effect last year. State Rep. Jimmie Don Aycock of Killeen said one important goal was to levy taxes on out-of-state corporations that formerly paid no franchise tax.

But it taxes gross profits, prompting some to call it an unconstitutional income tax, and it hits small businesses that may not be profitable and taxes them when the tax would create a deficit.

Critics say they understand the need to close loopholes but say the tax as written overburdens businesses already struggling.

It exempts sole ownerships and partnerships. Aycock said he had been hearing of businesses formerly organized as corporations, limited-liability partnerships and others structured to protect individual owners reorganizing as sole ownerships to escape the tax.

"I worry that they feel they have to do that and reduce their legal protection," Aycock said. "Also, I think there's a danger that out-of-state corporations will leave the state, or abandon plans to come in, if they think they can get a better tax arrangement somewhere else."

The tax gets its name from the "taxable margin," which is the lower of total revenue minus the cost of goods sold or total revenue minus employee compensation and benefits, not including payroll taxes. Then the tax is levied on the basis of the percentage of business done in Texas.

The total amount is 0.5 percent for companies primarily engaged in retail or wholesale trade and 1 percent for all others.

Companies with total revenue of less than $300,000 pay no tax, and others pay at graduated discounts up to $900,000. Companies above that pay the full amount, which is 1 percent for most entities, 0.5 percent for some, and 0.575 percent for entities with $10 million or less in total revenue.

The first returns were due in May of this year. The complexity of the system of exemptions and deductions caused many businesses much confusion, but many wound up paying many times the amount of taxes they did before, fueling the continued call for radical reform.

Despite attempts by the state comptroller's office to publicize the changes, some are only hearing about them for the first time when presented with the calculations from their bookkeepers.

"The tax is an attempt to collect some money from businesses that previously paid little or nothing," Aycock said, "and it enabled the Legislature to reduce the maintenance and operations part of the property tax by one-third in an effort to equalize the state's income."

Some school districts held bond issues to raise more money, including Lampasas and Marble Falls in his district.

Hurricane Ike, with its $5 billion price tag, and a $2.4 billion unexpected overrun in Medicaid costs have wiped out the projected budget surplus.

"We'll have better projections from the comptroller after the first of the year" when the Legislature goes into session, Aycock said, and lawmakers can start trying to decide how to balance the shortfall with the public outcry.

"I see two things as doable," he said. "We can raise the exempted amount from $300,000, and that's where most legislators are leaning, and we can stagger the rate somehow up from that. But the margins tax has to remain in some form."

NFIB/Texas executive director Will Newton said in July that almost half of Texas small-business owners said they would have to raise prices to cover the cost of the tax and about 20 percent expected to lay off at least one employee.

A third said they would not be able to hire new employees. Another third would not be able to invest in equipment or inventory, and another third expected to cut wages or forgo bonuses.

Newton said the tax was forcing some to close, and about 7 percent expected to take out a loan to cover the liability. Another 14 percent expected to drop health care or other benefits.

Melanie Alsop and her husband, Joseph, head a corporation that owns Alsop Plumbing in Killeen. She said the company has been paying up to $600 a year in franchise tax but faces a bill this year of $15,027.

"I was totally surprised when our bookkeeper told me that," she said. "I don't understand it. I asked him how it happened, and he just said they changed the system. You just have to pay it or lose your franchise. And last year was a slow year. I hate to think what it would have been otherwise."

She said the situation makes her think of dissolving the corporation.

"Incorporating doesn't do that much for you if you have enough insurance," she said. "I bet a lot of other business owners are thinking the same thing. That kind of amount is as much as workmen's compensation, and I wouldn't be surprised if some people aren't thinking of dropping that. A lot of people might have to go out of business if this keeps up."

Greater Killeen Chamber of Commerce president John Crutchfield said that chamber officials haven't heard much about the issue from their members, at least not yet.

"Possibly some business owners haven't heard about it yet and aren't aware what they'll have to pay. When it comes clear, they'll certainly have opinions about it. And it's unfortunate that it's happening this year, because the state's funds will be running so low because of hurricane costs. They won't be in a position to decrease revenue. But it will still be a hot issue in the Legislature."

He said the chamber may poll business owners, possibly in its online Hot Links! newsletter, to see what they do know at this point.

Contact Don Bolding at dbolding@kdhnews.com or (254) 501-7557.

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