The document summarizes concerns from small business owners and organizations about Texas's new margins tax, which replaced the previous franchise tax. The National Federation of Independent Business (NFIB) argues the tax will negatively impact many small businesses by increasing their tax burden significantly compared to before. While supporters argue it broadens the tax base, the NFIB is calling for reforms like raising the small business exemption amount to provide more relief for small companies. Whether any changes will be made is uncertain as it requires calling a special legislative session.

1. Margins tax stirs concern among small businesses and organizations
By Paul Wiseman
Special to theOil Report
"This is a money grab of historic proportions," said National Federation of Independent Business/Texas executive director Will
Newton.
"When I heard of the new (tax) proposals, I was very skepticalof them," said FiteFire and Safety president Lyn Fite.
"In the past few years the Legislature has done a lot for small businesses…. In addition to … tax breaks (on thenew margins
tax), many small business owners will receive property taxbreaks on both their business and personal property," said Texas
House Speaker Tom Craddick, R-Midland, in an e-mail interview.
What's stirring thestrong feelings is the Texas Legislature's most recent effort in the ongoing saga of public school finance
repair. For years there was a franchise tax on many categories of statebusinesses that made $150,000 or more in a year. This tax
had a number of loopholes that allowed businesses making much more than that amount to escape payment of any taxes. Most
groups, including the NFIB, agreed that this law needed some repair.
Closing loopholes, raising revenue
"There were two main loopholes in the old tax - the 'Geoffrey's loophole' and the 'Delaware sub,'" said NFIB's Newton. "The
Geoffrey's loophole was named after the Toys-R-Us giraffe. The home office of many national chains would charge the local
storea franchise fee for the use of its company logo - in the amount of whatever profit that storemade," thus making it appear
that the storemade no profit and, therefore, owed no franchise tax.
The "Delaware sub" loophole was related to thefact that many companies incorporatein Delaware, no matter where they are
physically located, because of that state's favorable incorporation laws. Companies incorporated there paid no tax under the old
franchise tax law. "Small businesses did not have the savvy to avoid thesetaxes like the major corporations did," Newton said.
Another factor pushing the 2006 Legislature to make changes involved a Texas Supreme Court ruling that, in basic terms,
forced legislators to again make changes in school financing, making new forms of revenue necessary.
The result is HB 3 from the 79th Legislature's third special session, amended by HB 3928 from the 80th Legislature in the
spring of 2007. It is called a margins tax because it is a tax on margin, or the least of these three figures:
- Totalrevenue minus thecost of goods sold;
- Totalrevenue minus employeecompensation and benefits or
- 70 percent of total revenue.
The margin is then apportioned by theproportion of the company's business that is done in Texas as opposed to out-of-state.
Tax is owed only on business done in the state.
The rate is one-half percent on taxable entities primarily engaged in wholesale or retail trade, and one percent on all other
taxable businesses. For any earnings under $10 million, however, the rate is 5.75 percent.
Businesses earning less than $300,000 under this margin are exempt from the tax. This number will be adjusted for inflation
every two years. The tax phases in at 20 percent increments up to a margin of $1 million. For example, a business with a margin
of $300,000 to $399,999 will pay taxes on only 20 percent of their totalrevenue, and so forth, up to 100 percent when it reaches
$1 million in revenue.
Sole proprietorships and general partnerships that haveonly natural persons as partners are exempt, as are most nonprofits and
certain other entities. Corporations of just about any sort are subject to this tax.
"Two hundred thousand new business owners in the statewho were not subject to thefranchise tax will have to file under this
tax," said Newton, although not all will have to pay. Newton said that filing such reports costs small businesses proportionately
more in man hours or accounting charges than large corporations pay. He is concerned about that being a hidden cost of the
margins tax.
State Senator Kel Seliger, R-Amarillo, said, "There has been a lot of resistance from peoplewho didn't pay any tax before,
which is not surprising. We can't just all enjoy being part of the Texas economy without paying our fair share."
Added Craddick, "As a result of this bill, a greater number of businesses will pay for thecost of educating our children. The
franchise tax base was broadened by bringing in partnerships and other business entities that receive liability protection."
The margins tax will indeed raise revenue, if thecomptroller's office estimates are correct. R. J. DeSilva, comptroller's office
spokesman, said estimates for the 2008-2009 biennium expect thenew tax to take in $11.9, or just about double what would have
been collected under the old franchise tax. DeSilva stressed that this is an estimate and, because this is a brand new taxing
structure, it is more difficult to accurately predict what the amounts will be.
The legislature made figuring the tax for 2006 voluntary, but DeSilva said only 1,500 businesses did this calculation and the
numbers were not used in helping the comptroller's office arrive at their figures.
The comptroller's office is touring the stateto bring business owner up to speed on the new tax. The Midland-Odessameeting
was held on October 23 and, according to NFIB's Stromberg who attended the meeting herself, was attended by approximately 50
people, most of whom were accountants.
DeSilva said his department has been contacting accounting and business groups since thelegislation was signed, asking for
feedback. The 2007 amendments, including the sliding scale discounts for businesses making less that $1 million, were largely a
result of that feedback.

2. How many will pay more?
It's not just the 200,000 new filing-responsible entities that has Newton concerned - it's thefact that many who were already
paying will be payingtwo to 10 times their previous tax amounts, according to informal polling of NFIB members.
"I have not talked to anyonewho says they will be paying less under this tax than they were before," Newton said. He cited
business owners who had told him they would have to raise prices, lay off workers, borrow money or, in one case, go out of
business because of thenew taxing structure.
It is ironic that some may have to lay off workers, said NFIB spokesperson Laura Stromberg, because, "Two thirds of all new
jobs created over the last 20 years came through small businesses."
Craddick counters, "Thevast majority of small businesses in Texas are sole-proprietorships, not partnerships or corporations.
Sole proprietors and general partnerships composed of only natural persons are exempt from thetax.
"In addition … many small business owners will receive property taxbreaks on both their business and personalproperty,"
Craddick continued.
Newton said most business owners he had talked to said their increases under the margins tax would be much more than their
property taxsavings.
One reason a law passed in 2006 is only now generating a reaction is that the 2006 tax year was still under the old franchise
tax. Thefirst tax payments under thenew plan will be due on May 15, 2008, and many businesses are only now starting to
understand thelaw itself and what its impact will be.
One of thoseis Lyn Fite.
"I've only been aware of this for several months now," he said. "When it first came up I was very skeptical of it. As a small
business owner, when I hear, 'This is going to be good for you,' I know that it usually means I'm not going to be a winner."
"If they'regoing to do something for us, they should get themargin (exemption) to $1 million or even $5 million to give us a
break so we can continue to build our businesses."
While Fite has not figured his tax obligation yet - he says his accountant is working on that - he fears he will have to take
strong measures involving prices and staffing to pay thenew tax.
He says he is not opposed to payingtaxes in general. "I have been in business for 25 years and I have not missed a (tax)
payment."
Fite is glad to see the tax base broadened to some extent. "Under theold system, it galled me that some were not payingthe
franchise tax. I thought, 'Let's everybody share in that (tax).'"
"This will surely not go unchallenged," he added. If nothing else, he will look forward to thenext election. "I have voting
power and I will exercise it."
NFIB's suggestions
The NFIB has put forth a list of seven reforms to thenew law that they would like to see enacted before the May payment is
due. This would require a special session of the legislature, which is not scheduled to meet again in regular session until 2009.
Some of the proposals are listed below.
The first proposalwould exempt money-losing businesses from payingthe tax. Under thecurrent accounting procedure it is
possiblefor business to lose money or make very little, and still pay thetax, raising the question of where a business in this
condition would get the money to pay its tax. The NFIB has suggested tying the tax to a company's federal tax form.
When asked how a company in the red could pay taxes, Seliger replied that, because of varying ways to account for income, a
company could show that it was not making money while still having income. Plus, that feature keeps it from being called an
income tax. "You can't call this an income tax if they can owe tax without showing any income," he said.
A second recommendation would be to raise the small-business exemption from $300,000 to $1 million, a proposalthat Lyn
Fite promotes as well.
NFIB also suggests allowing deductions in their cost of employment for all contract labor used by Texas firms. Because these
deductions are currently not allowed, firms that use much contract labor may have to pay more tax than their counterparts who
use only employees for their labor pool.
The organization also asks thelegislature to limit the tax increase under the margins tax to no more than a 100 percent increase
over a company's historic high under the old franchise tax. As stated above, Newton has talked to businesses facing tax bills of
two to 10 times their previous figures. "We think allowing a business to pay double is more than fair," he said.
Seliger indicated that he had great respect for theNFIB and any proposals they put forth should be considered. "A lot of laws
have unintended consequences. We don't know what they will be in the near term. As we find problems, we need to fix them. No
one who passed this law wanted to harm small businesses." He added that, while it is the governor's sole right to call a special
session, Seliger would be in agreement with theneed for a special session to address theseissues if one is called.
Seliger and Craddick both stated that they had not heard any complaints about the tax from constituent businesses.
Newton said that his organization alone stood against the margins tax in thebeginning - all other business groups were in favor
of it. But now some industry-specificgroups are coming to him asking to form a coalition under theNFIB banner to fight for
changes - and fast.
He is also getting calls from other NFIB state chairmen. "They'reasking me, "What did you do there in Texas? Our stateis now
looking at doing something like that,'" he said.
"The power to tax is a very important power," Newton continued. "It will destroy some."