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October 3, 2011


Texas Taxpayers and Research Association

400 West 15 1h Street, Suite 400, Austin, Texas 78701 Telephone: 512/472-8838 * FAX: 512/472-2636 * E-Mail:*Website:

Supreme Court of Texas PO Box 12248 Austin, Texas 78711 Re: Cause No. 11-0589; In re Allcat Services, L.P. and John Weakley We have an interest in this proceeding before the court, and wish to offer our thoughts on the merits of the Bullock amendment claim in this case. In doing so, we do not comment on any other aspect of the petition nor do we address any other policy considerations relating to the revised franchise tax or how it is calculated. The Texas Taxpayers and Research Association (TIARA) is the state's pre-eminent taxpayer organization. Our membership includes companies in all major sectors of the state's economy, organized under essentially all of the various business forms allowed in this state. TIARA has been actively involved in the development of business tax policy in this state for the past forty years. We participated in the legislative discussions that led up to the Bullock amendment, assisted in its drafting, and took part in the deliberations concerning the 2006 initiative that resulted in the current franchise tax. Consequently, we believe it is appropriate for us to comment on this important issue and provide the court with the rationale behind the conclusions we have come to and testified on previously before the legislature. Article VII, 24(a) of the Texas Constitution, commonly referred to as the "Bullock amendment" states: (a) A general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person's share ofpartnership 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 voting in a statewide referendum held on the question of imposing the tax. The referendum must specify the rate of the tax that will apply to taxable income as defmed by law. [emphasis added] TIlls provision does not prohibit the legislature from imposing a tax on partnerships. Several observations lead us to this conclusion:

1. The language in the Bullock amendment requires public approval of an income tax on natural persons. The phrase at issue, "including a person's share ofpartnership and unincorporated association income, modifies "net incomes of natural oersons" and is


Gary L. Hoekstra
The Dow Chemical Company

President Dale K. Craymer

Immediate Past Chairman Del R. Threadgill JC Penney Company

Supreme Court of Texas Page 2 October 3, 2011

simply clarifying language recognizing that the income of a natural person can include more than just wages and salaries. It does not require public approval of the direct taxation of a business that may be a source of income to a natural person. 2. The franchise tax is a tax on a business, including those operating as partnerships. It is the responsibility of the partnership to calculate the franchise tax, file the return, and pay the tax, not the individual partners-unlike the treatment of partnership income under federal tax law. The franchise tax is simply a cost of the partnership-like sales and property taxesthat must be paid before the net income of the partnership and its distribution to partners is even determined. It should also be noted that the franchise tax is a "privilege" tax imposed on business for the privilege of doing business in Texas in a form that provides protections from liability (Black's Law Dictionary actually provides separate definitions of the term "franchise tax" and "income tax"). Part of the rationale for the tax changes made in 2006 was to better align the tax with the benefits received under various forms of organization. Entities that receive the benefits of liability protection are subject to the tax; those that do not receive liability protections are not. For this reason the tax was extended to limited pminerships, limited liability partnerships, and professional associations, but not to general partnerships solely owned by natural persons or sole proprietorships. In this sense, the franchise tax is more like a fee assessed for the privilege of doing business. In fact, the U.S. Bureau of the Census classifies the Texas franchise tax as a fee on the business entity-not as an income tax. 3. State law specifically states that a partnership and its partners are distinct from one another. Sec. 152.056, Business Organizations Code, reads: "A partnership is an entity distinct from its partners." In fact, the very reason for forming a limited partnership is to create separation between the business and its owners. Therefore, levying a tax on a partnership does not equate to levying a tax on its partners. 4. The ballot language of the Bullock amendment made no reference to prohibiting a tax on business entities. Voters were simply asked to vote for or against the proposition:
The constitutional amendment prohibiting a personal income tax without voter approval and, ifan income tax is enacted, dedicating the revenue to education and limiting the rate oflocal school taxes.

This language clearly shows that the Legislature intended and voters approved a restriction concerning the imposition of a personal income tax, not a business tax. If the purpose of the phrase referencing income from partnerships was intended by the Legislature to prevent a tax on business entities, that surely would have been specifically mentioned in the ballot language. A voter's plain reading of the ballot language would never have led to the conclusion that a vote for the amendment was to impose a referendum requirement on the taxation of a business entity.

Chairman Gary L. Hoekstra The Dow Chemical Company

President Dale K. Craymer

Immediate Past Chairman Del R. Threadgill IC Penney Company

Supreme Court of Texas Page 3 October 3, 2011

5. The Legislature understood that the Bullock amendment did not prohibit the direct taxation of partnerships. a. Since some "partnerships" were subject to the franchise tax prior to the "Bullock amendment," had it been the legislature's intent not to tax partnerships they would have said so. In 1991, Texas authorized the "limited liability company" (LLC) as an entity able to organize under Texas law and added it to the list of businesses required to pay the franchise tax (House Bill 278, nnd Legislature, Regular Session). At that time and still today, an LLC with more than one member may elect to be treated as a partnership for federal tax purposes and file IRS Form 1065, U.S. Return of Partnership Income. If the Bullock amendment was intended to prohibit taxation of partnerships under the franchise tax, the existing tax on limited liability companies would have been called into question. It was not. b. House floor debate on the Bullock amendment shows that legislators understood that it was not meant to apply to a tax on a business entity. A series of questions often is asked during floor debate for the purpose of clarifying what a given measure is intended or not intended to do. The oral record of House floor debate on the Bullock amendment included the following exchange (as referenced by April 17, 2006 letter of the First Assistant Attorney General, Barry R. McBee, to the Governor's Chief of Staff, Deirdre Delisi): Q: Mr. Williamson: This amendment is addressed as a personal income tax. Is that correct? A: Mr. Stiles (House sponsor): That's correct. Q: Mr. Williamson: Now, is there a prohibition, or will there be a prohibition on a business income tax? A: Mr. Stiles: Be okay with me. Q: Mr. Williamson: No--but I mean-is that part of the amendment? A: Mr. Stiles: That's not there, no. We appreciate the opportunity to comment on the proceedings and are happy to offer any additional information the court may require. Sincerely,

Dale K. Craymer President

Chainnan Gary L. Hoekstra The Dow Chemical Company

President Dale K. Craymer

Immediate Past Chainnan Del R. Threadgill IC Penney Company

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