A constitutional challenge to the Texas Franchise Tax was recently rejected by the Texas Supreme Court.
In In Re: Allcat Claims Service, L.P. et al., No. 11-0589, 2011 WL 6091134 (Tex. 2011), a partnership argued that the Texas Franchise Tax constituted an income tax and, as such, violated the Texas Constitution. The Texas Constitution provides that the state may not collect an income tax on natural persons.
Allcat Claims Service LP, a Boerne insurance adjustment firm that filed the suit, contended that the Franchise Tax imposed against the partnership reduced the income of Allcat’s partners, making it an income tax.
The Supreme Court held the franchise tax is not unconstitutional. The Court distinguished the imposition of the Franchise Tax and an income tax on natural persons by reasoning that partnerships are treated as legal entities separate from their individual partners. The franchise tax is imposed on a partnership before the partnership distributes profits to any individual partners. Accordingly, the Supreme Court held that the law does not impose an income tax and, as such, does not violate the Texas Constitution.