Texas Franchise Tax Challenged


The Texas Supreme Court heard arguments this week in a case that could have significant implications on the Texas franchise tax.

Nestle USA and two Texas-based companies, Switchplace LLC and NSMBA Relators, sued the State of Texas arguing the Texas franchise tax is unconstitutional.  The franchise tax charges one-half of one percent to wholesalers, but a full one percent to businesses engaged in manufacturing. The plaintiffs claim this distinction violates the Texas Constitution’s requirement that taxes be levied in an “equal and uniform” manner, as well as the U.S. Constitution’s equal-protection and due-process protections.

The state of Texas argued that taxpayers can be classified differently as long as it’s done reasonably and that the Texas Constitution allows the creation of separate classifications for tax purposes.

Texas has had a version of the franchise tax since the 19th century. Texas lawmakers revised the franchise tax in 2006, expanding the kinds of businesses subject to the tax.  In the first two years after the revision, the tax brought in nearly $ 9 billion.