Texas Supreme Court Rules Franchise Tax is Constitutional

Franchise paperwork and graphs

On October 19, 2012, the Texas Supreme Court held that the Texas franchise tax does not violate the Texas Constitution. 

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 — even if all manufacturing activities are out-of-state. The petitioners claimed this distinction violated the Texas Constitution’s requirement that taxes be levied in an “equal and uniform” manner. 

The Texas Supreme Court held that the legislature must have discretion in structuring tax laws. “This is especially true when the object of the tax—occupations or the privilege of doing business in the state—is not easily or exactly valued.”  The Texas Supreme Court concluded that the legislature’s structuring of the franchise tax is reasonably related to its object and, as such, the “petitioners’ challenges are without merit.”

Justice Willett and Justice Lehrmann issued a dissenting opinion, asserting that the court lacks exclusive original mandamus jurisdiction in taxpayers’ constitutional challenges and that the court stretched mandamus jurisprudence beyond its constitutional limits.