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Businesses that finance sales using leases should consider filing Texas franchise tax refund claims based upon a recent Texas court case.

A Texas appellate court recently held that Xerox Corporation (“Xerox”) was entitled to compute its franchise tax based upon the lower Texas franchise tax rate, which resulted in a refund of half of the Texas franchise tax Xerox had paid during the relevant periods.

Xerox leases printers long-term to businesses under financing lease agreements. Xerox’s finance lessees:

  • Receive possession, but not title, to the equipment;
  • Were responsible for insuring the equipment against loss;
  • Were required to make all payments under the lease, even if the contract was terminated; and
  • Could purchase the equipment at the end of the lease but typically did not because the lease was designed to last for the useful life of the equipment.

Wholesale sales qualify for lower Texas franchise tax rate, but rentals do not.

Generally, taxpayers pay Texas franchise tax at the...

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Martens, Todd & Leonard is pleased to announce the addition of R. John Grubb II to its Texas state and local tax controversy team.

Mr. Grubb will join the other members of the firm in representing Texas taxpayers before the State Office of Administrative Hearings, in the state district courts, Texas courts of appeals and Texas Supreme Court.

Prior to joining the firm, Mr. Grubb defended businesses in court and before state administrative agencies in his employment litigation practice for an elite litigation boutique. Mr. Grubb also gained considerable state and local tax litigation experience as an attorney for the Tennessee Department of Revenue.

Mr. Grubb graduated from Vanderbilt Law School in 2009 where he was Notes Editor for the Vanderbilt Law Review and received his Law & Business Certificate.

Mr. Grubb may be contacted at jgrubb@textaxlaw.com.

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Texas Taxpayers have reached a deal with the Comptroller to delay implementation of the Comptroller’s new local sales tax sourcing rules for internet and shopping app sales until a trial expected to occur the week of June 13, 2022.

On Monday, August 30, 2021, Travis County District Judge Karin Crump presided over hearings over whether to issue an injunction blocking an effort by Comptroller Glenn Hegar to unilaterally upend the local sales tax sourcing rules established under Texas law. The next morning, as the hearing reconvened, the parties announced an agreement to delay implementation of these new rules and the Comptroller acquiesced in the injunction.

The Comptroller’s rule amendments would switch online sales to being sourced to the customer’s location, instead of the business location of the seller. This would apply to many sellers who have only one place of business in Texas. Sourcing online sales to these sellers’ business locations enhanced local taxing authorities’ ability to incentivize taxpayers to locate large facilities within their boundaries,...

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Experience. Innovation. Results.

On June 7, 2021, the Texas Governor signed both HB 2080 and SB 903 into law. The bills substantially lower the practical hurdles that taxpayers must meet to challenge the Comptroller in state court.

New Option to Challenge Audit Assessments

Generally, to bring a protest suit in state court, a taxpayer must pay the audit assessment under protest and submit a written protest letter raising the arguments that it will raise in its protest suit. Under the current “pay-to-play” provision of the Texas Tax Code, a taxpayer must pay the entire amount of the audit assessment to challenge it in court.

A newly-enacted law, HB 2080, eases that burden by allowing the taxpayer to pay only the undisputed portion of its audit assessment. Importantly, however, any portion of a disputed amount that is not initially paid but...

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Texas taxpayers can breathe a collective sigh of relief since House Bill 1195 was signed into law on May 8, 2021. The bill provides that forgiveness on Paycheck Protection Program (PPP) loans will not be considered revenue for Texas franchise tax purposes. Additionally, HB 1195 clarifies that taxpayers may include qualifying expenses paid with PPP loans into their Texas franchise tax compensation or cost of goods sold calculations (if they otherwise qualify).

Prior to the passage of this bill, the Comptroller’s position was that taxpayers must include the proceeds from the forgiven PPP loans in total revenue on their franchise tax reports for the year in which the loan was forgiven. For a significant number of taxpayers, this would have resulted in the taxpayers being hit with an increased tax bill stemming from PPP loan forgiveness.

The 2020 CARES Act stipulated that PPP loan forgiveness would not be classified as taxable income for federal tax purposes even though loan forgiveness is usually taxed under federal income tax law as cancellation-of-debt (COD) income....

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KATY BALLARD

Martens, Todd & Leonard is pleased to announce the addition of associate Katy Ballard to its Texas state and local tax controversy team. Ms. Ballard will join the other members of the firm in representing Texas taxpayers before the State Office of Administrative Hearings, in the state district courts, Texas courts of appeals and Texas Supreme Court.

Prior to joining the firm, Ms. Ballard assisted corporate clients with IRS audit defense, tax controversy and due diligence as a member of McDermott Will & Emery’s U.S. and International Tax Group. Ms. Ballard then joined her McDermott Will & Emery group leaders when they moved their practice to KPMG.

Ms. Ballard graduated summa cum laude from Trinity College in Hartford, Connecticut, in 2013 and obtained her Juris Doctorate from the University of Texas School of Law in 2016.

In addition to her prior tax controversy work, Ms. Ballard also has first-hand knowledge of the tax obligations and challenges of Texas business owners through her experience as the owner and operator of a pet daycare...

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Texas Franchise Tax Update: Congressman Fires Back with Proposed Bill After Texas Comptroller Threatens to Tax PPP Loan Forgiveness

A Texas lawmaker has introduced a bill in the current legislative session reversing the Comptroller’s policy of treating federal Paycheck Protection Program (PPP) loan forgiveness as revenue for Texas franchise tax. The proposed bill also allows taxpayers to include the corresponding costs when calculating their compensation or cost of goods sold subtraction.

During the 2021 Texas Comptroller’s Tax Policy Update, an official at the Comptroller’s office stated that the Comptroller plans to require taxpayers to add any forgiven portion of a PPP loan they received to their total revenue, which is the starting point for the Texas franchise tax margin calculation. Although cancellation-of-debt (COD) income is typically taxed under federal income tax law, the U.S....

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In May of 2020, the Texas Supreme Court held in EBS Solutions, Inc. v. Hegar that a taxpayer may gain access to the Texas courts without first paying the tax assessment against it in full, if the taxpayer satisfies the appropriate jurisdictional requirements.[1] EBS Solutions was audited for Texas franchise tax and received an assessment of tax, penalties, and interest for four year of almost $300,000.[2] EBS disagreed with the Comptroller’s assessment and sought to challenge it. However, EBS was unable to pay the full assessment.

Generally, a taxpayer...

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Texas Franchise Tax Update: Texas Comptroller Adopts Comprehensive Changes to Apportionment Rule

The Texas Comptroller has adopted broad amendments to his Rule 3.591 governing franchise tax apportionment. In doing so, the agency rewrote numerous detailed rules for sourcing dozens of different types of receipts. Notably, for receipts from services that don’t fall under one of the specific rules, the Comptroller’s rule codifies the “end-product act” test which first appeared in a 1980 Comptroller Hearing (Decision No. 10,028) and was recently employed by the Third Court of Appeals in Hegar v. Sirius XM Radio, Inc., No 03-18-00573-CV (Tex. App.—Austin 2020, pet. filed). The Comptroller intends to apply the adopted rule retroactively except for a few provisions which he concedes are changes in policy.

The adopted rule also:

· Codifies recent policy excluding net...

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Local governments, like cities and counties, collect local taxes to finance their governmental operations. Generally, local governments receive local sales taxes based upon orders that local businesses receive within their boundaries. Local governments may also receive local use taxes when goods are delivered to customers within their boundaries. A seller collects local use taxes only when the local sales tax where the item is sold is less than the maximum rate (2%) and the local use tax is not of the same type (such as a city tax or a county tax) as the local sales tax that applied. This may occur, for example, when a seller receives an order outside city limits and sells the product for delivery to a customer residing within city limits.

Generally, local governments want businesses to relocate within their boundaries. In doing so, the relocated businesses provide jobs, goods, services and generate sales and property taxes for the local government’s operations.

To induce a business to relocate to a particular city, the city may offer the business incentives,...

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