Franchise tax upheld by Texas Supreme Court

By David Yates | Oct 22, 2012

In a 6-2 ruling, the Texas Supreme Court has found that the state’s franchise tax does not violate the constitutional requirement that taxes be uniform and equal – declining to refund the $8 million Nestle USA paid in business taxes this year.

Court records show Nestle filed a petition on June 25 challenging the constitutionality of the Texas franchise tax, seeking mandamus relief to compel the Texas Comptroller of Public Accounts to refund the franchise tax paid by the company under protest.

A month earlier, on May 1 Nestle had hand-delivered a letter of protest to the comptroller, which was followed by an electronic submission of $8,682,998.99 for franchise taxes, court papers say.

“(Nestle) respectfully requests that … this court mandamus the comptroller to refund $8,682,998.99 of franchise tax paid by (Nestle) under protest … and declare that the Margin Tax violates the Texas Constitution and the United States Constitution,” states the company’s petition.

On Oct. 19 Justice Nathan Hecht delivered the high court’s opinion, denying the company’s petition of writ of mandamus.

“Since first imposing a franchise tax in 1893, the Legislature has restructured it several times, drawing various distinctions among taxpayers with adjustments, deductions, and exemptions that have become elaborate,” states the opinion.

“Petitioner in this original proceeding contends that the franchise tax now in place bears no reasonable relationship to its object, the value of the privilege of doing business in Texas, and therefore violates the Texas Constitution’s mandate that ‘taxation shall be equal and uniform,’ the Fourteenth Amendment’s Equal Protection and Due Process guarantees, and the U.S. Constitution’s Commerce Clause.

“We conclude that petitioner’s challenges are without merit.”

Justice Don Willett, joined by Justice Debra Lehrmann, issued a dissenting opinion, arguing that the court lacks exclusive original mandamus jurisdiction in taxpayers’ constitutional challenges like this and that the court has stretched mandamus jurisprudence beyond its constitutional and prudential limits.

“I would reaffirm those purposeful curbs on judicial power, not redefine them,” states the court’s opinion.

“Mandamus is not a jurisdictional talisman to conjure instant Supreme Court review.  As a constitutional matter, we cannot exercise original jurisdiction that the Constitution does not permit; as a statutory matter, the Tax Code disallows taxpayer suits like this; and as a prudential matter, deciding whether a statute is constitutional is simply not the stuff of mandamus.”

Austin attorneys Peter A. Nolan and Jennifer Patterson Rabb of Winstead PC represent Nestle.

Texas Supreme Court case No. 12-0518

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