Texas Supreme Court Shoots Down Challenge to Business Tax

By Janet Elliott, Staff Writer
janet.elliott@texaslawbook.net

AUSTIN (February 10) – The Texas Supreme Court today dismissed a constitutional challenge to the state’s main business tax, finding the court lacks jurisdiction because Nestle USA Inc. and two other companies did not pay their taxes under protest or request a refund.

The ruling gives some breathing room to legislators, who are expected to consider revising the underperforming tax in 2013. It was the second challenge to the franchise tax to lose at the high court in recent months.

Nestle argued that the tax fails to treat businesses equally and uniformly. It said the 2006 legislation creating the tax gave the Supreme Court exclusive and original jurisdiction over a constitutional challenge.

The unanimous opinion written by Justice Nathan Hecht said that the history of the tax – the Suspense Statute of 1933 – requires that taxes be paid in protest prior to a lawsuit.

“From the first Suspense Statute, it has been important that the tax collector know of disputes and their potential effect on revenues,” the court said. “In this case, petitioners acknowledge that if they were to prevail and all franchise taxes determined to be illegal were refunded to all similarly situated taxpayers, the impact on the state fisc would be enormous.”

In November, the court ruled in the Allcat case that the tax as applied to partnerships is not a constitutionally prohibited income tax.