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The business margins tax and the auto repair shops

Among other problems with the business margins tax, small business owners have complained that it’s less fair to them than it is to the big guys. This op-ed explores one example of that.

Mom-and-pop auto repair shops across Texas are being forced into an unfair competition with big companies, dealerships and franchises that receive preferential tax treatment under state law.

Texas requires incorporated businesses with more than $1 million in sales (in 2012 this figure rolls back to $600,000) to pay a business tax called the franchise or margin tax. Even though $1 million sounds like a lot of money, many small businesses fall into this category. The state provides different methods to calculate the tax based on the classification of businesses. Service industries use one method, retail businesses use another and trades such as plumbers and roofers use a third method. Which method do you suppose the auto repair business is required to use? The worst possible one.

The independently owned auto repair shops in Texas are taxed at twice the rate applied to dealership-owned shops or franchise stores because of an outmoded classification system.

If a dealership and an independent produced the same sales in their service departments and the independent shop owner paid $3,000 in taxes, the dealership would be required to pay only $1,500, even though both businesses performed exactly the same work.

The Texas Comptroller’s office says that independently owned auto repair shops belong to the service group, the same classification as funeral homes and barber shops. Dealerships fall into the retail category. The unintended result of the Legislature’s actions has been unequal taxation for identical operations. Adding insult to injury for the small-business owner, this favorable tax treatment extends to other large companies that own or operate auto service centers such as Wal-Mart, Sears, Firestone, Goodyear and Pep Boys.

The author cites HB429, by Rep. Allen Fletcher, as the auto repair shops’ preferred fix for this. I have not heard of this particular situation before, and I don’t have an opinion one way or the other on the remedy. I do believe, however, that given the current budget crunch, any bill that addresses issues of tax inequity must not be revenue negative. We simply cannot afford that. Leveling the playing field for independent auto repair shops may be a fine and valid policy goal, but it needs to be paid for. The bill as written doesn’t do anything that would make up for any revenue lost by this change; it doesn’t have a fiscal note yet, so we don’t know how much revenue would need to be regained. You can call this bill and any other bill like it whatever you want, but its effect is the same as new spending. We’re not doing that anywhere else, and as long as that is the case we shouldn’t be doing it like this. Find a way to pay for it, or wait till a future session.

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  2. Ross says:

    So, you are willing to continue to screw small business because “the state needs the money”? Sorry, that’s just evil, and you should be ashamed of yourself.

  3. Sorry, Ross, but I stand by what I wrote. If the fix for this is another unfunded tax cut, then it will be paid for by those who are already going to feel the full effect of the budget cuts. I don’t see how that’s any less “evil” than the status quo. I don’t think it’s at all unreasonable to say that this needs to be revenue neutral or it needs to wait.

  4. texaschick says:

    But, but, but don’t ya know? tax cuts pay for themselves and create jobs?

  5. Mr. Personality says:

    A small auto repair shop with $5 million in annual receipts should pay just under $29,000 in business tax. A car dealer with a repair department will pay around $13,000 on the same repair work (making some reasonable assumptions about the car dealer’s operation). Yes, it’s unfair, but the difference is only 3/10 of one percent of sales receipts. A bigger tax inequity is the sales tax loophole that Am azon and other big e-sellers use to avoid collecting and paying sales tax. That amounts to 8.25 percent of the sales price. At least the auto repair shops don’t have to compete with Am azon.