The volatile oil and gas industry already has prompted Texas Comptroller Glenn Hegar to reduce his state revenue estimate, but that may not be the last of the bad budget news.
A court decision potentially could cost Texas around $1.1 billion a year in franchise tax revenue, plus require four years’ worth of refunds totaling another $6 billion, according to the comptroller’s office.
“It could be enormous. Enormous,” Hegar said in an interview about the possible effect of the lawsuit brought by American Multi-Cinema, which so far has won its court battle for a bigger deduction from its franchise tax payments.
If the 3rd Court of Appeals ruling in the case stands, the two-year refund due AMC is calculated at nearly $1.2 million.
But Hegar is predicting a potentially much bigger hit for the state based on the assumption that a wide range of businesses would be quick to take advantage of the deduction awarded Missouri-based AMC. The state is asking the court for a rehearing.
The AMC lawsuit centers on the franchise-tax deduction for “cost of goods sold,” which includes such things as the raw material used to make an item.
The 3rd Court of Appeals ruled in the lawsuit in April that exhibiting a movie amounts to a “good” because it’s “perceptible to the senses,” fitting the definition of tangible personal property. Therefore, the court said, AMC can include its auditorium expenses as production costs when figuring its franchise-tax deduction.
“As a practical matter, the court’s holding could potentially treat a business exhibiting a movie as producing TPP (tangible personal property) in much the same way that a carpenter produces a chair or desk” and allow many other service providers to claim deductions, Hegar wrote to state leaders in June.
“It could be lawyers, accountants, people that mow yards. It’s just unbelievable how broad it was,” he said. It opens the door to deductions for their computers or other equipment. “You can even argue that now when somebody comes and mows your yard, you sit in the back yard and you smell that grass, and it’s real pretty. It’s perception to your senses.
“The list just doesn’t stop,” Hegar said. “It would kind of be like the kids’ Christmas list in a Santa Claus movie. It’s a real long list. It just keeps on rolling out the door.”
In a similar fashion, this ruling could also affect the state sales tax, and that could wind up offsetting some of the franchise tax loss. Or maybe not – estimates of the possible total cost of this ruling are in the $6 billion per year range. That’s getting into some real money, at a time when the state could wind up also being on the hook for a lot more money to public education. Like the public ed issue, this will ultimately be decided by the Supreme Court, but the ultimate responsibility lies with the Lege, which could clarify what the franchise tax covers or – since abolishing the franchise tax is the current fetish – replace it with something else. I wouldn’t hold out much hope.