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What is Going on With My Taxes?

-- Posted: March 04,2007 | Brian Varvel

On May 15, 2006, the Texas legislature adopted House Bill 1 and House Bill 3 to dramatically change the way schools are financed in the State of Texas. HB 1 implements an immediate cut in school property taxes effective September 1, 2006, which should benefit most property owners and tenants. The legislature also passed HB 3, which replaces the existing Texas franchise tax with a new "margin" tax on gross receipts. The new margin tax will apply to a broader range of taxpayers than the old franchise tax, and will impose a greater burden on some property owners than others, depending on various factors. All property owners and tenants should seek professional advice to determine how they will be impacted by this new legislation and whether there are any actions they can take to lessen or avoid a negative impact.

HB 1

• HB 1 reduces school property taxes by approximately $0.17 per $100 of valuation, effective September 1, 2006. The exact amount will vary, depending on the particular school district.
• HB 1 calls for an additional approximately $0.33 reduction for 2007, bringing the expected total reduction in school taxes to approximately $.50 per $100 of valuation, depending on the particular school district.
• Landlords and other property owners should see an immediate reduction in their property taxes for 2006 and 2007, the amount of which will depend upon on a number of factors, including whether and how much assessed values increase during these years.
• This property tax savings could be passed-through to tenants as a rent reduction, depending on how the tenant’s lease is structured.
• Property owners and some tenants could each face year-end adjustments for 2006 that might be significant.

HB 3

• HB 3 replaces the Texas franchise tax with a new "margin" tax applicable to virtually all business entities, not just corporations and limited liability companies.
• Under HB 3, businesses will pay a margin tax equal to 1% of the lowest of (a) 70% of total revenue, (b) total revenue minus cost of goods sold, or (c) total revenue minus total compensation and benefits. All sole proprietorships, general partnerships 100% owned by natural persons, and certain passive entities (such as family limited partnerships) are exempt, as are entities with less than $300,000 gross revenues annually.
• HB 3, on balance, could have a disproportionately negative effect on service and capital intensive businesses, such as large commercial property owners, who typically do not have as many of the specified allowable deductions.
• HB 3 takes effect January 1, 2007, but tax payments under it are not due until May 15, 2008.
• Depending on the terms of the applicable lease provisions, real estate owners, developers and managers might be able to pass-through all or a portion of the new margin tax to tenants.

What Is Most Important to You?

• HB 1 might grant immediate and tangible tax relief to real estate owners and some tenants for 2006 and 2007.
• HB 3’s provisions are highly complex and affect various types of real property owners, investors and tenants in different ways.
• Opportunities do exist to minimize or in some cases avoid the new margin tax.
• All clients should contact their Bracewell & Giuliani attorneys to determine the specific ways in which HB 1 and HB 3 will affect them.
• For a number of reasons, HB 3 is being challenged by various entities and may be changed by legislative action, or invalidated by court action. Bracewell & Giuliani is continually monitoring the latest developments regarding HB 3, and will answer your questions on the current status of such challenges and suggested courses of action.

HB 1 and HB 3 Timeline

• 11/22/2005:
  Texas Supreme Court finds statewide property tax for school finance unconstitutional, and requires legislative remedy.
• 05/15/2006:
  State Legislature passes HB 1 and HB 3.
• 09/01/2006:
  HB 1 reduces school property taxes by approximately $0.17 per $100 of valuation.
• 01/01/2007:
  HB 3 imposes new Texas margin tax on virtually all business entities, requiring payment of 1% of gross receipts.
• 09/01/2007:
  HB 1 calls for an additional approximately $0.33 school property tax reduction per $100 of valuation.
• 05/15/2008:
  Tax payments under HB 3 due on or before this date.

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