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Comptroller Estimates Tax Compact Case Could Cost Texas $675 Million

Posted on June 4, 2015 by Amy Hamilton

The Texas Comptroller of Public Accounts estimates the state could owe $675 million in revised franchise tax refunds to out-of-state corporations if businesses prevail in asserting the right to elect to apportion their business income under the Multistate Tax Compact's formula rather than the state's mandatory single-factor method.

The amount was cited by Texas Assistant Solicitor General Rance Craft during June 3 oral arguments before the Texas Court of Appeals in Austin in Graphic Packaging Corp. v. Hegar, the lead Multistate Tax Compact case in the state.

"I do want to stress the significant fiscal implications of this case to the state of Texas," Craft said. He said that the estimate has no bearing on the statutory construction argument Texas is making against the compact formula being available to Graphic Packaging, but added, "I do want this court to be aware that this is not just an $800,000 case."

Chief Justice Jeff Rose asked rhetorically what authority requires the Texas Court of Appeals to consider the comptroller's $675 million estimate when it conducts its review of Graphic Packaging. Taxpayers argue that state attorneys general are citing speculative revenue estimates in their arguments in an attempt to influence the courts in their state to decide these cases in part on the projected revenue impact to the state.

Texas is the fourth state to provide a court with the estimated aggregate cost in refunds it would owe to out-of-state businesses should the court rule in favor of the taxpayers. Also, the projected $675 million fiscal impact in Texas is the lowest estimated potential cost to a state involved in Multistate Tax Compact litigation.

Michigan officials put the tab at $1.1 billion, California $750 million, and Minnesota $700 million.

Graphic Packaging is appealing a trial court decision that said it had to apportion its Texas margin using the state's single-factor gross receipts method rather than the compact's evenly weighted three-factor formula.

The company argues, among other things, that the U.S. Supreme Court found the Multistate Tax Compact to be valid and binding and that interstate compact law and the contract clause of the U.S. Constitution preclude Texas from unilaterally eliminating the compact election.

Texas argues that the compact election doesn't apply in this case because the Legislature specified when it enacted the revised franchise tax that the margin tax is not an income tax. Texas also makes a statutory construction argument that the later enactment of the margin tax's mandatory apportionment formula would prevail over any conflicting language in the compact.