School property tax relief causes confusion for business owners

School property tax relief causes confusion for business owners

Written by Christi Snow Wednesday, 07 March 2007

The property tax relief promised last year by the 79th Texas Legislature may come with a price tag for consumers.

At least that is what some fear, as accountants begin to make projections for the fiscal year. A restructured business or franchise tax was designed to fund the property tax relief. However, John Clements, a certified public accountant with Greg Salley and Associates, believes the changes may cost smaller companies more than they can afford, which could translate into more expensive products and services.

“I have been in this business since 1997,” he said. “The principal of this office, Greg Salley, has been doing it since 1986. In our opinion, this is the worst tax legislation we have ever seen.”

In 2006, the Legislature wanted to relieve property owners of their school property tax burden. They began looking at the business tax, more commonly known as the franchise tax, because several loopholes allowed companies such as Dell Inc. and Southwestern Bell to find exemptions. The state decided to get the money for property tax relief by expanding the base of businesses that contributed to school finance.

The Legislature anticipated that by the 2007 tax year homeowners would see a drop in their property taxes from $1.50 to $1 per $100 valuation, translating into a more than $6 billion overall reduction.

Tax Facts

• Most school districts maintained a school property tax of $1.50 per $100 valuation prior to the 79th Legislature in 2006.
• The legislation passed in 2006 provided for an initial reduction of 17 cents in school property tax. Some homeowners may not easily recognize the tax cut because as their property value increases, so will the amount of taxes they owe.
• This year, another 33 cent reduction will bring the taxes to $1 per $100 valuation.
• The total: More than $6 billion in property tax relief for homeowners and employers by tax year 2007.
• Although the school property tax is capped, school districts can increase the tax through school bond elections up to 50 cents.
• Austin ISD Tax Rate: $1.493
• Pflugerville ISD Tax Rate: $1.68
• Round Rock ISD Tax Rate: $1.640646

Source: www.governor.state.tx.us, Round Rock ISD, Pflugerville ISD, Austin ISD

Innovative Taxation

Texas is the first state to use the new method of taxing. Rather than calculating how much a company would be taxed from their total net income, the legislation describes three different formulas to calculate a taxable margin.

1. They can multiply their revenue by 70 percent.
2. They can generate the margin by taking their total revenue generated from that year and subtracting the cost of goods sold—or how much their costs have been to make their product. Along with direct costs, they can subtract up to 4 percent of allocable overhead.
3. They can take the total revenue and subtract compensation—or how much they have paid to employees in wages and benefits, excluding payroll taxes and amounts paid to undocumented workers.

The number created from one of these formulas is used to multiply with either one percent or half a percent, depending on the type of business. Whatever amount is calculated is how much the company must send to the State Comptroller to help fund schools.

The legislation does have some exemptions, although they are much more limited. Small businesses generating $300,000 or less in revenue, or whose tax due is less than $1,000, will still not pay anything. However, they must still file the required Franchise Tax Return.

Service-oriented companies are expected to experience a greater impact from the new legislation. A doctor or lawyer or truck driver does not sell a product, so they have no or little cost of goods sold. That means they have a much smaller number to subtract from their total revenue. Smaller offices that operate with few employees might have a similar problem.

“These are family businesses,” Clements said. “These are your father-son, your husband-wife businesses. They are not Dell Inc. and many times, they are the ones paying the payroll.”

Clements does acknowledge the legislation is more equitable, making more businesses pay into the coffers, but he is also concerned for many of his clients. With the 80th Legislature in session since January, so far none of the state representatives have initiated a bill that would make anything beyond minor changes to the new tax laws.

Led by former State Comptroller John Sharp, a commission of 24 members appointed by Governor Rick Perry compiled a report for the Legislature last spring that provided the basis for the changes.

Although accountant Brad Van Houten of Shelton, Houten and Morrison, LLP hopes the state comes up with a simplified and more defined law, he has a pragmatic view of the situation, warning business owners to prepare their finances for the next year when it goes into effect.

“Forget if you believe in it or not,” Van Houten said. “It’s the law. If you don’t plan for it, it will hurt your cash flow.”

4b. Multiply by 1 percent if not a wholesale or retail business to get total due

Calculating Business Tax
In 2006, the 79th Texas Legislature reformed the state’s business or franchise tax to use a margin of a company’s revenue to calculate how much they owe. Although three methods are available, not everyone can use each method. In addition, the taxpayers’ trade or business activity will determine what makes up the revenues, cost of goods, etc. and the percentage to apply. Contact a tax professional for assistance.
METHOD 1	70 Percent Method
1. Total revenues	$5,000,000.00
2. Multiply revenue by 70 percent	$3,500,000.00
3a. Multiply by 0.5 percent if a wholesale or retail business to get total due*	$17,500.00
3b. Multiply by 1 percent if not a wholesale or retail business to get total due	$35,000.00
METHOD 2	Cost of Goods Sold Method
1. Total revenues	$5,000,000.00
2. Subtract cost of goods sold. Also subtract overhead for making product at 4 percent (assumed at $1,000,000 for illustration purposes)	($2,000,000.00) ($40,000.00)
3. Total taxable margin	$2,960,000.00
4a. Multiply by 0.5 perecent if a wholesale or retail business to get total due*	$14,800.00
4b. Multiply by 1 percent if not a wholesale or retail business to get total due	$29,600.00
METHOD 3	Wages and Compensation Method
1. Total revenues	$5,000,000.00
2. Subtract wages and compensation including distributions, benefits, excluding payroll taxes and amounts paid to undocumented workers	$2,000,000.00
3. Total taxable margin	$3,000,000.00
4a. Multiply by 0.5 percent if a wholesale or retail business to get total due*	$15,000.00
4b. Multiply by 1 percent if not a wholesale or retail business to get total due	$30,000.00
*Wholesale & retail-oriented businesses multiply their margin by half a percent, while other businesses multiply by one percent. Source: John Clements, Greg Salley and Associates

Tax Talk

• Cost of goods sold: The expenses incurred to purchase or manufacture the merchandise sold during a period.
• Franchise: An entity that has been licensed to sell the product of a manufacturer or to offer a particular service in a given area.
• Gross sales: Total recorded sales before deducting any sales discounts or sales returns and allowances.
• Net income: An overall measure of the performance of a company; equal to revenues minus expenses for the period.
• Revenue: Increase in a company’s resources from the sale of goods or services.

Source: Concepts and Applications: Accounting by Albrecht, Stice, Stice and Swain