The DMA Way

Texas Legislative Update

by DMA Staff | Jan 06, 2017

DuCharme, McMillen & Associates, Inc. (DMA) provides this information relating to the 85th Texas Legislature Regular Session.

The Texas Legislature meets in regular session commencing on the second Tuesday in January of each odd-numbered year, which means the 85th Texas Legislature Regular Session begins January 10, 2017. The Texas Constitution requires the Comptroller to prepare and submit to the Governor and the Legislature a report concerning the state's financial condition. Comptroller Glenn Hegar has not yet released his Biennial Revenue Estimate (BRE) report reflecting revenue available for the remainder of fiscal year 2017 (ending August 31, 2017) and the upcoming 2018-2019 biennium (September 1, 2017 through August 31, 2019). The BRE report should be coming out shortly.
The pre-filing of bills commenced November 14, 2016, and some of the tax bills that have been filed to date are summarized below.

In the 84th Legislative Session, the Legislature permanently reduced the franchise tax rates by 25% and increased the eligibility threshold for the EZ computation from $10 million to $20 million. While doing so, the Legislature expressed the desire to eventually repeal the franchise tax. The Senate Finance Committee was given the following interim charge: “Study the benefits, including the dynamic effects, of continuing to phase out the franchise tax. Consider alternate approaches to funding the Property Tax Relief Fund.” During the interim, the Senate Finance Committee directed the Legislative Budget Board to perform a dynamic fiscal study using the following four alternative scenarios:

  • Repeal the franchise tax on January 1, 2018
  • Phase out the franchise tax over five years (20% tax reduction per year)
  • Phase out the franchise tax over eight years (12.5% tax reduction per year)
  • Phase out the franchise tax over 20 years (5% reduction per year) 

In its interim report, the Senate Finance Committee concluded that though the franchise tax reduction would yield benefits to the Texas economy, “phasing out the franchise tax would create a significant impact on the state budget, both in the short term and longer term” and that the Legislature would need to weigh the additional tax relief against the state’s growing revenue needs. With this cautionary recommendation as the backdrop, the following bills on the subject matter have been introduced:
HB 388 (Murphy, Jim) would phase out the franchise tax over five years. 

HB 538 (Metcalf, Will) and SB 131 (Creighton, Brandon) would authorize the Comptroller to issue franchise tax rebates if the state has an unencumbered positive balance of general revenues from the preceding state fiscal biennium. 

SB 72 (Nelson, Jane) would phase out the franchise tax over 29 years.

SB 112 (Huffines, Donald) and HB 599 (Schofield, Mike) would reduce the tax rate by a percentage at certain prescribed times only if the Comptroller determines that the state has sufficient revenue to meet the state’s needs.

SB 178 (Estes, Craig) would repeal franchise tax on December 31, 2017.

The viability of any of these bills will be contingent on available revenue, which the BRE report will reveal.

In every legislative session since 2006, there has been a bill introduced that proposes to modify the Texas cost of goods sold (COGS) deduction to conform it to the federal COGS; thus, it is not a surprise to see a bill on that subject matter being introduced this session. SB 142 (Taylor, Van) would allow taxable entities that are eligible to claim the COGS deduction to compute COGS by either using the definitions of COGS under current law or using the COGS reported for federal income tax purposes.

Here are bills introduced this session that propose to modify other allowable deductions:

SB 130 (Creighton, Brandon) would replace the current deduction, which is the greater of $1 million, COGS, or Compensation, with a deduction that is equal to the sum of $1 million, COGS and Compensation.

HB 509 (Button, Angie) would allow taxable margin to be computed by subtracting any costs that are properly allowable under the Federal Acquisition Regulation (48 C.F.R. Chapter 1) for contracts or subcontracts for the sale of goods or services to the federal government by a taxable entity that is a party to at least one contract subject to the requirements of 48 C.F.R. Chapter 2 (Defense Acquisition Regulations).

HB 423 (Wray, John) would allow a taxable entity that transports ready-mixed concrete to include distribution costs in the computation of COGS regardless of whether the taxable entity owns the ready-mixed concrete.

HB 725 (Bohac, Dwayne) would allow a taxable entity that is a health care provider to exclude 100% of certain payments received (e.g., Medicaid, Medicare, CHIP, TRICARE, etc.) from the entity’s computation of Total Revenue, rather than 50% as the current statute provides.

HB 55 (Guillen, Ryan) would exempt the sale of feminine hygiene products. Other bills that are identical or deal with the same subject matter are HB 219 (Howard, Donna), HB 232 (Alvarado, Carol), HB 410 (Springer, Drew), HB 716 (Wu, Gene), SB 129 (Garcia, Sylvia), and SB 162 (Rodriguez, Jose).

HB 105 (Metcalf, Will) would repeal the taxation of Internet access service. [Note: Under a grandfather clause of the Internet Tax Freedom Act, Texas and six other states have been allowed to continue the taxation of Internet access service. The Trade Facilitation and Trade Enforcement Act of 2015 requires the grandfathered states to repeal their tax on Internet access service by June 2020.]

HB 170 (Lucio, Eddie) would exempt textbooks purchased by college students during certain prescribed time periods. Other bills that are identical or deal with the same subject matter are HB 242 (Hernandez, Ana), HB 350 (Canales, Terry) and SB 48 (Zaffirini, Judith).

HB 221 (Howard, Donna) would exempt child and adult diapers. 

HB 343 (Canales, Terry) would exempt taxable items purchased by or on behalf of a permanently disabled veteran with a disability rating of 100%.

HB 485 (Fallon, Pat) and SB 133 (Creighton, Brandon) would exempt the sale of a firearm or hunting supplies during the last full weekend in August.

HB 589 (Bohac, Dwayne) would increase the maximum cap for exempt clothing and footwear purchased during the sales tax holiday in August from $100 to $200; and would exempt the sale of an e-reader, personal computer, or tablet computer if the item is purchased during the sales tax holiday period in August and if the item is not purchased over the Internet.

HB 660 (Villalba, Jason) would exempt the sales of Texas state flags.

HB 803 (Dale, Tony) would exempt taxable items purchased and directly used by a business that is primarily engaged in space flight activities and that begins doing business in Texas on or after January 1, 2018. To claim the exemption, the entity must apply for and obtain a registration number from the Comptroller, which would be valid for 10 years. [Note: The bill would also exempt a qualifying business from franchise tax for 10 years.]

HJR 19 (Raymond, Richard) proposes a constitutional amendment prohibiting the legislature from enacting a general law that imposes state tax on the sale or use of a prescription medicine that is not subject to tax under Chapter 151, Tax Code, on January 1, 2017. 

HJR 22 (Raymond, Richard) proposes a constitutional amendment prohibiting the legislature from enacting a general law that imposes a state or regulatory tax under the guise of a "fee", "levy", "surcharge", "assessment", or "penalty".

HB 778 (Ashby, Trenton) would allow a credit or refund of taxes paid on diesel fuel that is used by auxiliary power units or power take-off equipment on any motor vehicle. 

SB 66 (Zaffirini, Judith) and SB 184 (Uresti, Carlos) would exempt motor vehicles purchased by an active-duty member of the United States armed forces.

After taking public testimony at hearings held during the interim period, Senator Paul Bettencourt introduced SB 2, entitled “The Property Tax Reform & Relief Act of 2017”, which he states would provide for  “simplification, clarification and transparency of the property tax and appraisal system”. It includes, among others, the following proposed changes:

  • create a Property Tax Administration Advisory Board in the Comptroller’s office to oversee the entire property tax process;
  • require the Comptroller to determine and make a finding as to whether appraisal districts are in compliance with standards, procedures, and methodology prescribed by the appraisal manual; 
  • require an individual who serves on an appraisal district’s board to be elected;
  • require an appraisal review board in a county with population of 120,000 or more to establish a separate special panel for each of the following classifications of property to conduct protest hearings under Chapter 41 relating to property included in that classification: (1) commercial real and personal property; (2) real and personal property of utilities; (3) industrial and manufacturing real and personal property; and (4) multifamily residential real property. Each member of the special panel must have certain qualifications to be appointed to the panel (must be a lawyer, a CPA, a person who holds a master of business administration degree , accredited senior appraiser, MAI professional appraiser, CAE professional assessor, or a person with at least 20 years of experience in property tax appraisal or consulting); 
  • change the deadlines for rendition statements, notices of appraised value, completed appraisal records, certification of the appraisal roll, certification of estimated taxable value, and protest of property tax;
  • lower the rollback tax rate from the current 8% to 4%;
  • require a voter tax ratification election if the taxing unit adopts a tax rate that exceeds the rollback rate; and
  • increase the value of properties that have the option of going to binding arbitration to $5 million.
The number of property tax bills filed to date exceeds the combined bills on other taxes filed during the same period, which indicates that property tax will garner a lot of attention during the session. Here are some of the property tax bills filed to date:

HB 44 (Keough, Mark) and HB 167 (Bell, Cecil) would limit the maximum appraised value of real property (not just residence homestead) to 105 percent of the appraised value of the property for the preceding tax year. HJR 17 (Keough, Mark) and HJR 26 (Bell, Cecil) propose a constitutional amendment that would authorize the legislature to limit the appraised value.

HB 301 (Larson, Lyle) would apply a 5% limitation on an increase in the appraised value of property with a value that was lowered in the preceding year by agreement, protest, or appeal.

HB 513 (Davis, Sarah) would require the chief appraiser to reappraise a property damaged in a disaster at its market value if the property is located partly or entirely inside an area declared to be a disaster area by the governor. 

SB 403 (Kolkhorst, Lois) would prohibit a chief appraiser from increasing the appraisal value of a real property (commercial or residential) for two years if the prior year’s appraisal value was reduced by at least 15% by an appraisal review board or by a final determination of an appeal of the ARB’s order.
Exemption - Inventory
HB 425 (Button, Angie) would exempt from property tax imposed by a school district the appraised value of the person's inventory held for sale at retail. The proposed exemption would not apply to (1) real property; (2) a dealer's motor vehicle inventory; (3) a dealer's heavy equipment inventory;(4)  a dealer's vessel and outboard motor inventory or (5) retail manufactured housing inventory. HJR 35 (Button, Angie) proposes a constitutional amendment that would authorize the legislature to grant the exemption. 

HB 734 (Workman, Paul) would incrementally phase in an exemption from taxation by a school district for inventory. Beginning 2018, the appraised value of inventory would be 10% exempt, and each year thereafter, the exemption would increase by another 10% until fully exempted effective January 1, 2027. HJR 48 (Workman, Paul) would propose a constitutional amendment that would authorize the legislature to grant the exemption. 

Property Tax Agreements 
HB 386 (Murphy, Jim) would make various changes to the Texas Economic Development Act (Chapter 313, Tax Code), including the following: (1) change the definition of “qualifying job” to include a transfer of a job from one area in the state to another if the transfer represents a net new job in the state; (2) modify the wage requirement to qualify a job that pays 110% of the lesser of the state median annual wage for manufacturing jobs in the state or the county average annual wage for manufacturing jobs in the county; (3) require the Texas Workforce Commission to adopt rules regarding the cumulative economic benefit of indirect jobs for purposes of meeting the qualifying jobs threshold; (4) add definitions for wages and change the wage requirement for nonqualifying jobs; and (5) require the Comptroller to verify the number of qualifying jobs and wage data. 

HB 445 (Frank, James) would prohibit any property tax abatement agreement or limitation on appraised value agreement after September 1, 2017, if a wind-powered energy device is installed or constructed on the real property at a location that is within 30 nautical miles of the boundaries of a military aviation facility located in this state.

HB 559 (Hernandez, Ana) and SB 400 (Kolkhorst, Lois) would require the Comptroller to perform some form of verification of the data reported by taxpayers under an agreement for limitation of value under the Texas Economic Development Act. 

Tax Rate
HB 345 (Canales, Terry) would require the rollback rate to be set at the lower of 1.08 or 1.05 if the inflation rate exceeds 5%. The Comptroller would be required to determine the inflation rate by August 1 for the current year and publish the rate. 

HB 390 (Howard, Donna) would authorize a school district that has had its adopted tax rate approved by a tax ratification election to lower its M&O rate, and then in future years increase it back to the previously approved rate without having to hold another tax ratification election. This authorization would apply for a maximum of ten years.
Sales Price Disclosure
HB 182 (Bernal, Diego) and HB 379 (Bernal, Diego) relate to sales price disclosures. HB 182 would require the Comptroller to conduct a study as to the impact sales price disclosure would have on the property tax system. HB 379 would require the disclosure of sales price upon filing a deed of record with the county clerk.

Administrative or ARB
HB 85 (Keough, Mark) would require a chief appraiser of an appraisal district to be elected by the voters.

HB 119 (Craddick, Tom) would make the chief appraiser responsible for ascertaining the ownership of interest in minerals in place on the basis of duly executed and recorded instruments of title. The chief appraiser may not require the operator to provide information regarding ownership by others of separate interests in minerals in place as a condition for listing the interest of the operator separately.

HB 139 (Bell, Cecil) would require an appraisal review board to deliver the notice of a protest hearing by certified mail if the property owner requests it. The property owner could be required to pay for the cost of postage.

HB 566 (Keough, Mark) would require an appraisal review board to have five members (rather than three members as currently required) and that the members be elected by voters of the county. 

HB 455 (Metcalf, Will) would allow a property owner to appear by telephone to offer arguments at the protest hearing before an appraisal review board. The property owner would have to offer evidence by affidavit.

HB 804 (Dale, Tony) would require a property owner to provide a lessee with a copy of any notice of appraised value of the property within 10 days of the property owner’s receipt. 

We look forward to providing you information during the 85th Texas legislative session that will assist you in your work.

Please do not hesitate to contact your local DMA office should you have specific questions or requests.