By Cynthia M. Ohlenforst, Sam Megally, and Angela J. Seekins

Abstract
If tax interpretations of the past are a prologue for tax interpretations to come, then this year’s Survey foreshadows an additional focus on several key, repeating issues. In the sales tax context, reported cases as well as practical experience with audits indicate that the comptroller and taxpayers continue their struggle to determine the scope of multiple exemptions. The sale-for-resale exemption gave rise to significant controversy, especially in the context of software licenses that are granted or used in providing taxable services, such as data processing.

Franchise tax issues also presented multiple controversies, as the Survey period witnessed what was for many of the state’s taxpayers, their first audit under the new “margin tax” version of the franchise tax. While those audits have not yet produced reported court cases, they predict a heavy focus on determining the scope of the cost-of-goods sold deduction and on multiple other issues that are new to Texas, including determining which taxpayers qualify for the lower franchise tax rate accorded to wholesalers and retailers.

Despite the original legislative plan that envisioned significant property tax relief resulting from the adoption of the margin tax, property taxes have continued to rise for many taxpayers, and property tax cases reflect continuing issues related not only to property valuation, but also to procedural pitfalls that sometimes lurk in the Texas Tax Code.

What is the most common of the common themes? The search for more funds. At the same time taxpayers are struggling with business challenges (and the temptation to take increasingly aggressive tax positions), taxing authorities are struggling with their own revenue challenges (and their own temptations to take increasingly aggressive positions about the amount of taxes owed). The resulting cases offer some interesting lessons.

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Recommended Citation
Cynthia M. Ohlenforst, et al., Taxation, 64 SMU L. Rev. 559 (2011)