The Texas Supreme Court has denied Swift Transportation’s request to overturn two lower courts’ rulings finding that motor carriers are not exempt from the state’s franchise tax, keeping the megacarrier on the hook for $1 million.
On Friday, Aug. 30, the Texas Supreme Court denied Swift Transportation’s petition for review of a Thirteenth Court of Appeals’ decision against the company. The carrier argued that it and other motor carriers should not have to pay Texas’ franchise tax. Swift was seeking a refund of nearly $1 million in paid franchise taxes.
Texas’ franchise tax
At the center of Swift Transportation’s dispute was a franchise tax that most larger businesses must pay.
According to the Texas Comptroller’s website, the franchise tax is a privilege tax on all taxable entities doing business in the state. Also called a margin tax, the franchise tax is considered a fee for the privilege of doing business in Texas, which does not collect income taxes.
Franchise taxes are levied only on companies that have gross receipts of more than $2.47 million a year. Businesses with revenues in excess of $20 million a year pay 0.375% (retail or wholesale) or 0.75% (all other businesses). Smaller businesses pay 0.331%.
A franchise tax is not a sales tax. Whereas the consumer pays sales taxes, a franchise tax is paid by the business. How much businesses pay in franchise taxes is based on their margin, not income. The margin is calculated by using the lesser of the following methods:
- Total revenue times 70%
- Total revenue minus cost of goods sold
- Total revenue minus compensation
- Total revenue minus $1 million
Swift Transportation’s exemption claim
In an attempt to avoid paying Texas’ franchise tax, Swift Transportation claimed motor carriers are exempt.
The carrier pointed to Texas Transportation Code section 20.001, which exempts motor carriers from “any occupation tax measured by gross receipts.” Swift Transportation argued that occupation taxes and franchise taxes both levy a fee on the privilege to do business in Texas. Therefore, a franchise tax is an occupation tax.
Swift Transportation pointed to two court cases. In 2003, a state court of appeals described the franchise tax as a type of occupation tax. However, the Thirteenth Court of Appeals determined that description was merely a footnote that had nothing to do with the overlying issue and decision. In 2012, the Texas Supreme Court noted that the two taxes are defined in similar ways but failed to state they are the same.
The Thirteenth Court of Appeals also pointed out that when section 20.001 was passed, both taxes existed, yet only occupation taxes were explicitly mentioned. The appellate court argued that the omission of franchise taxes was likely intentional.
Furthermore, state lawmakers removed a franchise tax exemption for transportation companies in 1985.
Since then, the statute has been amended numerous times, with the latest version clearly distinguishing between an occupation tax and a franchise tax. That amendment and the exemption removal show the clear intent of the state legislature to differentiate between the two taxes while also keeping motor carriers on the hook for the franchise tax.
Swift Transportation failed to convince a judicial body otherwise. In May 2018, the carrier initiated administrative proceedings with the comptroller, seeking a refund claim for franchise tax paid for reporting years 2014 through 2016. Swift sought more than $979,000 plus interest in the form of a tax return. The comptroller denied the request.
After the State Office of Administrative Hearings came to the same conclusion, Swift Transportation filed a petition in a district court. After the district court ruled in favor of the state, Swift moved to the court of appeals, which also was not persuaded. In January 2023, the carrier made one final push to the Texas Supreme Court. Last week’s denial put an end to Swift’s attempt to be exempt from franchise taxes. LL
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