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Texas' high court upholds franchise tax

PAUL J. WEBER, Associated Press
Friday, 19 Oct 2012 | 2:31 PM ET

AUSTIN, Texas -- The Texas Supreme Court on Friday upheld the state's much-maligned business tax that provides the second-biggest source of general revenue, preserving current rules for now before lawmakers potentially overhaul the law next year.

The high court rejected a challenge by Nestle USA Inc. that had been closely watched by business groups and political observers. The company argued that the tax runs afoul of the Texas Constitution's mandate that taxes be applied equally to all.

The tax is expected to bring in about $4 billion this fiscal year, second to only the sales tax in terms of revenue. Yet the law doesn't sit well with politicians in either party: Democrats complain that the tax has never brought in as much money as projected since the 2006 overhaul of the law, and Republicans say it hurts business.

Nestle paid more than $8 million under the tax this year. The food giant argued that it shouldn't be subject to the 1 percent tax rate applied to producers because it only sells in the state.

Nestle, which is headquartered in Glendale, Calif., claimed the higher rate discriminates against interstate commerce.

The court disagreed in a 6-2 decision.

"The manufacturing rate is fairly related to the services provided by Texas," Justice Nathan Hecht wrote for the majority opinion in the 27-page ruling.

Nestle USA did not immediately comment on the decision.

Also known as the margins tax, the franchise tax is levied on a company's revenue. That can sometimes result in unprofitable companies still having to pay the tax.

Business executives and industry groups called the business tax mediocre at best and disastrous at worst during a legislative hearing this summer. Both parties have shown an appetite for reforming the tax, fueling speculation that the Legislature will make changes next year.

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