Small businesses worry about new state tax

APRIL CASTRO

Associated Press
Star-Telegram

July 15, 2006

AUSTIN, TX- A platter of ribs, potato salad and beans will probably cost 35 cents more at Green Mesquite Barbecue next year, and the owner of the popular eatery blames the state's new business tax.

"If I have to pay an extra $3,000 to $4,000 a year in taxes, I'm going to have to raise my rates," said owner Tom Davis. "There's no way around it."

In fact, many small businesses in Texas expect to absorb the biggest impact from the state's new tax structure. That could mean higher rates for Texans on a for a lot more than a plate of barbecue.

"When small businesses are going through crunch time, we're not like the big corporations that can just lob off big chunks of overhead," said Kurt Summers, who owns Austin Generator Service. Summers expects a lofty increase in his annual tax bill, too.

The Legislature approved the new tax format this spring, bringing in new business tax money to replace local school property taxes that would be cut. The tax takes effect next year, and the first due date for businesses is May 2008.

The new law changes a system under which only one in every 16 Texas businesses is estimated to pay the tax. Most Texas businesses, including Dell Inc., use well-known accounting tricks to avoid paying the tax.

But many small business owners worry they'll carry the burden. They fear big companies with a lot of land and property will get a net tax cut when the new hike is coupled with property tax reductions.

"I think small businesses by and large want to and are willing to pay their fair share," said Will Newton, state director of the National Federation of Independent Business. "But if it comes down to paying for property tax reductions for mega-corporations, they have a little heartburn over that."

Experts say the tax will be favorable to capital intensive industries, or those with a lot of land and equipment like the oil and gas industry. Service-oriented businesses, like accounting and law firms, will have a harder time and are more likely to raise their rates, said Jimmy Martens, an Austin attorney who specializes in state tax law.

Businesses will be taxed at 1 percent - 0.5 percent for retailers - of gross receipts, which is the total amount of money a company brings in before expenses. Companies can choose between deductions for cost of goods or employee benefits like salary and health care. Sole proprietors and general partnerships are exempt. Companies with annual gross receipts of $300,000 or less also are exempt.

Lawmakers spent years trying to fix the loophole-ridden franchise tax. They stumbled over how to structure a new tax within legal constraints that would apply equally to different business structures. And business-friendly Republicans were hesitant to levy a new tax that could be harmful to job creation and economic growth.

"The people of Texas need to understand that the Legislature was faced with a very serious challenge on a lot of different levels," said Bill Hammond, president of the state's largest business group, the Texas Association of Business. "They came up with what we thought was a fair and reasonable response."

The result will be a new tax bill for thousands of businesses that haven't paid it before - many of them smaller businesses.

"I don't object to businesses, whatever size they are, getting a tax benefit," Summers said. "But it's the same old song and dance. Big business gets a break or breaks even, the consumer gets property tax relief. But who gets the majority of the burden? Small businesses."