Could corporations claim a Texas franchise-tax manufacturing credit for sales taxes paid by a related partnership?

Plain-English summary

The Tax Policy Director rejected a corporation's manufacturing-credit claim for sales taxes paid by a related partnership.

The letter relied on Texas's consistent entity theory of partnership, citing six Comptroller decisions and Marshall v. Marshall. Under that theory, the partnership was treated separately from its partners rather than as an aggregate.

The Director also said that even an aggregate approach would not override the unambiguous tax-credit language in Section 171.0021. Staff members consulted by the Director agreed with that conclusion.

The issue was already in administrative hearings. The letter referred the recipient to Legal Services for further discussion and did not state a final hearing result.

What this means for you

Corporations operating through partnerships

The policy position did not attribute a partnership's sales-tax payment to its corporate partners for the manufacturing credit.

Tax professionals

Treat this as the Director's stated hearing position, and verify the later disposition before relying on the historical conclusion.

Common questions

Q: What partnership theory did the Comptroller apply?
A: The entity theory.

Q: Did the Director think an aggregate theory would change the tax result?
A: No.

Q: Does the letter contain the final hearing decision?
A: No.

Citations and references

• Texas Tax Code Sec. 171.0021
• Comptroller Decision Nos. 9838 (1979), 10,002 (1982), 11,814 (1982), 12,557 (1982), 21,221 (1987), and 21,696 (1988)
• Marshall v. Marshall, 735 S.W.2d 587, 593 (Tex. App.—Dallas 1987, writ ref'd n.r.e.)
• L & W Construction Co. v. Wisconsin Department of Revenue, 439 N.W.2d 619, 621 (Wis. Ct. App. 1989)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9801090L

Original ruling text

January 14, 1998

Dear *****:

I have reviewed your letter dated December 19, 1997, and understand your
clients' position and argument. However, for several reasons, I do not believe
your clients are entitled to the franchise tax credit for sales taxes paid by
the partnership.

As you know, the Comptroller's Office has consistently upheld an entity theory
of partnership rather than an aggregate theory. Comptroller's Decision Nos.
9838 (1979), 10,002 (1982), 11,814 (1982), 12,557 (1982), 21,221 (1987), and
21,696 (1988). Also, I have not found authority that Texas subscribed to an
aggregate theory during the period in question. Apparently contrary to
Connecticut, 302 F.2d 1, 2 (2d Cir. 1962), with the passage of the Uniform
Partnership Act in 1961, Texas discarded the aggregate theory and adopted the
entity theory of partnership. Marshall v. Marshall, 735 S.W.2d 587, 593 (Tex.
App.-Dallas [5th Dist.] 1987, writ ref'd n.r.e.).

Finally, even if an aggregate theory did apply, I see the issue before us not
as one of partnership law but rather one of tax law. L & W Construction
Company v. Wisconsin Department of Revenue, 439 N.W.2d 619, 621 (Wis. Ct. App.
1989). The language of Section 171.0021 is unambiguous, and the meaning of the
Texas Tax Code should prevail over the aggregate concept which, according to
the case you cited, ruled at common law.

Also, as I told you I would, I have discussed this issue with other members of
the Comptroller's staff who have reached the same conclusion.

I hope this letter addresses your concerns. Insofar as this issue is a legal
one which is currently in hearings, I would refer you to Mr. Krohn for further
discussion.

Sincerely,

Wade Anderson
Director, Tax Policy

cc: Dean Krohn, Legal Services
Teresa Comer, Tax Policy