TEXAS inched closer to shutting a loophole. Most companies with projects in Texas set up limited partnerships to own them.The state franchise tax does not apply to limited partnerships, but rather is collected directly from the partners. However, out-of-state companies that are limited partners are not taxed because they are viewed as having an insufficient “nexus” with the state to subject them to tax.
The legislature is moving to tax limited partners. Three bills have been introduced — two in the House and one in the Senate. All three would impose a tax retroactively to January 1, 2003. The bills remain controversial, and the legislature is scheduled to adjourn for the year on June 2. It is a close call whether anything will be enacted, according to sources in the state government.
Meanwhile, power companies are pressing for relief from an accounting problem. A company must record as a “deferred tax liability” on its books the difference between the “tax basis” and the “book basis” that it has in its assets. The tax basis is usually lower. The company multiplies the gap by the state tax rate to which it is subject. Thus, if it has a tax basis in an asset of $100 million, but a book basis of $200 million, and the state tax rate is 4.5%, then it would have a deferred tax liability of $4.5 million.
This is recorded as an expense. It reduces book earnings. It also appears on the balance sheet as a liability (an additional debt that it will have to pay one day to the state). Out-of-state companies that invested in Texas projects as limited partners have not been recording any deferred tax liability because their state tax rate was 0%. If the law changes this year, then they will suddenly have a deferred tax liability show up on their books for the full difference between tax and book basis.
This will be a big charge to earnings in a single year. They want relief from the legislature and are proposing that the amount of the deferred tax liability on December 31, 2002 would become a special “Texas asset” that they would amortize over 30 years for tax purposes. In other words, they would get a tax deduction in Texas spread over 30 years for the amount of the deferred tax liability. Since the company would be able to deduct the same amount as the deferred liability — albeit over time — the two would cancel each other out.
There would be no expense or liability to record on the books. Utilities were given relief from the same problem when they were first subjected to income taxes in other states like Virginia, New Jersey, New York and Ohio.