Texas BOMA: Margin Tax Insurance Company Provision
by Robert D. Miller and Gardner Pate

The new franchise tax, commonly referred to as the ˇ§Margin Taxˇ¨, goes into effect January 1, 2008. The Margin Tax is a tax on the gross revenues, less some deductions, of almost every business entity organized or operating in this state. Legislators enacted the Margin Tax to reduce reliance on property taxes.

Legislators exempted certain companies from paying the Margin Tax. Among those exempted are insurance companies that pay an annual tax on their gross premiums. The Texas franchise tax has excluded insurance companies since at least 1981. Texas law does not limit the exemption to exclude just income from premiums; instead, it is a blanket tax exemption for those entities.

Insurance companies pay the state a tax based on their gross premiums. The original franchise tax was based on net income or net assets. The rationale behind exempting the insurance companies from paying this tax was simple: since they already pay a tax on their gross insurance premiums, they should not also have to pay an additional tax on their profits. With the adoption of the Margin Tax, the legislature kept the insurance company exemption.

To receive the exemption, an insurance company must apply with the Comptrollerˇ¦s Office and pay the Texas gross premiums tax. Texas applies retroactive exemptions dating to when a company first qualified. This is good news for any company that could have qualified in previous years but did not apply. However, if a company applies for an exemption, any owed but unpaid taxes must be paid. For most insurance companies, this should not pose a problem.

The tax exemption does not apply to all insurance company assets. Texas has historically taken the position that tax exemptions are based on an entity-specific basis. In other words, if an insurance company has a subsidiary, the subsidiary must qualify for an exemption in its own right. If the subsidiary does not qualify for an exemption, then all income generated by that subsidiary is subject to the tax.

This exemption may affect Texas BOMA members. The new Margin Tax requires companies owning commercial office properties to pay a tax on their gross revenues. Insurance companies own many commercial office buildings. If an insurance company owns a building, and it qualifies for an exemption, then that company will not have to pay the new Margin Tax on rental income from the building.

This article is not a tax opinion, and should not be relied upon as tax advice. We encourage Texas BOMA members reading this article to speak with their attorney to determine whether this exemption may apply to them.

Next month, we will publish an article about the upcoming filing deadline for candidates and how it will affect BOMA.