TAAA Margin Tax
Important Tax Information for Aerial Applicators
TAAA’s top priority during the 2013 Texas Legislative Session was to address the unusually unfair application of the State’s main business tax, called the “Margins Tax”, to aerial application operations. Thanks to the diligent efforts of three key legislators, a narrowly drafted bill applying only to aerial applicators was passed by the legislature and signed into law by then Governor Perry. The three key legislators were Representative Tracy King (D – Uvalde), current Chairman of the House Agriculture Committee, Representative Harvey Hilderbran (R –Kerrville), former Chairman of the Ways & Means Committee, and Senator Glen Hegar, (R – Katy), who was the Chairman of the Fiscal Matters Subcommittee in the Senate, and is now the State Comptroller of Public Accounts.
The margins tax took the place of the state’s prior franchise tax structure in 2006, but is only recently fully implemented, applied and understood, partially as the result of a number of comptroller audits of taxpayers. As the audits began to occur, it became apparent that accountants filing returns on behalf of aerial application operations were interpreting the statute in different ways, and that applying the statute to these operations in the “correct” manner would result in a 15% to 20% tax on net revenue (profit) in a best case scenario.
This was not the intention of the legislature, and our industry was not the only example where the new law impacted a specific trade in a uniquely unfair way. It is simply too complicated to explain how the tax works in this article, but the key takeaway for all aerial applicators is that you need to make sure that you or your accountant are aware of the new law. The change will dramatically lower the amount of your margins tax liability for the 2013 tax year and subsequent years. The new language can be found in the Tax Code in Section 171.1011 (w-1), and the bill that includes the change is House Bill 2451.
The change effectively allows aerial applicator operations to deduct the cost of their labor, airplanes, related equipment, fuel and other materials. These costs obviously represent the vast majority of expenses associated with an operation, but they were not previously deductible. In other words the margins tax was applied against a tax base that included these costs prior to the passage of House Bill 2451. For the accountants reading this article, a simple way to think about it is that the change in law recognizes that even though aerial applicators are providing a service, they should be treated under the margins tax much more like manufacturing operations with large capital costs than a service industry like lawyers or accountants. As a result, aerial applicators are now allowed a “cost of goods” deduction in the calculation of the tax.
TAAA is extremely grateful to the legislators who fixed this problem for our industry. No tax related legislation is easy to pass, and this bill simply would not have made it to the governor without the committed efforts of senior experienced legislators like King, Hilderbran and Hegar. We also want to offer special appreciation to 2013 TAAA President Bob Bailey who helped organize and push our successful effort with the legislature. It is a tribute to our organization, and the credibility and respect that legislators have for our members that this problem was successfully addressed. Finally, please note we are required to say that TAAA is not providing you with tax advice in this article; we are providing you with information that you and your accountants may utilize as you prepare your margins tax filings.
Ag Planes Not Subject to Property Taxes
Every year, TAAA receives a few calls from aerial applicators indicating that local taxing officials are seeking to impose property taxes on aerial application aircraft. If this happens to you, please let these officials know that ag planes are considered exempt from property taxation in accordance with Tax Code Section 11.161 which reads as follows:
Sec. 11.161. IMPLEMENTS OF HUSBANDRY. Machinery and equipment items that are used in the production of farm or ranch products or of timber, regardless of their primary design, are considered to be implements of husbandry and are exempt from ad valorem taxation.
The Texas Constitution, Art. 8, Section 19a, specifically authorizes this Tax Code provision. That section reads:
Sec. 19a. IMPLEMENTS OF HUSBANDRY; EXEMPTION. Implements of husbandry that are used in the production of farm or ranch products are exempt from ad valorem taxation.
These provisions have been the law of the land for more than 30 years, and various arguments that they do not apply to commercial use (i.e. ag planes for hire) or under other circumstances have been routinely rejected. If reading the law is not enough for your local tax officials, please direct them to ask the Texas Comptroller. The comptroller’s office has routinely and consistently worked with local officials and ag operators to explain the law and prohibit the taxation of ag aircraft.