¹ Along with H.B. 3, the Texas Legislature passed four other bills: H.B. 1 (property tax relief), H.B. 2 (appropriations), H.B. 4 (used motor vehicle reform) and H.B. 5 (cigarette tax increase). These bills have been enacted but are not addressed herein, except to note that the property tax bill (H.B. 1) reduces property tax rates in 2006 and 2007. H.B. 1 attempts to correct a constitutional violation identified by the Texas Supreme Court; see Shirley Neely v. West Orange-Cove Consolidated Independent School District, 176 SW3d 746 (2005) (holding that the state’s method of funding public schools violated the constitutional prohibition against state property tax under Article VIII, Section 1-e of the Texas Constitution).

² 2006 TX H.B. 3, Sections 22 and 26. Special rules appear in 2006 TX H.B. 3, Section 22.

³ TX Tax Code Section 171.001(a). All citations to the TX Tax Code are as amended by 2006 TX H.B. 3.

⁴ TX Tax Code Section 171.002(a) and (b).

⁵ 2006 TX H.B. 3, Section 21. H.B. 3, Section 21 also provides that the protection granted under P.L. 86-272 does not apply. Interestingly, in an April 21, 2006 letter to the Texas Attorney General, the Texas Comptroller questioned whether H.B. 3 may operate to impose a net income tax on natural persons, thus requiring voter approval to be constitutionally permissible under Article VIII, Section 24(a) of the Texas Constitution.

⁶ Note that the view that the margin tax is a tax on income for SFAS No. 109 purposes does not extend to whether or not P.L. 86-272 applies to the tax margin.

⁷ TX Tax Code Section 171.0002(a).

⁸ A passive entity is generally defined as an entity that (1) is a general or limited partnership or a trust, other than a business trust; (2) derives at least 90% of its Federal gross income from passive income (i.e., dividends, interest, royalties, real property gains, etc.); and (3) does not receive more than 10% of its Federal gross income from conducting an active trade or business; see TX Tax Code Section 171.0003. Certain “passive” family limited partnerships, general and limited investment partnerships, and certain trusts are identified as not being “taxable entities” under specified circumstances; see TX Tax Code Section 171.0002(c)(4)–(7).

⁹ TX Tax Code Section 171.0002(b) and (c).

¹⁰ TX Tax Code Section 171.0003(a).

¹¹ TX Tax Code Section 171.0003(b).

¹² TX Tax Code Section 171.002(d). Beginning in 2009, these amounts will be adjusted by a formula measured by the Consumer Price Index; see TX Tax Code Section 171.006.

¹³ TX Tax Code Section 171.1011(c)(1)(A). Additional subsections of Section 171.1011(c) define “total revenue from entire business” for taxable entities other than corporations. Also, the reference to IRS Form 1120 includes variants of the form (e.g., IRS Forms 1120-A and 1120-S).

¹⁴ TX Tax Code Section 171.1011(c)(1)(B).

¹⁵ TX Tax Code Section 171.1011(g), (g-1), (g-2), (g-3), (k), (m), (m-1), (n) and (o).

¹⁶ TX Tax Code Section 171.1011(c)(2).

¹⁷ TX Tax Code Section 171.1012(a), (c) and (d).

¹⁸ TX Tax Code Section 171.1012(e).

¹⁹ TX Tax Code Section 171.1012(k).

²⁰ TX Tax Code Section 171.1012(k-1).

²¹ See, e.g., the rules that apply to staff leasing companies and management companies, under TX Tax Code Section 171.1013(d)–(g).

²² TX Tax Code Section 171.1013(a)–(c). Amounts paid to “undocumented workers” are excluded; see TX Tax Code Section 171.1013(c-1).

²³ TX Tax Code Section 171.101(a)(1).

²⁴ TX Tax Code Section 171.101(d).

²⁵ TX Tax Code Sections 171.101(a)(2) and 171.106(a).

²⁶ See the repealed portion of TX Tax Code Section 171.103(a) (2006 TX H.B. 3, Section 5).

²⁷ TX Tax Code Section 171.1032(a)(2).

²⁸ TX Tax Code Section 171.002(a).

²⁹ TX Tax Code Section 171.002(b).

³⁰ TX Tax Code Section 171.002(c).

³¹ TX Tax Code Section 171.002(c-1).

³² An “affiliated group” means a group of one or more entities in which a controlling interest is owned by a common owner or owners (either corporate or noncorporate), or by one or more of the member entities; see TX Tax Code Section 171.0001(1). A “controlling interest,” for a corporation, means 80% or more of the total combined voting power of all classes of stock or 80% or more of the beneficial ownership interest in the voting stock; see TX Tax Code Section 171.0001(8).

³³ A “unitary business” means a single economic enterprise made up of separate parts of a single entity or of a commonly controlled group of entities that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts; see TX Tax Code Section 171.0001(17).

³⁴ TX Tax Code Section 171.1014(a).

³⁵ TX Tax Code Section 171.1014(b) and (c).

³⁶ TX Tax Code Section 171.1014(a).

³⁷ TX Tax Code Section 171.1014(d).

³⁸ TX Tax Code Section 171.1032(b).

³⁹ 2006 TX H.B. 3, Sections 22 and 26; see 2006 TX H.B. 3, Section 22 for special compliance
considerations.

⁴⁰ 2006 TX H.B. 3, Sections 18 and 19.

⁴¹ 2006 TX H.B. 3, Section 18.

⁴² TX Tax Code Section 171.111(a).

⁴³ TX Tax Code Section 171.111(b)(1). These amounts are calculated as they are shown on the taxable entity’s books and records on the last day of its tax year ending in 2006; see id.

⁴⁴ TX Tax Code Section 171.111(b)(2)–(4).