Did Kansas treat the revised Texas franchise or margins tax as an income tax for addback and credit-for-taxes-paid purposes?

Plain-English summary

The taxpayer noted that an earlier Kansas Opinion Letter had classified the former Texas franchise tax as a franchise tax rather than an income tax. Texas later replaced it with the revised franchise tax, described as a privilege tax on entities chartered, organized, or doing business in Texas.

Kansas looked through that label and concluded the revised tax was based on income and in the nature of an income tax. The Department gave two Kansas consequences:

• it was an addback modification for Kansas corporate income-tax purposes; and
• it could be claimed as a credit for taxes paid to another state.

The request specifically raised Kansas partnerships, S corporations, and individuals in connection with income-tax adjustments and credits, while the Department's stated addback conclusion referred to Kansas corporate income tax.

What this means for you

Multistate businesses

Kansas classified the tax by its base rather than the “franchise” or “privilege” label used by Texas. Analyze the current computation before deciding whether Kansas treats a foreign-state levy as income-based.

Corporate tax preparers

Under this letter, a federally deducted revised Texas franchise tax required a Kansas corporate addback because the Department regarded it as income tax.

Pass-through owners and individuals

The Department said the tax could be claimed as a credit for taxes paid to another state, but the exact eligibility and limitation for the taxpayer and year must be verified under current Kansas law.

Common questions

Q: Did Kansas treat the revised Texas franchise tax as a traditional franchise tax?
A: No. The Department treated it as income-based and in the nature of an income tax.

Q: Was an addback required?
A: Yes for Kansas corporate income-tax purposes under the letter.

Q: Could the tax support a credit for taxes paid to another state?
A: The Department said it could.

Q: Does the old classification of the former Texas tax control?
A: No. The letter distinguished the revised tax from the version addressed in O-2003-001.

Citations and references

• Kansas Opinion Letter O-2003-001 — earlier treatment of the former Texas franchise tax, distinguished in this letter
• Revised Texas franchise tax — classified by Kansas as income-based for the stated addback and credit purposes

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2008-004

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

September 2, 2008

XXXXXXX
XXXXXXX

Re: Kansas Income Tax

Dear: Mr. XXXXX

Your correspondence of June 13, 2008 has been referred to me for response. Thank you for your inquiry and please accept my apologies for the delay in responding.

Your e-mail notes that in Opinion Letter O-2003-001 the Kansas Department of Revenue ruled that the Texas franchise tax was a state franchise tax and not a state income tax. You also note that since the issuance of that ruling the Texas franchise tax has been replaced with the revised Texas franchise tax which is characterized on the Texas web site as “a privilege tax imposed on each taxable entity chartered/organized in Texas or doing business in Texas.” By your e-mail you ask whether Kansas considers the revised Texas franchise tax to be a franchise tax or an income tax with respect to Kansas partnerships, S corporations and individuals for purposes of (1) adjustment for taxes on or measured by income or fees or payment in lieu of income taxes and (2) credits for taxes paid to other states.

In response to your inquiry, please be advised the Department has considered this matter and has determined the revised Texas franchise tax is based on income and is therefore in the nature of an income tax. Accordingly, the revised Texas franchise tax will be an addback modification for Kansas corporate income tax purposes. It could also be claimed as a credit for taxes paid to another state.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

NOTE: This opinion letter is based solely on the facts provided in your request for advice. If material facts or information were not disclosed this letter is null and void. This letter will be revoked without further action by the Department if the statutes, administrative regulations, published revenue rulings, or court decisions that materially affect this opinion are changed.

Date Composed: 09/04/2008 Date Modified: 09/04/2008

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