Bill Caption

Relating to the computation of the franchise tax by a taxable entity engaged in Internet hosting.

Fiscal Notes

Estimated Two-year Net Impact to General Revenue Related Funds for HB416, As Introduced: an impact of $0 through the biennium ending August 31, 2015. The bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($5,000,000) for the 2014-15 biennium. Any loss to the Property Tax Relief Fund must be made up with an equal amount of General Revenue to fund the Foundation School Program.

Bill Analysis

Summary: HB 416 would change how Texas internet hosting businesses count receipts for purposes of apportionment under the Franchise Tax. Internet hosts provide information technology services over the Internet to people both inside Texas and outside of the state. Currently, businesses must count receipts for both Texas and out of state customers when determining apportionment because receipts are required to go to the location where services are performed, and technically internet hosting services that are performed on servers in Texas subject these services to the Franchise Tax. HB 416 would allow internet hosts to count only receipts of customers provided service in Texas for purposes of the Franchise Tax, allowing them to exclude receipts of out of state customers and reduce their Franchise Tax burden. HB 416 would make an internet hosting receipt qualify as “business done in this state,” only if “the customer to whom the service is provided is located in this state.” LBB estimates a negative impact of $5 million over 2014-15 to the Property Tax Relief Fund due to HB 416.

Analysis: HB 416 would relieve internet hosting firms in Texas from paying Franchise Tax apportionments for out-of-state customers. Removing this tax burden will make internet hosting businesses more competitive against similar out-of-state companies, and it will make Texas’ tax climate more hospitable for this industry. Ideally, general language would be used to include all businesses that deal with this outdated mode of Franchise Tax apportionment, instead of just continuing an incremental exemption process for internet hosting businesses. HB 416 nevertheless reduces the amount of revenue Texas government will take in from internet hosting businesses, providing a limitation on government and allowing these firms to keep more of their resources, which is a promotion of private property. The overall goal should be to make tax creation broad based and low rate, but reducing the Franchise Tax burden incrementally is an acceptable alternative in the present. Support HB 416.

Support HB 16 because it limits the burden of Texas’ franchise tax for another industry to make Texas internet hosting businesses more competitive and Texas a more friendly tax climate.

Legislators should continue to look for ways to mitigate the effects of the Franchise Tax on businesses and expand the exemption given to internet hosting companies by HB 416 to all such businesses adversely affected by the Franchise Tax in the same way. Support HB 416.