Special Session started on Tuesday in Austin.  The Governor has only included in the "call" education and its funding.  That has not stopped legislators from re-filing bills that didn't make it through the regular session!  Bills have been filed on water, telecommunications, and judicial pay raises.  It is anyone's guess as to whether the governor will permit final action on these items.  They have the potential to divert energy from the critical issue of school funding.

Apparently the session was called without a consensus among the leadership (much less the chambers) regarding the ultimate tax bill.  So far, there is a house plan, a senate plan, and the governor's plan.  We understand that Rep. Chisum will be carrying the governor's proposal, but we haven't seen it yet.  Allegedly it closes the "Delaware loophole," but we don't know which loophole they are referring to!

HB 3 is the House tax bill.  (Remember that these bills must begin in the House.)  It looks a lot like it did in the regular session.  There is an increase in the sales tax amount by 1%, and customer software is added to the taxable list (along with auto repair and a few other items).  The major piece is franchise tax reform.  More entities are covered under this bill.  The so-called "Geoffrey" loophole is closed.  (This involves putting a business's logo and other intellectual property, e.g. Geoffrey the Toys 'R Us giraffe, into a separate Delaware subsidiary.  The stores then pay large royalties to the Delaware sub, thereby reducing their income and taxes.)  The allocation of capital based on source of revenue is not touched, so the bank holding company arrangement is safe....for now.  For purposes of calculating taxes, however, dividends are sourced to the recipient.  No double taxation of them.

The centerpiece of the reform involves an option between a payroll tax (1.15% on all wages, exclusive of benefits) and the traditional franchise tax.  There is no cap on the wages in the payroll tax section.  A taxable entity may elect which tax to pay but may never pay less than 50% of the higher tax.  In the franchise tax area, the definition of "officer" (for purposes of add back to taxable surplus) is deleted.  However, banks still add back only executive officers.  BHCs, however, add back for all officers.  the exemption for government securities is still in place--as it must be in order to comply with federal law.

This is just the first salvo.  We haven't seen the other bills, and there are likely to be amendments to HB 3.  Rest assured that we are watching carefully and visiting regularly with decision makers!

Education bills are already being heard in committee.  There may be action on these.  Remember, too, that the legislature could simply re-pass the public ed budget and send it back to the governor!

Thanks to all of the bankers during the regular session who responded to our urgent requests for information or who filled out sample tax returns for comparison purposes.  Stand by....we may need you again!  Also, kudos and thanks to Chet Fenimore and Jeff Blair from the law firm of Jenkens & Gilchrist and Steve Moore from the law firm of Jackson Walker, who have provided valuable insights and assistance in analyzing the tax bills and formulating strategy.

IBAT's Agenda in the regular session was 100% successful, with all of our bills signed by the governor.  For more information on these--and the other bills we worked on--just sign up for the Legislative Update teleconference on July 6 and 7.  Go to the calendar section at www.ibat.org for more information.  Also, watch for the IBAT end of session White Paper, coming your way soon.

So much for summer casual...