The Texas Court of Appeals held that a taxpayer was not entitled to elect the Multistate Tax Compact (MTC) three-factor formula because the Texas franchise (margin) tax is not an “income tax,” as defined in the MTC. Specifically, the court ruled that the franchise tax is not “imposed on or measured by net income.” Relying on the plain meaning, dictionary definition of “net income,” the court reasoned that all expenses must be deducted for a tax to qualify as an “income tax.” For franchise tax purposes, conversely, a taxpayer’s margin is computed by deducting a flat amount unrelated to expenses (e.g., 30%) or certain limited expenses (e.g., costs of goods sold). The court also rejected the taxpayer’s reliance on Int’l Bus. Machines Corp. v. Dep’t of Treasury, 852 N.W.2d 865 (Mich. 2014), which held that Michigan’s modified gross receipts tax was an “income tax” under the MTC. Because the Michigan tax was a “variation of net income,” the court determined that the tax was not “sufficiently similar” to Texas’s franchise tax.

Because the MTC election applies only to an income tax, the court did not decide the taxpayer’s two other issues: (1) whether the single-factor formula repealed the election by implication; and (2) whether the MTC is a binding, interstate compact. However, the opinion indicates that the Legislature intended to exclude the three-factor formula election when it restructured the franchise tax in 2006. Graphic Packaging Corp. v. Hegar, No. 03-14-00197-CV (Tex. App.—Austin July 28, 2015, no pet. h.).