The Texas Supreme Court rejected a partnership's claim that the Texas franchise tax violates Article VIII, §24, of the Texas Constitution (known as the "Bullock Amendment") by imposing a tax on the net incomes of natural-person partners without approval in a statewide referendum (see +In Re Allcat Claims Service, L.P. and John Weakly, Relators+, Tex. Sup. Ct. No. 11-0589, November 28, 2011).
The Bullock Amendment provides, in relevant part, that voters must approve "[a] general law enacted by the legislature that imposes a tax on the net incomes of natural persons, including a person's share of partnership and unincorporated association income" before it becomes effective. Allcat Claims Services (Allcat), which is a limited partnership, claimed that the franchise tax taxes each partner's allocated share of its income because the income of a partnership is allocated to each partner according to the partner's partnership interest. In this manner, Allcat asserted, the franchise tax is a tax on the net incomes of its partners and violates the Bullock Amendment as to partners who are natural persons. On the other hand, the Texas Comptroller argued that whether the tax is an income tax is irrelevant because Texas has adopted the entity theory for partnership law and a tax imposed on a limited partnership entity does not constitute a tax on the net incomes of the partnership's individual partners.
The court agreed with the Comptroller that Texas adheres to the entity theory, under which a partnership is considered an entity separate and distinct from its partners. In addition, the court rejected Allcat's argument that the separate entity concept applies only in contexts unrelated to net income, such as property ownership and enforcement of liability, or that §152.202(a) of the Texas Business Organizations Code provides an exception to the separate entity concept for partnership income. Thus, according to the court, the tax does not violate the Bullock Amendment because it constitutes a tax on the partnership as an entity, rather than a tax on the net income of the partnership's natural-person partners.