Franchise Tax

As described in Texas law, the franchise tax is levied in exchange for the “privilege” of doing business in the state. Part of this privilege includes liability protections under state law.

A business’ tax liability is based on its “margin,” which state law uniquely defines as total revenue minus one of four possible deductions (some of which are highly complex).

Once determined, this margin is multiplied by the percentage of the firm’s business revenues earned in Texas during the year. The tax typically is due in May of each year. The current franchise tax is levied on the apportioned margin at the following rates:

0.5 PERCENT for retailers and wholesalers;

1 PERCENT for most other entities (such as manufacturers, construction firms, energy companies, etc.); and

0.575 PERCENT for small businesses with $10 million or less in total revenue for the year (these businesses forego certain other deductions).

For 2015, no tax is due from companies with $1,080,000 or less in total revenues, or with less than $1,000 in tax liability.

The 2013 Legislature enacted a temporary reduction in franchise tax rates. For tax reports due in 2015, the rates will be 0.475 percent for retailers and wholesalers and 0.95 percent for other entities (the small business rate remains unchanged). Under current law, the tax will revert to its previous rates for reports due in 2016.

In terms of its contributions to the state’s tax revenues, the franchise tax is a distant second in size to the sales tax. In 2014, the franchise tax generated 9.3 percent of the state’s total tax collections, while the sale tax accounted for almost 54 percent. Recent projections from the Comptroller’s office have its share of tax collections shrinking to 8.6 percent by fiscal 2017
The History of the Texas Franchise Tax – The Complex Evolution of Our Main Business Tax

 

Problems:

  • Water’s Edge Loophole

Solutions:

  • Close corporate loopholes by:
    • Determine a list of tax haven countries for state tax purposes that should be updated regularly.
    • Require corporations to include the income of foreign subsidiaries based in state-identified tax havens on their state tax returns.
    • Calculate the income subject to taxation based on the sum of domestic and tax haven income.
    • Apply the state’s typical apportionment formula to determine the share of reported profits it will tax.

 

Texas Constitution
Code – Tax Code
Chapter – 171 Franchise Tax
Sec. 171.0002. DEFINITION OF TAXABLE ENTITY.
Sec. 171.003. INCREASE IN RATE REQUIRES VOTER APPROVAL.
Sec. 171.1016. E-Z COMPUTATION AND RATE.

 

Wall Street Journal – Texas Alters Analysis of Tax Cuts To Account for Economic Effect

TTARA – Understanding the Texas Franchise — or “Margin”—Tax

Economist – Blowing up the Delaware Sub

Texas Comptroller – Texas Franchise Tax Rates

CPPP – Impacts of Reducting the Franchise Tax

CPPP – How to Fill the Hole in the Texas Revenue System

CPPP – A Smart Approach to Closing a Costly Loophole

Houston Chronicle – Corporate Franchise Tax Vs. Income Tax

Houston Chronicle – Laffer: End franchise tax, online loopholes

Houston Chronicle – State’s franchise tax is universally despised in Texas Capitol

Tax Foundation – The Texas Margin Tax: A Failed Experiment

Texas DARS – Texas Franchise Tax Credit for Hiring Persons with Disabilities

R Street – Texas’s Margins Tax: Principles for Reform

CBPP – Texas Cost Estimate of Legislation Shows Impact of Franchise Tax Cut by Income Level

Many businesses avoid franchise tax

Business Journal – Delaware loophole faces closure

Business Journal – North Carolina’s ‘water’s edge’ tax loophole hurting state economy

Texas Tribune – Senators Consider Ditching Business Franchise Tax

Texas Tribune – As Oil Prices Plunge, Questions About Big Tax Credit

Texas Tribune – Cable and Satellite Providers Square Off Over Tax Break

Texas Tribune – House Sends Franchise Tax Cut to Abbott

Texas Tribune – Abbott Says Budget Must Include Business Tax Cuts

Texas Monthly – For an Income Tax

Texas Monthly – Perry’s Tax Cut

Star Telegram – Eliminate Texas’ flawed franchise tax

Truth Out – Close the “Water’s Edge” Loophole

Pew – Hunting Lost Revenue in Offshore Tax Havens

ILSR – Closing State Corporate Tax Loopholes: Combined Reporting

ILSR – Four Corporate Tax Loopholes States Should Close

ILSR – Closing State Corporate Tax Loopholes: Throwback Rules

U.S. PIRG – Taxpayers would Pay $426 to Make Up for Tax Haven Abuse, Small Businesses $2,116

Texas PIRG – Texas could save $141.5 million with simple, proven method to curb offshore tax dodging, new study finds

ITEP – Delaware: An Onshore Tax Haven

Texas Observer – Instead of Tax Breaks for Yacht Owners, How About Closing Corporate Loopholes?

8 Ridiculous Tax Loopholes: How Companies Are Avoiding the Tax Man

Dallas News – Wendy Davis targets corporate tax breaks to get money for schools

Dallas News – Study: 40% of tax cut benefit would go to highest-paid fifth of Texans

Progress Texas – My Tax Dollars Pay for WHAT?!?!

Texas Public Radio – Coalition Rallies To Dump The State Franchise Tax In 2015 Legislative Session

Huffington Post – 18 Of America’s Biggest Companies Using Tax Havens To Skirt $92 Billion In U.S. Taxes

Huffington Post – States Crack Down On Corporate Tax Loophole While Congress Does Nothing

Common dreams – American elites don’t have to go to Panama to hide their money—they can go to Delaware.

Next City – Getting Rid of Anonymous Shell Companies Would Help Local Businesses

Reuters – Texas legislature passes tax cuts for businesses

Center for American Progress – Five Problems with Dynamic Scoring: It’s a Bad Method for Estimating the Cost of Proposed Legislation

Governing – The States’ Disappointing Experiences With Dynamic Scoring

Vox – Dynamic scoring is a good idea with big problems

Wall Street Journal – Why Data Centers Collect Big Tax Breaks

Dallas Morning News – For ideology and industry, Texas Legislature passes lots of little tax breaks, and they add up

Think Progress – States Could Haul In A Billion Dollars By Closing One Tax Loophole

USA Today – Delaware seeks compromise in anti-money laundering fight