Is Your Ecommerce Business Subject to Texas Franchise Tax?
- September 25, 2015 | Suzanne Kearns
Chances are, when you read the title of this blog post, you assumed that unless you own a franchise in Texas, you don’t need to worry about the Texas franchise tax.
Unfortunately, that’s not the case.
In fact, almost anyone who does business in Texas, or has nexus in the state, has to at least file a franchise tax information report. Here’s what you need to know about this sometimes confusing Texas tax.
What is the Texas Franchise Tax?
According to the Texas Comptroller, the franchise tax is considered a privilege tax, and is applicable to most businesses that were formed or organized in Texas or that do business in the Lone Star State.
Which Businesses are Required to Report the Franchise Tax?
Almost every type of business structure is subject to this tax. But the good news is that most people will only have to file a report saying they don’t owe anything (that's right, you still have to file even if you owe nothing).
If you operate as an LP or LLP partnership, corporation, LLC, joint venture, business trust, or a professional and business association, you will have to report to the State of Texas about this tax. The only business types that are exempt are sole proprietorships (unless you operate as an LCC that files as a sole proprietor), general partnerships directly and solely owned, exempt business entities, passive business entities, and unincorporated political committees.
If your business is on the hook for the tax, don’t panic. Texas doesn’t require businesses that gross less than $1,080,000 to pay up. If your gross receipts are close to this figure, check with the comptroller’s office next year because the threshold changes often.
Now for the bad news: Even if you don’t meet the threshold, you’ll still have to file a report.
What Are the Reporting Options?
Texas gives business owners three ways to report, and each has its own benefits and disadvantages.
If you are not required to pay the tax, you will simply have to file the No Tax Due (PDF) information report. Specifically, if you don’t have any Texas receipts, are a passive entity according to Texas law, are structured as a real estate investment trust (REIT) as outlined in the code, and did not meet the $1,080,000 threshold, you only have to file the report informing Texas that you do not owe any tax.
If you met the threshold, you most likely owe the tax. Business owners that owe the franchise tax can choose to file the E-Z Computation Form or the long form. The E-Z Computation Form (PDF) is right for those businesses that earned revenue above the threshold, but below $10 million. And although this form is easier to complete than the long form, it does have its drawbacks. If you file this from, you won’t be able to:
- Deduct the costs of goods sold,
- Deduct paid compensation,
- Claim economic development credits,
- Claim temporary credits, or
- Carry over credits to be applied to future years.
If you meet the requirements, you must file this form even if you don’t owe any taxes. If you wish to take your deductions and claim credits, you should file the long form (PDF).
Texas has created a video series designed to walk you through the more complicated aspects of filing reports for the franchise tax. If you owe the tax, or simply need to file a No Tax Due report, watching these short videos may save you some valuable time.