What is Texas franchise tax?

• Texas franchise tax is a privilege tax that applies to taxable entities formed, organized, or doing business in Texas, including corporations, LLCs, and partnerships —  regardless of whether they owe sales tax.

• Franchise tax liability is based on business margins. There are multiple calculation options and a “no tax due” threshold that exempts small businesses under $2.65 million in annual revenue.

• Remote sellers and marketplace facilitators must file Texas franchise tax if they exceed $500,000 in annual gross receipts in Texas.

The term franchise tax may inspire thoughts of franchises, but a franchise tax has nothing to do with franchising, per se.  

A “franchise” is the right or license granted to an individual or group to market a company’s goods or services. It’s also a business granted such a right or license. Your local McDonald’s is probably a franchise, because 90% of McDonald’s restaurants are franchises. Other well-known franchises include Ace Hardware locations, RE/MAX real estate businesses, and The UPS Store centers. 

A franchise tax is a type of tax imposed on a taxable entity doing business in a state. It can apply to all sorts of businesses, including but not limited to franchises.

Specific franchise tax requirements vary by state. Some states call their franchise tax a privilege tax: Per the Texas Comptroller, “The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.”

Many states have a franchise tax. For simplicity’s sake, we’ll focus on Texas franchise tax in this article.

Franchise tax is not the same as sales tax. In fact, it’s more akin to a corporate income tax. Texas has both a sales tax and a franchise tax. There’s no personal income tax in Texas.

One key difference between sales tax and franchise tax, and there are many, is liability. The Texas sales tax is something a business must collect from a Texas consumer and only affects businesses that sell taxable property or services. The Texas franchise tax is a tax on doing business in the state and applies to taxable entities regardless of the type of business. It isn’t intended to be passed on to a third party. The two taxes are structurally different.

Furthermore, Texas franchise tax is a statewide tax and there are no local franchise taxes. There’s a statewide sales tax too — the base state sales tax rate in Texas is 6.25% — but most jurisdictions add a local sales tax and/or a special district sales tax. As a result, combined sales tax rates vary from location to location. (Some remote sellers can apply to collect a single local use tax rate for all transactions in Texas, but that doesn’t change the fundamental differences between the franchise tax and sales tax.)

According to the Texas Comptroller, the franchise tax is “Texas’ primary tax on businesses.” For the most part, if you’re required to collect and remit Texas sales tax, you’d also have a Texas franchise tax obligation. 

Businesses rather than individuals are liable for franchise tax: The legal formation of an entity rather than the entity’s treatment for federal income tax purposes dictates whether the entity must pay the Texas franchise tax. Taxable entities formed in Texas must file and pay Texas franchise tax. Taxable entities that were formed elsewhere but do business in Texas may also be liable for franchise tax in Texas.

Taxable entities liable for Texas franchise tax include, but aren’t limited to:

• Banks and state limited banking associations
• Business associations
• Corporations
• Joint ventures
• Limited liability companies (LLC), including series LLCs
• Partnerships (general, limited, and limited liability)
• Professional associations and corporations 
• S corporations
• Savings and loan associations
• Trusts

Other legal taxable entities may also be liable for the tax. 

The following entities are among those generally not subject to franchise tax:

• Certain grantor trusts, estates of natural persons, and escrows
• Certain unincorporated passive entities
• Nonprofit self-insurance trusts created under Insurance Code Chapter 2212
• Sole proprietorships (except for single member LLCs)
• Trusts exempt under IRS code section 501(c)(9) or qualified under IRS code section 401(a)
• Unincorporated political committees

The Texas Comptroller provides a list of entities that are and aren’t subject to franchise tax and offers specific examples in its Franchise Tax FAQ. If you’re not sure whether you’re liable for Texas franchise tax, check with a trusted tax advisor. 

Franchise tax is based on your margins. Unless you choose to file the EZ computation report — and qualify to do so — franchise tax is computed in one of the following ways:

• Total revenue times 70%;
• Total revenue minus cost of goods sold (COGS);
• Total revenue minus compensation; or
• Total revenue minus $1 million (effective January 1, 2014).

The Texas Comptroller offers more guidance, including how to determine your compensation, COGS, and total revenue.

This question is trickier to answer than you might think, because franchise tax rates vary in Texas depending on your business’s annual revenue and how you report it. Moreover, franchise tax deductions, rates, and thresholds may change by report year.

Current rates, thresholds, and deduction limits for Texas franchise tax are as follows: 

As you can see in the above chart, Texas has a “no tax due threshold.” If you’re the type of entity generally required to pay franchise tax but sell beneath the Texas no tax due threshold, you’re not required to pay Texas franchise tax for that period. 

The Texas no tax due threshold changes every two years (on even years). It was $1.23 million for 2022–2024, then took a big leap. For franchise tax reports originally due on or after January 1, 2026, the no tax due threshold is $2.65 million. 

Texas discontinued the No Tax Due Information Report for the 2024 report year and later: A taxable entity with annualized total revenue at or below the No Tax Due Threshold is no longer required to file a No Tax Due Report but must still file Form 05-102 or Form 05-167.

Texas franchise tax is paid annually rather than quarterly or monthly, and it doesn’t require quarterly estimated payments. Annual franchise tax reports are due on May 15, or the next business day if that falls on a weekend or holiday. 

It’s generally preferable to file a franchise tax report online through the Texas Comptroller WebFile. If online filing isn’t an option for you, you’ll find Texas franchise tax report information and instructions on the Texas Comptroller website. 

Late returns are subject to penalties.

Maybe. Online sellers formed in Texas are generally required to register for Texas franchise tax. Businesses with no physical presence in the Lone Star State (i.e., remote businesses) generally need to pay franchise tax if they do a certain amount of business in the state.

As of January 1, 2020, a remote online seller is liable for Texas franchise tax if it has $500,000 or more in annual gross receipts from business in Texas. Basing a tax obligation on economic activity is known as economic nexus.

Like other business entities, a marketplace facilitator would need to register for and pay Texas franchise tax if it has a physical presence in the state or economic nexus with the state. The same goes for marketplace sellers. 

Yes, indeed. Numerous states levy franchise taxes, including Arkansas, California, Delaware, Mississippi, New York, North Carolina, Tennessee, and Washington D.C. As you can see if you click on these links, some states lump franchise taxes and income taxes together on the same pages.

Bear in mind that state franchise tax requirements are subject to change. For example, Oklahoma eliminated franchise tax after tax year 2023, and there will be no corporate franchise tax in Louisiana on or after January 1, 2026.  

A tax professional can help you sort out your franchise tax obligations in Texas and other states. Avalara solutions can help ensure you collect, remit, and report sales tax properly. Get in touch to learn more.