What’s the difference between the margin, privilege, and franchise tax?
The formal name of the tax is—and has always been—the Texas Franchise Tax, which has been levied in some form since the 1800s. Since its inception, the tax has been assessed as a fee for the “privilege” of doing business in the state of Texas, thus its colloquial name: “privilege tax.” The tax is often referred to as the margin tax because, unlike income tax, it is levied on the business’s gross margin (minus certain deductions), not profit. The overhaul of the tax that occurred in 2008 changed the taxable base from "earned surplus" (profit with certain additions) to margin.
What entities are required to pay the franchise tax?
Corporations (C and S alike)
Limited Liability Companies
Partnerships (except general partnerships owned by natural persons)
Business Trusts
Professional Associations
What entities are exempt from the franchise tax?
Sole proprietorships (except the tax does apply to single member LLCs filing as a sole proprietor for federal income tax purposes);
General partnerships directly and solely owned by natural persons (except the tax does apply to all limited liability partnerships);
Entities exempt under Subchapter B of Chapter 171;
Passive entities (as defined under TTC 171.0003). Note that some passive entities have an annual reporting requirement to affirm their passive status.
Unincorporated political committees organized under the Election Code or the provisions of the Federal Election Campaign Act of 1971
How does the franchise tax differ from an income tax?
Currently, the franchise tax includes some deductions that adjust gross margin and thus make it more akin to an income tax than the "margin" tax it was designed to be. A tax on pure margin would suppress business, lead to compounding payments throughout the supply chain, and be unfair to low-margin businesses like wholesalers and retailers, so a number of deductions have been added (and some subsequently removed) over the years. A direct personal income tax is prohibited in the Texas Constitution, so the franchise tax is largely popular because negates some of the need for a tax that might be levied on income or payroll instead of simply being passed on via price increases.
How much does the franchise tax contribute to the state budget?
The franchise tax was projected to raise $3.9-4.5 billion dollars in yearly revenue when it was last updated in 2008. Last year, it brought in over $4.7 billion, or around 9% of the total revenue from taxes and around 4.5% of total revenue. This is a marked increase from recent years, both in magnitude and percentage.
The formal name of the tax is—and has always been—the Texas Franchise Tax, which has been levied in some form since the 1800s. Since its inception, the tax has been assessed as a fee for the “privilege” of doing business in the state of Texas, thus its colloquial name: “privilege tax.” The tax is often referred to as the margin tax because, unlike income tax, it is levied on the business’s gross margin (minus certain deductions), not profit. The overhaul of the tax that occurred in 2008 changed the taxable base from "earned surplus" (profit with certain additions) to margin.
What entities are required to pay the franchise tax?
Corporations (C and S alike)
Limited Liability Companies
Partnerships (except general partnerships owned by natural persons)
Business Trusts
Professional Associations
What entities are exempt from the franchise tax?
Sole proprietorships (except the tax does apply to single member LLCs filing as a sole proprietor for federal income tax purposes);
General partnerships directly and solely owned by natural persons (except the tax does apply to all limited liability partnerships);
Entities exempt under Subchapter B of Chapter 171;
Passive entities (as defined under TTC 171.0003). Note that some passive entities have an annual reporting requirement to affirm their passive status.
Unincorporated political committees organized under the Election Code or the provisions of the Federal Election Campaign Act of 1971
How does the franchise tax differ from an income tax?
Currently, the franchise tax includes some deductions that adjust gross margin and thus make it more akin to an income tax than the "margin" tax it was designed to be. A tax on pure margin would suppress business, lead to compounding payments throughout the supply chain, and be unfair to low-margin businesses like wholesalers and retailers, so a number of deductions have been added (and some subsequently removed) over the years. A direct personal income tax is prohibited in the Texas Constitution, so the franchise tax is largely popular because negates some of the need for a tax that might be levied on income or payroll instead of simply being passed on via price increases.
How much does the franchise tax contribute to the state budget?
The franchise tax was projected to raise $3.9-4.5 billion dollars in yearly revenue when it was last updated in 2008. Last year, it brought in over $4.7 billion, or around 9% of the total revenue from taxes and around 4.5% of total revenue. This is a marked increase from recent years, both in magnitude and percentage.