Texas stands apart in the realm of corporate taxation by not imposing a corporate income tax. Instead, the state opts for a gross receipts tax as a means of revenue generation. This distinctive approach sets Texas apart from many other states, offering a unique tax landscape for businesses operating within its borders.

This approach, coupled with specific thresholds and unique filing options, creates a tax landscape that is both complex and dynamic. For businesses operating within the Lone Star State, understanding the nuances of Texas tax laws, including franchise tax, sales tax, and credits available, is essential. This blog post provides insights into Texas business taxes, highlighting key aspects that companies need to navigate in this diverse and economically vibrant state.

What is the Texas Corporate Income Tax Rate?

Texas operates without a corporate income tax, opting instead for a gross receipts tax.

Texas Gross Receipts Tax

Small businesses with annual receipts falling below a specific threshold are exempt from paying any franchise tax, commonly referred to as the no-tax-due threshold. For the tax years 2024 and 2025, this threshold is set at $2,470,000.

Businesses with annual revenues exceeding this threshold but not surpassing $20 million are subject to a tax rate of 0.331% on the portion of their income attributed to Texas, known as apportionment. These businesses have the option to file using the E-Z Computation Report form, a streamlined one-page document. It’s important to note that this form restricts certain deductions and credits, excluding those related to cost of goods sold (COGS), compensation, economic development, or temporary credits.

For those unable to utilize the E-Z Computation form, varying tax rates apply depending on the nature of the business. Wholesalers and retailers face a tax rate of 0.375%, while businesses outside the retail and wholesale sector are taxed at a rate of 0.75%. In such cases, the tax is calculated based on the state-defined taxable margins, which is the lowest of the following: 70% of total revenue, 100% of revenue minus COGS, 100% of revenue minus total compensation, or total revenue minus $1 million.

Texas imposes franchise tax on nearly all businesses, with exceptions for sole proprietorships and specific general partnerships. The tax structure varies based on the type of business entity:

• C Corporations: Typically, small businesses are not structured as corporations, but some may transition from LLCs and S corporations to C corporations as they grow. C corporations in Texas are subject to the franchise tax, and the no-tax-due threshold and E-Z Computation rules apply.
• S Corporations: Popular among small businesses, S corporations pass income through to shareholders who are individually taxed. While not subject to separate federal and most state income taxes, Texas imposes franchise tax on S corporations based on annual revenue. Shareholders, however, are not personally taxed by the state.
• Limited Liability Companies (LLCs): Unlike many states, Texas charges franchise tax on LLCs, applying the same rules as other business types. However, income passing to owners as personal income is not subject to state income tax in Texas, which lacks a personal income tax.
• Partnerships and Sole Proprietorships: Most partnerships in Texas, including limited partnerships (LPs) and limited liability partnerships (LLPs), are subject to the franchise tax. Sole proprietorships, on the other hand, are exempt. Partnerships that directly distribute business income to individual owners are treated similarly to sole proprietorships, not incurring franchise tax. While federal income tax applies, Texas does not levy state tax on personal income. Business owners seeking to form partnerships can benefit from consulting a tax accountant for optimal tax treatment based on specific circumstances.

How is Texas Franchise Tax Nexus Triggered?

Concerning income tax, Texas enforces a franchise tax on corporations, most partnerships, limited liability companies, and entities exhibiting a substantial nexus with the state. This nexus can be established through either physical presence or economic factors, offering companies various avenues to create a presence in Texas.

The list of activities includes:

• Entering Texas for purchasing, placing, or displaying advertising on behalf of another in the ordinary course of business.
• Performing a contract in Texas, irrespective of the employment arrangement.
• Delivering sold items into the state.
• Maintaining inventory within the state.
• Providing services within the state.
• Employing individuals, including independent contractors, agents, or representatives in Texas, regardless of their residency, to promote or induce sales for the out-of-state taxable entity.

The economic nexus provisions for the Texas franchise tax took effect on January 1, 2019. An out-of-state entity establishes economic nexus if gross receipts from Texas business activities amount to $500,000 or more, even without a physical presence.

It’s crucial to note that an entity’s federal income tax treatment doesn’t dictate its responsibility for Texas franchise tax. Every taxable entity organized or conducting business in Texas is subject to franchise tax, and even disregarded entities for federal income tax purposes may find themselves subject to franchise tax in Texas.

Does Having an Employee or Contractor Trigger Nexus?

Yes, establishing a nexus occurs when individuals, whether employees, independent contractors, agents, or representatives, are engaged in Texas to promote or induce sales for the out-of-state taxable entity, irrespective of their residency.

Are There Texas Tax Credits Available?

Texas does offer various tax credits and incentives that businesses can take advantage of. These credits are designed to encourage specific activities, investments, or contributions that contribute to the state’s economic growth.

Some common types of tax credits and incentives in Texas include:

Research and Development (R&D) Tax Credit:

This credit is aimed at companies engaged in qualified research and development activities.

Sales Tax Exemptions:

Depending on the nature of the business and its activities, certain sales tax exemptions may apply.

Job Creation Tax Credits:

Businesses that create new jobs in Texas may be eligible for job creation tax credits.

Investment Tax Credits:

Companies making qualified investments in the state, such as machinery, equipment, or real property, may qualify for investment tax credits.

Renewable Energy Credits:

Businesses investing in renewable energy projects, such as solar or wind, may qualify for credits to support sustainable practices.

What is the Texas Sales Tax Rate?

The sales and use tax rate in the state of Texas is 6.25 percent. However, additional local taxing jurisdictions, including cities, counties, special-purpose districts, and transit authorities, have the authority to levy sales and use taxes, which can result in a combined rate of up to 8.25 percent.

How is Sales Tax Nexus Triggered in TX?

Businesses undertaking diverse activities to promote products and manage operations are subject to sales tax nexus in Texas. Utilizing agents, representatives, independent contractors, or salespersons operating under the seller’s authority for selling, delivering, or taking orders, and employing catalogs, periodicals, and advertising flyers for selling taxable items are common practices. Franchisors permitting franchisees, responsible for collecting sales or use tax, to operate under the franchisor’s name is another avenue. Participation in trade shows to introduce and demonstrate products is a prevalent strategy.

These activities alone can trigger sales tax nexus in Texas. Additionally, the state has affiliate nexus provisions, stipulating that an out-of-state retailer affiliated with a retailer maintaining a Texas business presence becomes liable for sales tax if the in-state affiliate engages in specific activities. Texas also implements economic sales tax nexus provisions, requiring a remote seller with total Texas revenue exceeding $500,000 in a 12-month period to obtain a permit and collect use tax.

What Transactions are Included or Excluded from Sales Tax?

In Texas, sales tax applies to various transactions, but there are also exemptions. Here’s a general overview of transactions that are included (taxable) and excluded (non-taxable) from sales tax:

Included (Taxable):

• Sale of Tangible Personal Property: Sales tax is typically levied on tangible items such as electronics, clothing, furniture, and other physical goods.
• Products Transferred Electronically: Tax applies to products transferred electronically, reflecting the modern digital economy.
• Services: Specific services are subject to sales tax.

Excluded (Non-taxable):

• Food Sales: Unprepared food for home consumption is often exempt from sales tax.
• Prescription Drugs: Sales of prescription drugs for human use are typically exempt.
• Sales to Government Entities: Sales to federal, state, and local government entities are often exempt.
• Sales for Resale: Items sold for resale are generally exempt from sales tax.
• Medical Equipment: Some medical equipment and supplies may be exempt.

Are Services Taxed for Sales Tax?

The definition of Taxable Services in Texas, encompasses 17 comprehensive categories of services, each containing various specific services. The following list outlines taxable services, provides examples, and refers to additional information for each category:

• Amusement Services
• Cable Television Services and Bundled Cable Services
• Credit Reporting Services
• Data Processing Services
• Debt Collection Services
• Information Services
• Insurance Services
• Internet Access Services
• Laundry, Cleaning and Garment Services
• Motor Vehicle Parking and Storage Services
• Nonresidential Real Property Repair, Restoration, or Remodeling Services
• Personal Property Maintenance, Remodeling, or Repair Services
• Personal Services
• Real Property Services
• Security Services
• Telecommunications Services
• Telephone Answering Services
• Utility Transmission and Distribution Services
• Taxable Labor – Photographers, Draftsmen, Artists, Tailors, Etc.

Apart from the specified taxable services, certain sales often categorized as “services” are taxable, specifically those related to the sale, processing, or remodeling of tangible personal property. For instance, charges for manufacturing, assembling, fabricating, or processing products are subject to tax, even when the customer provides raw materials, tools, or equipment. Examples of labor resulting in the sale of taxable items include photography, videography, artwork production, printing, calligraphy, embroidery, custom sewing or tailoring, woodworking, welding, catering, and assembling products such as computer systems, toys, furniture, or equipment.

Is SaaS Taxable for Sales Tax?

Texas mandates sales tax on Software-as-a-Service (SaaS), making SaaS services taxable in the state. The imposition of sales tax on SaaS in Texas is based on the classification of the service as a “taxable data processing service.” If your Software-as-a-Service aligns with Texas’s definition of taxable data processing services, you may be required to charge sales tax on 80% of the sale price.

In Texas, a “taxable data processing service” encompasses various computerized activities, including word processing, data entry, data retrieval, data search, information compilation, payroll, and business accounting data production. It also includes the use of a computer or computer time for data processing, irrespective of whether the processing is performed by the provider, the purchaser, or another beneficiary of the service. 

However, certain activities, such as the transcription of medical dictation by a medical transcriptionist, are explicitly excluded from the definition. Additionally, the term “data storage” excludes specific types of advertisements displayed on an Internet website owned by another person. Furthermore, in Texas, SaaS is classified as tangible personal property, reinforcing its taxability within the state.

Frequently Asked Questions (FAQs) – Texas Business Taxes

Do I need to pay franchise tax in Texas?

In Texas, most businesses, including corporations, partnerships, and limited liability companies, are subject to franchise tax. Certain exceptions apply, such as sole proprietorships and specific types of general partnerships.

What is the no-tax-due threshold for small businesses?

Small businesses with annual receipts below a certain level, set at $2,470,000 for the tax years 2024 and 2025, are exempt from franchise tax, known as the no-tax-due threshold.

How is franchise tax calculated for businesses with revenues above the threshold?

For businesses with revenues exceeding the threshold but not exceeding $20 million, the tax rate is 0.331% on the portion of revenue attributable to Texas, known as apportionment. Different tax rates apply to wholesalers, retailers, and businesses other than retail and wholesale.

When is the Texas corporate income tax return due?

Texas corporate income tax payments are due annually on the 15th day of the fourth month following the conclusion of the financial year. For calendar year businesses (January 1 to December 31), the deadline is April 15 of the subsequent year, with extensions available.

How is income tax nexus triggered in Texas?

Franchise and excise taxes apply to entities “doing business” with a “substantial nexus” in Texas. This includes activities such as having a physical presence, systematic business activity, or licensing intangible property for use in the state.

Does having an employee or contractor trigger nexus in Texas?

Yes, engaging any employee or independent contractor providing taxable services within the state can establish a significant nexus for a business in Texas.

Are there income tax credits available in Texas?

Yes, Texas offers various income tax credits to eligible businesses, encouraging activities contributing to economic growth. Credits include Job Tax Credit, Investment Tax Credit, Research and Development Credit, and others.

What is the sales tax rate in Texas?

The standard statewide sales tax rate in Texas is 6.25%, with local taxing jurisdictions having the authority to impose additional taxes, resulting in a total maximum combined rate of 8.25%.

How is sales tax nexus triggered for remote sellers in Texas?

Remote sellers lacking a physical presence must collect and remit sales tax on items delivered into the state. Economic nexus, with a $500,000 revenue threshold, requires registration and tax remittance for qualifying sellers.

Which transactions are included or excluded from Texas sales tax?

Taxable transactions include the sale of tangible personal property, products transferred electronically, and specific taxable services. Exemptions apply to food sales, prescription drugs, sales to government entities, and more.