Doing Business in Texas: Taxation

Texas has been consistently ranked as one of the best states for businesses, no doubt in large part to our low tax rates and business friendly tax policies. In this installment of our Doing Business in Texas series we cover the topic of Taxation in Texas. There are a variety of taxes imposed by the state and local governments that businesses need to be aware.

Sales and Use Tax

Texas imposes a sales tax on retail sales of tangible personal property and some applicable services. [Link] The state sales tax rate is 6.25%. Local governments may levy up to an additional 2% sales tax leading to a maximum sales tax rate of 8.25%. Sales taxes are collected by the business or seller at the point of sale or service and is only applied to sales done wholly within the state. The state exempts some important purchases from the sales tax including: the sale of a business, manufacturing equipment, resale of used property, many medical and food products, and some utilities such as gas and electricity. Tax exempt entities are also afforded an exemption from the sales tax. Personal property is not taxed in Texas as in many other states.

Property Tax

Local Texas governments, which includes cities, counties, school districts, municipal districts, etc.) are funded through property taxes on land. Each year the county appraisal district reviews and issues the valuation of the property and the tax levied. Property owners may protest their property tax valuations before the district’s review board when appropriate. Although some areas of Texas have higher than average property tax rates than other states, these rates are set at the local level and allow taxpayers to have greater say on what the rate is and how it is used. Another unique aspect to Texas property taxation is that the local taxing entities collect their taxes themselves. The state does not collect all taxes and then reapportion them to the appropriate districts as in many states. Property taxes are generally payable by January 31st of the year following the tax year.

Franchise Tax

As we have discussed before [Link] the franchise tax is the tax levied on most business entities in Texas. The franchise tax is imposed on most registered business entities in Texas including corporations, limited partnerships, and limited liability companies. Sole proprietorships, general partnerships (owned wholly by natural persons) and some entities that qualify as “passive entities” are exempt from the franchise tax.

The tax rate for the franchise tax is currently 0.5% for retail and wholesale businesses and 1% of gross receipts for businesses not retail and wholesale. Starting in 2016, the franchise tax rate will be lowered to 0.375% for retail and wholesale businesses and 0.75% for other businesses. Gross receipts are defined by the Texas Comptroller but generally will be total revenue (that is apportioned to Texas) minus the allowed deductions. Deductions can be the greater of three choices: a. the cost of goods sold, b. cost of compensation, or c. 30% of total revenue.

Entities with annual total revenue below the no-tax-due threshold and taxable entities with a tax due of less than $1000 owe no tax franchise for that tax year. The no-tax-due threshold is currently $1.08 million. Even if entities owe no tax for the year, they are still required to file a Public Information Report (PIR) with the Texas Comptroller stating the registered agent, registered office, and who the managers/executive officers of the business are.

Income Tax and Other Taxes

Texas is one of the few remaining states which does not have a personal income or corporate income tax. Texas does have an unemployment tax of 1% of the first $9,000 of wages paid to an employee. These taxes go to the Texas Unemployment Compensation Fund for unemployed workers. Some counties in Texas tax personal property that is used by a business or individual to earn income. The property must be reported to the local county appraisal district and updated annually. There may be an occupation tax depending on your industry or occupation. The Texas Department of Licensing and Registration is the umbrella office for any applicable licenses and occupation taxes. [Link: http://www.tdlr.texas.gov]

Taxation is one of the more unique aspects of doing business in Texas due to our strong business friendly legislature. For more information about doing business in Texas, call Reidel Law Firm at (832)510-3292 or use the form below to schedule your free legal consultation.