Texas Franchise Tax Explained for E-Commerce Sellers

Aug 29, 2023 | E-Commerce, Tax Compliance

E-commerce merchants are already accustomed to dealing with taxes in states where we don’t actually have a presence. (Thanks, economic nexus.) But in some cases, those taxes aren’t sales taxes. Take the Texas Franchise Tax for example. Under Texas law, entities either formed in Texas or doing business in Texas are required to pay this franchise tax if they meet certain requirements. 

The way many non-Texas based e-commerce retailers find out about this law is from receiving a notice from Texas in the mail. 

Who is subject to Texas Franchise Tax?

Businesses who do business in the state but make less than $1,230,000 in gross receipts (in and outside of Texas) are not required to pay Texas franchise tax. (Though you may still be required to file a return. More on that below.) 

Businesses who “do business in the state” are considered businesses that operate or have a physical location, employees, etc. in the state. Businesses with economic nexus in the state (ie. businesses who grossed $500,000 in sales to buyers in the state during the previous calendar year) are also potentially subject to the tax.

Some entity types are also not subject to the tax. 

According to the Texas Comptroller website, entities that are subject to Texas Franchise Tax include

  • corporations
  • limited liability companies (LLCs), including series LLCs
  • banks
  • state limited banking associations
  • savings and loan associations
  • S corporations
  • professional corporations
  • partnerships (general, limited and limited liability)
  • Trusts
  • professional associations
  • business associations
  • joint ventures
  • other legal entities

Entities not subject to the Texas Franchise Tax include

  • sole proprietorships (except for single member LLCs)
  • general partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships)
  • entities exempt under Tax Code Chapter 171, Subchapter B
  • certain unincorporated passive entities
  • certain grantor trusts, estates of natural persons and escrows
  • real estate mortgage investment conduits and certain qualified real estate investment trusts
  • a nonprofit self-insurance trust created under Insurance Code Chapter 2212
  • a trust qualified under Internal Revenue Code Section 401(a)
  • a trust exempt under Internal Revenue Code Section 501(c)(9)
  • unincorporated political committees

How much is the Texas Franchise Tax?

The tax rate for retailers is 0.375%. The tax rate for all other businesses is 0.75%. As with other types of income taxes, taxpayers may take deductions such as wages and Cost of Goods Sold (COGS).

E-Commerce Merchants: How to Handle Texas Franchise Tax

Texas Franchise Tax is due on May 15th of each year. 

I think I’m subject to Texas Franchise Tax. What do I do? 

If you received a notice of Texas Franchise Tax due, we highly recommend contacting an income tax expert like our friends at Xendoo to help. Though you may meet the stated requirements, such as operating an S Corp that makes more than $1,230,000 in revenue, you may also be eligible for credits. Otherwise, your income tax expert can assist you in paying the tax and tax planning for future years. 

I received a notice, but I don’t meet the requirements for the Texas Franchise Tax. What do I do?

In this case, we again recommend contacting a tax expert like our friends at Xendoo to ensure that you are in total compliance with Texas law. However, if your business does not meet the requirements to owe this tax you will likely be instructed to file a “No Tax Due” return. 

How do I file the Texas Franchise Tax return?

As with sales tax, taxpayers can file and pay this tax due via the Texas Comptroller’s eSystems website

If you need further time to gather your information or file, you can also request an extension through eSystems. Just be sure you request the extension before the annual due date of May 15th.

What happens if I don’t file and/or pay the Texas Franchise Tax?

There is a $50 penalty for failing to file even if no tax was due. This is similar to sales tax when states require a “zero return” even when you did not make any sales during the taxable period.