The first thing to know when it comes to Texas franchise tax is that it is NOT the same as sales tax. Sales tax only taxes the end consumer. Franchise tax taxes all the businesses involved in the process from the manufacturer to the end distributor. It can be considered a tax for the privilege of doing business in Texas.
Who Needs to File for Texas Franchise Tax?
The short answer is everyone who has nexus in Texas has to file & pay Texas franchise tax. (If you need some nexus or sales tax guidance, click here to download our “10 Steps of Sales Tax” PDF.)
The longer answer is that all businesses that conduct business in TX or have passed the economic nexus threshold ($500K) have to file. That being said, there are some exceptions.
- If you do not have nexus in Texas
Example – Let’s say that you are a fairly new ecommerce seller doing about $1M in annual sales, with $275K of that coming from Texas customers. Since you have not yet hit the economic nexus threshold, you are not responsible for filing Texas franchise tax. Yay!
- If you do not conduct business in Texas
Example – This time, you are a thriving ecommerce seller that, for some reason, is not doing any business in Texas. Well, that means you’re off the hook, too.
- If you are a sole proprietorship or general partnership
Example – Now let’s say you are a thriving ecommerce seller going gangbusters with your sales, even in Texas. You either own the business all by your lonesome OR you’re in a partnership where you share and share alike. Well, you’re still off the hook.
If you don’t fit one of these criteria, you get to file Texas franchise tax.
What are the Thresholds?
The next thing to know is that not everyone will file franchise tax in the same way. There are different thresholds that determine what you’ll pay or what form you’ll file.
Threshold 1 – If your sales in the entire country are less than $1.18M, you’ll file a No Tax Due Information Report. You have to file, but you don’t have to pay the tax.
Threshold 2 – If your sales in the entire country are between $1.18-20M, you’ll file the EZ Computation Report.
Threshold 3 – If your sales in the entire country are over $20M, you’ll file the Long Form Report.
The main difference between the EZ Form & Long Form are the different deductions you can take.
What are the Due Dates?
Usually May 15th for the filing & payment deadline and November 15th for the extension deadline.
If you need to file an extension, this is the link: https://comptroller.texas.gov/taxes/franchise/filing-extensions.php. Remember, the extension is an extension to file, NOT an extension to pay. You still have to pay by the original deadline.
For more information, go to https://comptroller.texas.gov/taxes/franchise/.
How to File for Texas Franchise Tax – Step-by-Step
Filing Texas franchise tax isn’t difficult, but it is a bit of a process, so we’ll walk you through it.
Getting a Texas Franchise Tax Account Set Up
First, go to www.comptroller.texas.gov.
This is where you’ll register for both a sales tax permit and a franchise tax account. Actually, most people go ahead and sign up for both at the same time.
You should have received your webfile number in a letter when you registered for your sales tax permit. The letter would look like this:
At the bottom of the letter, it’ll have your sales tax webfile number. You can extrapolate your franchise tax webfile number from your sales tax webfile number. You do that by changing the last digit of your sales tax number to one more and changing the R to an X.
Ex: Sales tax webfile number: RT590914 -> Franchise tax webfile number: XT590915
After you login, you’ll come to a screen that looks like this:
If you don’t see both options, click on the blue button in the upper right corner to be assigned an account.
You’ll enter your taxpayer number and be directed to another screen.
If you scroll down a little, you’ll see where to enter that webfile number for franchise tax. After you do, both will be highlighted in green and you know it’s been assigned to you.
How to Fill Out the No Tax Due Report
After you click on “File and Pay” for your franchise tax account, you’ll come to a page that looks like this:
This page is where you’ll access all three types of forms, make a payment, and file extensions.
Remember, if you sold less than $1.18M nation-wide, you’ll file a No Tax Due Information Report. You can file this electronically by answering the questions on the screen. But we’ll show you what the whole form looks like, so we can walk you through it.
The top part is pretty self-explanatory.
- Taxpayer number
- Contact information
- NAICS code
You may be wondering what your NAICS code is. It’s different for various industries, but for online sellers it’s usually 454110.
After the top section, you’ll see 5 questions.
Here’s what to do for each line number:
- 1 – Check the box if it’s a sole proprietorship or general partnership.
- 2 – Check the box if your sales are below the threshold of $1.18M annually nation-wide.
- 3 – Check the box if you didn’t sell anything into TX.
- 4 – Check the box if it’s a real estate investment trust.
- 5 – Check the box if it’s a veteran-owned business.
After filling in your accounting year begin and end dates, you’ll come to the total revenue box. This is where you’ll put your nation-wide revenue.
The last part is also self-explanatory.
Fill it out, sign and date and then it’s ready to mail in.
How to Fill Out the EZ Computation Report
You’ll start on the same screen as before.
Once again, you can fill this out electronically, but we’ll show you the downloadable PDF so we can walk you through the parts.
The top section is the same as the No Tax Due Return. The differences start below with all the revenue questions. It’s a good idea to click on the info icon on each line to make sure you know what to put there.
Lines 1-7 need to match your federal income tax return exactly. This is why you really can’t file your Texas franchise tax report until you’ve filed your federal income tax return and why the deadline is a month after the income tax deadline.
See how it should match up with forms based on your entity:
- Corporation – must match Form 1120, line 1C.
- S-Corp – must match Form 1120S, line 1C.
- For an LLC taxed as a sole proprietorship, it must match Form 1040, Schedule C, line 3.
- Partnership – must match Form 1065, line 1C.
What each line is:
- 8 – Add up lines 1-7.
- 9 – This is your bad debt expense.
- 10 – Line 8 minus line 9. This is why you don’t want to just multiply your gross receipts in Texas by the Texas franchise tax rate.
- 11 – Pull the gross receipts in Texas from your sales channel.
- 12 – Should equal line 12.
- 13 – Divide line 11 by line 12.
- 14 – Multiply line 10 by line 13.
- 15-17 – Just do the math and then sign at the bottom.
How to Fill Out the Long Form Report
Everything is pretty much the same as the EZ Form, but it’s on two pages and you go into a bit more detail. Lines 10 – 23 allow you to take more deductions.
Then you’ll use those numbers to get your apportionment factors and the taxable margin. Finally, you’ll calculate the total tax due in Texas.
If you get confused, make sure to click on the info icon at the beginning of each line.
How to Get Some Help
Hopefully this explained the process and made it more doable for you.
If you’re ready to learn about our ecommerce services, click here.
If you’d like to learn about our sales tax services, click here. We do this stuff all day, every day, and we’d love to take it off your plate if you’re ready for that.
If you’d like to watch the video this article is based on, click here.