Texas franchise tax is a compulsory contribution to be collected from corporations, limited liability companies and banking institutions for the privilege of being able to operate and do business in the state of Texas. It does not apply to sole proprietorships, general partnerships and entities expressly excluded under the Texas Tax Code. The Texas franchise tax must be paid by the corporation on or before May 15 of each year.

In the old Texas franchise tax, the tax base used is either of the taxable capital or earned surplus. The old annual rate of 0.25 per cent is imposed on the taxable capital. A fix 4.5% annual rate is imposed on the earned surplus, on the other hand. The franchise tax to be imposed is that which is of the higher of the two calculations.

Since January 1, 2008, Texas has been adopting the “margin” taxing in computing the franchise tax. The switch to marginal taxation is due to following reasons: 1) To make the Texas franchise tax system simpler for the corporate taxpayers; 2) To encourage small businesses; 3) to have a tax system that is aligned with the economy; 4) And for the Texas government to achieve its goal of collecting annual revenue of at least $3 billion.

In the revised Texas franchise tax system, small businesses that have annual revenue not exceeding $300,000.00 are exempted from paying franchise tax. In 2010, the amount was raised to $1 million. Corporations whose tax margin is less than $1000.00 are also exempted from paying franchise tax but are required to file a franchise tax report.

The new Texas franchise tax rate is fixed at 1% of the tax margin for all industries except for businesses engaged in wholesale and retail for which the tax rate is lowered to 0.5% of the tax margin.

There were issues regarding the lower tax rate of the wholesale and retail industry. To some, the adoption of the different tax rate negates the goal of uniformity of the new Texas franchise tax system. The office of the Texas comptroller addressed the issue by explaining that the wholesale and retail industry have higher cost of goods sold than other industries. It will create a real inequality if businesses in such industry will also be taxed at 1%, considering that most small businesses are engaged in wholesale and retail industry.

The lower Texas franchise tax rate will encourage the establishment of small businesses while protecting the existing ones.

Despite the revisions on the Texas franchise tax, tax experts claim that it did not address the much criticized issue of double taxing of Texas gross receipts which is burdensome to franchise taxpayers. The revised Texas franchise tax system also failed to lessen the rampant practice of tax avoidance. Hence, even if the new Texas franchise tax system is more feasible than the former Texas franchise tax system, it does not maximize the potential of franchise tax collection. The revision only made the Texas franchise tax reasonable and at the present tolerable.