What is Franchise Tax: Everything You Need to Know
A franchise tax is a specific type of taxation that involves a certain type of business.3 min read
What Is Franchise Tax?
A franchise tax is a specific type of taxation that involves a certain type of business.
Some US states have different kinds of a taxes on business income. Some states only tax corporations. However, the vast majority will tax businesses no matter the form of the business. The taxes are named differently depending on the state and some people become confused by the jargon or the confusing wording involved with naming the different taxes.
In the state of California, income tax is called “franchise tax.” This same tax is called a gross receipt tax and it is used to tax the business income.
Some sole proprietorships do not have to pay the franchise taxes, and they also may not have to pay the state business income tax. Since the business is not a formally registered one in relation to the state where the business is transacted, they are not subjected to the taxes.
How Businesses Pay Franchise Tax
Franchise taxes are charged by that state and partnerships, LLCs, and corporations must pay the tax if they conduct business in the state. Every year franchise taxes must be paid. In the event that the business does not pay said taxes, they may be unable to do business in the state any longer. The term nexus applies to the taxes. This means location in relation to the business, state, and how it is taxed for completing business legally in the state.
Determining nexus is sometimes a difficult tax, especially if it is not immediately clear. However, it involves the business and whether or not it sells goods or services in the state, has employees there, or retains a physical location in the state.
If you have a formal registration in a specific state, then you will need to pay the franchise taxes in the state of each registration. The tax is not one that applies to a specific franchise, like the name implies. Specifically, you are not taxed based on the number of a businesses or branches you have in the state.
When you look at laws that concern franchise taxes, you may see some mention of the word privilege. Privilege tax is basically a charge or tax on the company so it has the privilege of doing business in that state.
What Is Franchise Tax?
The specific states that impose a franchise tax include Delaware, Alabama, Arkansas, Illinois, Georgia, Louisiana, Missouri, Mississippi, North Carolina Oklahoma, New York, Texas, Tennessee, Pennsylvania, and West Virginia. In each state, there is different criteria when it comes to determining the tax rate and whether each type of business should may the franchise tax or not.
Some states will base the franchise tax on income, the value of stocks, stock shares, net worth, assets, net investment, and other factors. For example, Texas taxes are based on margins which is revenue that is adjusted in one of several ways. The revenue multiplied by 70%, revenue with the cost of goods subtracted, and revenue minus one million dollars are a few ways that margins are calculated.
In the state of California, there is a Franchise Tax Board that collects and administered the income taxes that are required from both individuals and businesses who owe the taxes.
The state of Louisiana has a franchise taxes and income taxes that are charged to businesses. They are imposed on businesses that are considered corporations and any entity that is taxed as one of these businesses.
Who Pays Franchise Tax?
If the business does not pay the tax that they are supposed to in relation to the state and its laws, then the business will lose its privilege and it may also have to pay fines for failing to pay the tax on time. Also, the business may not be able to implement contracts or file lawsuits.
Penalties and fines that apply for the failure to pay the tax must be paid before the business can resume all of it privileges. While this is true, any business you start will be informed well in advance and at the start of setup and registration that the tax is required.
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