With no corporate income tax and no individual income tax, Texas has one of the lowest tax burdens in the country. Texas friendly is the mantra and that translates into one of the best business climates in the United States.
Income Tax/Franchise Tax
Texas does not have a corporate income tax nor an individual income tax. However, our corporate franchise tax does have a component based on earned surplus. The tax is effectively the greater of 4.5% of earned surplus apportioned to the state under a single-factor gross receipts test or 0.25% of taxable capital.
In 2008, Texas will replace its franchise tax with a Margins Tax, a tax of 1% on gross receipts less compensation or cost of goods sold. (retailers and wholesalers will have a rate of 0.5%) Sole proprietorships and general partnerships are exempt. Businesses with revenue under $300,000 are also exempt.
Texas has no property tax at the state level. Local governments and special taxing districts levy taxes on real and tangible personal property. All property is appraised at full market value and are assessed on 100% of appraised value. The total tax rate is the sum of all taxing units including cities, counties, schools and special districts.
Local governments have the option to exempt goods in transit, or “freeport goods”, from ad valorem taxation. Freeport goods are inventories acquired or brought into the state by businesses and held for no more than 175 days before being shipped out of the state.
Local governments can offer to businesses an abatement of local ad valorem taxes on real and personal property for up to ten years.
Sales and Use Tax
The state levies a sales and use tax of 6.25 percent on sales of tangible personal property and certain services. Additionally, cities, counties and transit authorities may add to the rate for a combined state and local rate of 8.25 percent.
Sales and use tax exemptions are offered on machinery and equipment used in the manufacturing process and on natural gas and electricity when sold to commercial businesses that are “predominately” manufacturing.
Businesses that employ one or more individuals may be subject to unemployment tax. New employers will pay 2.7 percent on the first $9,000 of wages per employee. A minimum of six quarters is required to obtain an experience rating.
The Texas Department of Insurance, Division of Workers’ Compensation (Division) is a state agency that regulates the delivery of workers’ compensation benefits to injured workers and to eligible family members of employees killed on the job. Benefits are paid by workers’ compensation insurance companies, by employers certified by the Division to self-insure, or by self-insured governmental entities. Workers’ compensation is not mandatory in Texas. The Texas Department of Insurance publishes a rate guide to assist employers in comparison shopping for worker’ compensation and employers’ liability insurance in Texas.
Additional information on taxation in Texas is available on the State Comptroller’s website at http://www.cpa.state.tx.us/taxes/
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To Contact the Comptroller
||Texas Comptroller of Public Accounts
||Post Office Box 13528, Capitol Station
||Austin, Texas 78711-3528
||Texas Comptroller of Public Accounts
||Lyndon B. Johnson State Office Building
||111 East 17th Street
||Austin, Texas 78701