What Is a Franchise Tax and Which States Have One?

A franchise tax is a levy that some state governments charge certain businesses for the privilege of being chartered as a legal entity or conducting business within that state’s borders. A common point of confusion is the name; this tax is not related to owning a franchise operation, like a fast-food restaurant. Instead, it is a distinct tax liability separate from any federal or state income taxes a business might owe.

This tax applies to various business structures, including corporations, partnerships, and limited liability companies (LLCs). A business may owe franchise tax in the state where it is legally formed and in other states where it has significant operations. Even if a company does not generate a profit in a given year, it may still be required to pay, as the calculation is often independent of net income.

States with a Franchise Tax

Several states impose a franchise tax, though the specific rules and affected entities vary. Alabama levies its tax based on a corporation’s net worth. Arkansas imposes a franchise tax on corporations and LLCs, calculated on the value of a company’s capital stock.

California’s franchise tax applies to most business entities and has a minimum tax of $800. Delaware’s tax can be calculated based on either the number of authorized shares or a method using gross assets and issued shares, with a minimum payment of $175 for many corporations.

Georgia’s tax, often called a net worth tax, is applicable to corporations. Louisiana’s franchise tax is levied on corporations and LLCs, with the calculation tied to the amount of capital employed in the state. Mississippi’s tax is based on the value of capital used or invested in the state, but it is being phased out and is scheduled to be eliminated by 2028.

New York has a corporate franchise tax based on a corporation’s entire net income. North Carolina’s tax is calculated on the largest of three bases: apportioned net worth, 55% of the appraised value of tangible property, or the actual investment in tangible property.

Oklahoma imposes a franchise tax on corporations based on the amount of capital invested or used in the state. Tennessee’s tax is based on the greater of a company’s net worth or the value of its real and tangible property in the state. Texas has a “Margin Tax,” calculated on a business’s margin using a specific formula.

Common Calculation Methods

One prevalent method is based on the net worth or capital stock of a business. Under this approach, the state levies the tax against the value of the company’s capital as reported on its balance sheet, which often involves summing the value of issued stock and any additional paid-in capital.

Another approach is to base the tax on a company’s gross receipts or revenue. This calculation is a percentage of the total sales a business generates within the state and is not concerned with profitability.

Some states utilize more complex formulas. The Texas Margin Tax, for instance, requires a business to calculate its margin by taking its total revenue and subtracting the greater of either its cost of goods sold, its compensation, or a flat 30% of its revenue. The resulting margin is then apportioned to the state and taxed. In other cases, the tax might be a simple flat fee, especially for smaller entities or as a minimum tax.

Determining Your Taxable Base

To calculate franchise tax, a business must gather specific financial data from its accounting records. The company’s balance sheet and income statement for the tax period are the primary documents needed. From the balance sheet, you will need to identify figures such as total assets and liabilities to determine net worth, along with the value of capital stock and additional paid-in capital.

For states that tax based on property, you must compile a detailed schedule of all real and tangible personal property owned or used in the state, including its original cost and current appraised value. Payroll records are also important to determine the total compensation paid to employees, a factor in calculations like the Texas Margin Tax.

If your business operates in multiple states, you must collect data to properly apportion your tax base. This requires breaking down your total sales, property, and payroll by state to ensure you are only taxed on the portion of your business activity connected to that jurisdiction.

General Filing and Payment Process

The necessary tax forms can be found on the official website of the state’s department of revenue or comptroller’s office. It is important to find the specific form number that corresponds to your business entity type and the correct tax year.

Most states require franchise tax returns to be filed annually, with deadlines that often fall in the spring, typically around March 15th or April 15th, though extensions are usually available. Many states now encourage or mandate electronic filing through their online tax portals, which allow you to fill out forms, upload documents, and receive confirmation.

Payment can be made concurrently with the filing. Accepted payment methods include electronic funds transfer (EFT) from a bank account, credit card payments, or mailing a physical check with a payment voucher. After submission, you should retain a copy of the filed return and the payment confirmation for your records.