What Is the Gross Receipts Tax in Texas and How Does It Work?

Texas imposes a tax on businesses based on total revenue, known as the franchise tax. While sometimes compared to a gross receipts tax, it differs in how it is calculated and applied. This tax is a major source of state revenue and affects many businesses. Understanding its structure helps businesses comply with regulations and manage liabilities.

Entities Subject to the Tax

The Texas franchise tax applies to most businesses operating in the state, with some exceptions. Corporations, limited liability companies (LLCs), professional associations, business trusts, and joint ventures must file and pay this tax. Out-of-state businesses with a physical presence or economic nexus in Texas may also be subject to the tax if they exceed revenue thresholds.

Sole proprietorships and general partnerships are typically exempt unless they have limited liability protection. For example, a sole proprietor running a retail shop is not taxed, but if the business is structured as an LLC, it must file. A general partnership consisting only of individuals is exempt, but if a corporation or LLC is a partner, the entity may be liable.

Nonprofits are generally exempt but must file an annual report to maintain their status. Banks and certain financial institutions follow a different tax structure, while insurance companies pay a separate premium tax and do not owe the franchise tax.

Calculating Gross Receipts

Texas determines franchise tax liability based on total revenue, which includes all income generated from business activities before deductions. The Texas Comptroller defines total revenue as income reported on federal tax returns, with modifications under state law.

Gross receipts include revenue from sales of goods, services, rents, royalties, and interest. A manufacturing company must report income from product sales and any revenue from leasing equipment. A consulting firm must include fees for advisory services and licensing income from proprietary software.

Rather than taxing gross receipts directly, Texas uses a margin-based approach. Businesses calculate their taxable margin using one of four methods: cost of goods sold (COGS), compensation, 30% of total revenue, or a $1 million standard deduction. The taxable margin is then multiplied by the applicable tax rate—0.375% for retail and wholesale businesses and 0.75% for most others. Businesses with revenue below the no-tax-due threshold ($2.47 million for 2024) owe nothing but must still file a report.

Exclusions

Certain types of revenue are excluded from total revenue calculations, reducing the taxable margin for some businesses. One major exclusion is pass-through funds—amounts collected on behalf of another party and not retained as income. A travel agency that books vacations but remits most payments to airlines and hotels can exclude those amounts. Similarly, real estate brokers who collect payments from buyers and transfer them to sellers can exclude those funds.

Industry-specific exclusions also apply. Healthcare providers can exclude payments from Medicare, Medicaid, and certain government programs, as these funds are reimbursements rather than earned revenue. Legal and financial service firms may exclude payments held in trust for clients, such as settlement funds or escrowed amounts.

Revenue from services performed outside Texas may also be excluded if the benefit is received by a foreign entity. This is relevant for consulting firms and technology companies serving international clients. Proper documentation is required to substantiate these exclusions, as incorrect reporting can lead to audits or penalties.

Filing and Payment Requirements

Businesses subject to the Texas franchise tax must meet strict filing deadlines. The annual franchise tax report is due May 15, or the next business day if it falls on a weekend or holiday. Extensions require prepayment based on expected tax liability.

Businesses must submit both a franchise tax report and a Public Information Report (PIR) or Ownership Information Report (OIR), depending on their entity type. These reports disclose financial and ownership details. The Texas Comptroller allows electronic filing through the Webfile system, which provides immediate confirmation. Businesses below the no-tax-due threshold must still file a No Tax Due Report to certify their exemption.

Companies with a franchise tax liability exceeding $10,000 must make quarterly payments. The first payment is due with the report, with the remaining three spread across the year. Late payments result in interest charges and potential enforcement actions.

Penalties for Non-Compliance

Failing to file or pay the Texas franchise tax results in financial penalties and administrative consequences. Businesses that miss the filing deadline face an automatic 5% penalty on unpaid tax, increasing to 10% if unpaid for more than 30 days. Interest accrues on unpaid amounts starting 61 days after the due date, calculated at the annual prime rate plus 1%.

Extended non-compliance can lead to forfeiture of a business’s right to operate in Texas. A forfeited entity cannot enter contracts, enforce agreements, or maintain good standing with state agencies. Officers and directors may become personally liable for unpaid tax if the business continues operating after forfeiture. To regain good standing, businesses must file overdue reports, pay outstanding taxes and penalties, and submit a reinstatement request.