Tax Notes

Texas Franchise Tax Apportionment

Texas imposes a franchise tax on each taxable entity that does business in the state or that is chartered or organized in the state.1 It is a tax om the value and privilege of doing business in the Lone Star State.2

To calculate a taxable entity’s franchise tax liability, the first step is to determine the entity’s “margin.” Margin is the taxable entity’s total revenue less a subtraction, such as 30 percent of revenue, compensation, or cost of goods sold.3 Next, a taxable entity must determine its taxable margin by apportioning the entity’s margin to its business in Texas.4 To apportion margin, an entity multiplies its “total margin by an apportionment factor,” which represents the percentage or fractional proportion of an entity’s gross receipts from its business in Texas relative to its gross receipts from its business everywhere.5 To reach the tax due, the taxable entity then multiplies its taxable margin by the applicable tax rate and subtracts appropriate credits.6

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  1. See Tex. Tax Code section 171.001(a).
  2. See Combs v. Newpark Resources Inc., 422 S.W.3d 46, 47 (Tex. App. — Austin 2013, no pet.).
  3. See Tex. Tax Code section 171.101(a)(1) (determination of taxable entity’s “margin”).
  4. See Tex. Tax Code. section 171.101(a)(2).
  5. See Tex. Tax Code section 171.106(a) (describing apportionment); and Hallmark Marketing Co. LLC v. Hegar, 488 S.W.3d 795, 796 (Tex. 2016) (explaining that apportionment factor numerator “consists of receipts from business done in Texas and the denominator consists of receipts from all business”).
  6. See Tex. Tax Code sections 171.101(a)(3) and 171.002 (“Rates; Computation of Tax”).