State income and franchise taxes: one idea, many names
Income tax, franchise tax, gross receipts tax, margin tax: what eight states levy on a corporation, and how to tell which one you owe.
Most states tax corporations too, and the one constant is that they don't agree on what to call it. A state may levy an income tax, a franchise tax measured on income, a franchise tax measured on capital, a gross receipts tax that ignores costs, a margin tax, or nothing at all. Some cities add a net profits tax of their own. Read the name as a label, and look at what the tax is measured on.
Who owes which state
A corporation owes a state's income tax when it has nexus there for income tax, which many states now define partly by economic presence — receipts from customers in the state — as well as by people and property. Federal law (P.L. 86-272) still shields a seller whose only activity in a state is soliciting orders for tangible goods; it doesn't reach services. A company with nexus in several states divides its income among them by apportionment, in most states by the sales factor alone with services sourced by where the customer benefits. And a state's starting point is federal taxable income only as far as its conformity goes.
Income tax
- Good at
- Little or nothing owed in a loss year (minimums aside).
- Follows the federal return as its starting point.
- Watch for
- Needs apportionment once the company has nexus in more than one state.
- Some states add a minimum or a capital-based tax.
- Best for
- Most states.
Gross receipts tax
- Good at
- Simple base: what came in.
- No apportioned profit to compute.
- Watch for
- Owed on revenue, profit or loss, because costs aren't deducted.
- An operating expense, not an income tax, so it sits above the tax line.
- Best for
- Washington, Ohio, Nevada and a few others, which tax receipts instead.
Wrong
It's called a franchise tax, so it's like Delaware's.
Right
Read each state's tax by its base: income, receipts, margin or capital.
Texas calls its tax a franchise tax and measures it on margin; California calls its corporate income tax a franchise tax too. The name tells you little. What it's measured on tells you where it goes in the books and when it's owed.
Every state names its business taxes differently. Find what each is measured on, and where the company has nexus for it.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- State authority
- Delaware Division of Corporations — Annual Report and Tax Information (opens in a new tab)Due date, the $50 annual report fee, minimum and maximum tax, the $200 penalty and 1.5% monthly interestFree to read
- Background reading — not an authority
- Wikipedia, “Franchise tax” (opens in a new tab)A levy some US states charge businesses with a nexus in the stateFree to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Gross receipts taxA tax on a business's gross receipts with no deduction for costs, levied on the seller — Washington B&O, Ohio CAT, Nevada commerce tax, New Mexico GRT, Arizona TPT. An operating expense, not an income tax under ASC 740; Texas's margin tax, measured on a modified gross margin, is treated as an income tax
- Economic nexusA connection with a state created by economic activity alone — sales into the state above a threshold — rather than physical presence. The basis of remote-seller sales tax since South Dakota v. Wayfair (2018), and of many states' income and franchise taxes, where P.L. 86-272 still shields solicitation of tangible goods sales
- ApportionmentDividing a multistate business's taxable income among states by formula — historically property, payroll and sales; now in most states the sales factor aloneConvention
- Market-based sourcingAssigning receipts from services and intangibles to the state where the customer receives the benefit, for the sales factor — the rule in most statesConvention
- IRC conformityHow a state's income tax adopts the federal Internal Revenue Code — rolling (as currently amended), fixed-date (as of a stated date, updated by legislation) or selective. A fixed-date state may not follow §174A, bonus depreciation or other recent federal changesConvention
- Municipal net profit taxA city income tax on a business's net profits, usually paired with a tax on wages earned in the city — Ohio municipalities, Philadelphia, Wilmington, Kansas City and St. Louis. Filed with the city, not the state
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Registering in a new state: remote hires and nexusA remote hire or nexus in a new state means foreign qualification, payroll tax accounts and maybe a sales tax permit. What to register, in what order.
- Startup tax deadlines by month for a C-corpFederal tax deadlines for a calendar-year C-corp, month by month: W-2s, 1099s, Form 941, Form 1120, estimated taxes and Delaware franchise tax.
- Income tax provisionThe income tax expense in your financial statements: tax owed for this year, plus the future tax effect of differences between your books and your tax return.
- Voluntary disclosure agreementA deal with a state for a business that owes a tax it never filed and comes forward before the state contacts it. In return the state limits how many years back it collects and waives most penalties. Most states offer one, and sales tax is the usual case.