Business Tax

Texas has one of the lowest tax burdens in the nation, ranking 49th among the 50 states in per capita state taxes in 2000. Total state taxes averaged $1,286 per person, 32 percent less than the national average of $1,899. Similarly, state taxes in Texas are low relative to income. Total tax collections amounted to just over $49 per $1,000 of personal income in 2000 compared to the national average of $67 per $1,000 of income.

Income Tax

Texas has no personal income tax, nor does Texas have a corporate income tax. Our corporate franchise tax, however, does have a component based on earned surplus. Earned surplus is essentially federal net taxable income plus compensation paid to corporate officers and directors if the corporation has more than 35 shareholders.

Corporate Franchise Tax

The franchise tax is imposed upon all corporations that do business in the state or that are chartered or authorized to do business in the state. It is a tax on the privilege of doing business, measured by net taxable capital and by net taxable earned surplus that are apportioned to Texas. Apportionment is determined by using a single gross receipts formula, with allowable deductions applying to both the capital and earned surplus components. The tax rate on net capital assets is 0.25 percent, or $2.50 per $1,000 of net taxable capital (taxable capital is computed by adding the corporation’s stated capital, as defined by state law, and the corporation’s surplus). The tax rate on net earned surplus is 4.5 percent. Corporations calculate the franchise taxes due on taxable capital assets and on taxable earned surplus, paying the greater of the two amounts. There is no minimum tax, and no taxes are due on liabilities of less than $100.

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. Cities, counties, and transit authorities may add to the sales tax rate up to a maximum combined state and local rate of 8.25 percent. Texas grants sales and use tax exemptions on machinery and equipment utilized in the manufacturing process. Purchases of machinery and equipment, replacement parts, and accessories that have a useful life of more than six months, and that are used or consumed in the manufacturing, processing, fabricating, or repairing of tangible personal property for ultimate sale, are exempt from state and local sales and use tax. Natural gas and electricity are exempt from sales taxes when sold to commercial businesses that are "predominantly" manufacturing.

Property Tax

Texas has no state property tax. Local governments and special taxing districts levy taxes on real and tangible personal property. All property is appraised at full market value, and taxes are assessed by local county assessors on 100 percent of appraised value. The total tax rate is the sum of the rates of all applicable taxing units including cities, counties, schools, and special districts. Local governments can enter into agreements with businesses to abate local ad valorem taxes on real and personal property for up to 10 years. In 1989, the Texas Constitution was amended 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 state. Local jurisdictions were allowed a limited amount of time to take official action and continue taxing such goods. Otherwise, the goods became exempt. A number of jurisdictions in Texas have chosen to allow the exemption, which is irrevocable once in effect. Jurisdictions opting to tax freeport goods may later rescind the action. Property utilized for pollution control is exempt from ad valorem taxation. A facility receives determination from the Texas Natural Resource Conservation Commission that the property is for pollution control purposes. A positive determination is based on property purchased, acquired, constructed, installed, replaced, or reconstructed after January 1, 1994 to meet or exceed federal, state, or local government laws, rules, or regulations.

Motor Fuels Tax

Taxes are imposed in Texas on three fuels: gasoline, diesel, and liquefied gas. The state tax rate on gasoline is 20 cents per gallon (19 cents for transit companies) and 20 cents per gallon on diesel fuel (19.5 cents for transit companies). The tax rate on liquefied gas is 15 cents per gallon.

Unemployment Insurance Tax

Businesses that employ one or more individuals may be subject to the state unemployment tax. In 2002, 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 in order to determine an employer’s revised rate. The effective tax rate in 2002 ranges from a minimum of .30 percent to a maximum of 6.54 percent for experienced-rated accounts.

Workers Compensation Insurance

Workers compensation insurance is not mandatory in Texas. Recent tort reform changes by the Texas Legislature have resulted in major improvements in the state’s program for workers compensation and improvement in the overall Texas business climate.