What Triggers Franchise Tax in Texas?

What Triggers Franchise Tax in Texas

If you’re running a business in Texas—or even doing business with customers in the state—you may be subject to the Texas Franchise Tax. This tax isn’t limited to large companies with offices in major cities. In fact, many small businesses and out-of-state entities are surprised to learn they’re required to file simply because they have a business presence in Texas.

Formation or Business Activity Triggers the Tax

Texas franchise tax obligations are triggered in two main ways:

  1. Forming a business entity in Texas: If you register your LLC, corporation, partnership, or other legal entity with the Texas Secretary of State, you are automatically considered a taxable entity under Texas law. This means you’re required to file franchise tax reports annually—even if you generate no revenue or operate at a loss.

  2. Doing business in Texas: Even if your business is formed in another state, you may still have franchise tax obligations if you're considered to be “doing business” in Texas.

What Counts as "Doing Business" in Texas?

The Texas Comptroller defines “doing business” broadly. You may have tax obligations if your business:

  • Has a physical presence in Texas (e.g., office, warehouse, storefront)

  • Employs people or contractors in Texas, even remotely

  • Sells goods or services to Texas customers

  • Owns or leases property in Texas, including equipment or inventory

  • Holds a Texas license, permit, or registration to operate

  • Advertises or solicits business in the state in a regular and systematic way

In other words, your business doesn’t have to be headquartered in Texas or even maintain a local office to trigger the tax. If you’re economically active in the state, that activity could create a nexus, requiring you to file.

Out-of-State Businesses: Beware of Nexus

Many out-of-state businesses, including online sellers and service providers, fall into the Texas franchise tax system without realizing it. For example, a New York-based software company selling subscriptions to Texas customers or an e-commerce brand shipping regularly to Houston may be required to file and pay tax.

Takeaway

If your business has any operations or customers in Texas, it’s crucial to evaluate whether you’ve triggered franchise tax responsibilities. Failing to file—whether tax is owed or not—can result in penalties and the loss of your business’s good standing.

George Dimov