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Sales and Use Tax
A sales tax is imposed on all retail sales, leases and rentals of most goods, as well as taxable services. The use tax is placed on the storage, use or consumption within the state of Texas of taxable items purchased, leased or rented on which the Texas sales tax has not been paid. The use tax is applicable to taxable items purchased out-of-state and later used in Texas, and to any taxable merchandise or inventory purchased tax-free for resale which was converted to personal use. The state tax of 6.25 percent and any applicable local tax are due for the reporting period in which the item was converted to personal use. Texas state law limits the collection of local sales and use tax to no more than 2 percent.
The Texas franchise tax is imposed on corporations, limited liability companies (even if directly owned by one person), partnerships (general, limited and limited liability) business trusts, professional associations, business associations and other legal entities that are organized in or that do business in Texas. See Franchise Tax Rule 3.586 for a list of some activities considered to be “doing business in Texas.”
The tax base is the taxable entity’s margin. Margin should equal the least of three calculations based on eligibility: total revenue minus cost of goods sold; total revenue minus compensation; or 70 percent of total revenue.
The tax rate is 1 percent for most taxable entities. For entities meeting the following criteria, the tax rate is 0.5 percent:
• the entity is primarily engaged in the retail or wholesale trade under division F or G of the 1987 Standard Industrial Classification (SIC) Manual. Effective for reports originally due on or after January 1, 2012, retail trade includes apparel rental activities classified as industry 5999 or industry 7299 of the 1987 SIC Manual;
• the total revenue from activities in retail and wholesale trade is greater than the total revenue from activities in trades other than the retail and wholesale trade;
• less than 50 percent of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and
• the taxable entity does not sell retail or wholesale utilities, including telecommunications services, electricity or gas.
For an overview of the Franchise Tax, visit the Texas Comptroller’s website at http://www.window.state.tx.us/taxinfo/taxpubs/tx98_806.html or for more specific information visit http://www.window.state.tx.us/taxinfo/franchise/.
Some states, such as California, employ something called the “unitary business” principle when determining corporate taxable income (also called combined reporting). This principle basically says that a unitary business has to report all its worldwide income to the state, even if the unitary business is divided into numerous subdivisions and affiliates located all over the world. In Texas, businesses do not pay a unitary tax.
An ad valorem tax, or local property tax, is levied on the real property of individuals, proprietorships and corporations, whether domestic or foreign. These local taxes provide the largest source of money local governments use to pay for schools, streets, roads, police, fire protection and many other services. State law establishes the process followed by local officials in determining the value for property, ensuring that values are equal and uniform, setting tax rates and collecting taxes. In Lubbock, the taxing districts include the city, county, various school districts and several other taxing authorities. Most businesses can generally expect their property tax rate to be between $1.96 and $2.15 per $100 valuation depending on the location of the operation.