Texas is the second largest state in the country by both area and population. Due to its size and geographic features, the state contains diverse landscapes common to both the U.S. Southern and Southwestern regions. Although Texas is popularly associated with the U.S. southwestern deserts, less than 10% of Texas’ land area is desert. Most of the population centers are in areas of former parries, grasslands, forests, and the coastline. Traveling from east to west, one can observe terrain that ranges from coastal swamps and piney woods to rolling plains and rugged hills, and finally the desert and mountains of the Big Bend.
Texas is nicknamed “The Lone Star State” to signify its former status as an independent republic, and as a reminder of the state’s struggle for independence from Mexico. The “Lone Star” can be found on theTexas state flag and on the Texan state seal. The origin of Texas’ name is from the word taysha, which means “friends” in the Caddo language.
Business Climate
Texas’ large population, abundance of natural resources, thriving cities and leading centers of higher education have contributed to a large and diverse economy. Ever since the discovery of oil at Spindletop, energy has been a dominant force politically and economically within the state.If Texas were its own country it would be the sixth largest producer of oil in the world.
Texas leads the nation in the production of cattle, horses, sheep, goats, wool, mohair and hay. The state also leads the nation in the production of cotton. The state grows a significant amount of cereal crops and produce. Texas has a large commercial fishing industry. With mineral resources, Texas leads in creating cement, crushed stone, lime, salt, sand and gravel.
Texas is the headquarters of many technology companies, such as Dell, Inc., Texas Instruments, Perot Instruments, Rackspace and AT&T. The National Aeronautics and Space Administration’s Lyndon B. Johnson SpaceCenter (NASA JSC) in Southeast Houston, sits as the crown jewel of Texas’ aeronautics industry.
Tax Climate
Texas does not have an individual income tax. The state also does not have a corporate income tax. It is one of seven states that lack a state income tax.
Texas Franchise Tax
Each taxable entity formed in Texas or doing business inTexas must file and pay franchise tax. These entities include corporations, limited liability companies (LLCs), S corporations, professional corporations, partnerships (general, limited and limited liability) and others. Franchise taxis based on a taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin and is computed in one of the following ways: total revenue times 70%,total revenue minus cost of goods sold (COGS), total revenue minus compensation or total revenue minus $1 million (effective Jan. 1, 2014). Total revenue is determined from revenue amounts reported for federal income tax minus statutory exclusions. Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts. There are some credits available to offset the franchise tax.
Texas adheres to the market based sourcing rules for sales of services.
Sales Tax Structure
The state sales tax rate is 6.25%, and ranks 13thin the nation. In addition to the state rate, counties, cities and special taxing jurisdictions can impose tax as well. The tax rate in TX is, therefore, 8.25% in many areas.
Texas is in the preliminary stages of enacting economic nexus legislation. The Texas legislature is likely to enact a law conforming to recent “Wayfair” thresholds in 2019. For more information on the state enacting economic nexus legislation, click here.
Texas is aggressive in its approach to taxation of technology products for sales tax purposes. All digital products are taxable. Prewritten and custom computer software that is electronically downloaded is taxable. Lastly, all cloud services are taxable. How products are produced,sold and delivered is critical to determining its tax status. Note that 20% of the value of some services is exempt from sales and use tax. For instance, SaaS (Software as a Service) is considered data processing in Texas and is taxed at 80%.
Taxpayers can buy certain items tax free during Texas’ four annual sales and use tax holidays. Eligible purchases include back-to-school and emergency supplies, as well as energy and water saving products. For more information on these sales tax holidays, click here.
Random Facts
- Texas joined the United States in 1845 as the 28th state.
- The Houston Comets are the only team in thenation to win four back to back WNBA championships.
- The official state sport of Texas is the Rodeo.
- The state of Texas was an independent nation from 1836 to 1845.
- The Waco Bridge of Texas is the first suspensionbridge in the country.
- Three of the top then most populous cities inthe United States are in Texas: Houston, Dallas and San Antonio.
- Texas is the largest producer of wool in thecountry.
- The University of Texas at El Paso is the only TX based college NCAA basketball team to win a national championship. In 1966,the (then) Texas Western Miners defeated Kentucky’s Wildcats 72-65. The team made history by becoming the first all-black starting line-up to win the championship against an all-white Kentucky team. The team inspired the film Glory Road. (Miles Consulting Group founder, Monika Miles, is a proud UTEP grad and a forever Miner!)
Our team at Miles Consulting Group is always available to discuss the specifics of your state tax situation, whether in Texas or other states, we can help you navigate the complex tax structures arising from your multistate operations. Call us to help you achieve the best tax efficiencies.
