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Texas Business Profile - Business Climate

Texas Tax Restructuring Benefits Business

In the spring of 2006, the Texas Legislature overhauled the tax structure providing for $3 billion in property tax relief for businesses (33% decrease). The old franchise tax was replaced with Taxable Margin Tax (TMT). Loopholes were closed so that many businesses that were previously exempt from the old tax must now pay the new margins tax. Virtually every major business will now pay 1% on revenue minus specified expenses – (0.5% for wholesalers and retailers.) The Texas Association of Business said the property tax reduction “removes a major impediment to job and business expansion in Texas.”

Income Tax

Texas is one of the few states which does not have a corporate profits tax or a personal income tax. The 2006 state and local tax burden was a low $3368 per capita compared with the national average of $4072. Texas was the sixteenth lowest in the nation.

Sales Tax

Texas levies a 6 1/4 percent tax on all retail sales, leases and rentals of taxable items. Texas cities, counties, transit authorities and certain special purpose districts have the option of imposing an additional local sales tax for a combined total of state and local taxes of 8 1/4 percent. An equivalent use tax is levied on the storage, use or consumption in Texas of taxable items that have been purchased, leased or rented outside Texas and upon which the Texas tax has not been paid. Certain types of labor and services are subject to taxation in Texas.

Sales and use tax exemptions include:

• grocery food products and prescription medicine;
• property that becomes a component of a manufactured product;
• property that will be consumed in manufacturing or processing;
• property sold for resale;
• some items taxed under other statutes

Corporate Franchise Tax (Revised by HB 3 in Spring 2006)

Texas levies an annual franchise tax on corporations, partnerships, limited liability companies, business trusts, professional associations, business associations, and joint ventures. Entities with revenues of $300,000 or less will owe no tax. The tax rate is 0.5% for entities primarily engaged in retail and wholesale trades and eating and drinking establishments. The rate is 1% for all other entities. The tax base is the taxable entity's margine.  Margin equals the lesser of three calculations: total revenue minus cost of goods sold; total revenue minus compensation; or total revenue times 70%.

Property Tax

The State does not levy a property tax. Cities, counties, school districts and other local entities levy a property tax on real and tangible personal property. Property is taxed in the place on which it is located on January 1 of each year. Goods passing through the state or held in the state for less than 175 days are exempt from property taxation.

Unemployment Compensation

The State of Texas assesses a tax for unemployment insurance on the first $9,000 of wages to each employee. The rate of tax for new companies is 2.7 percent of the $9,000 per employee wage base or the applicable industry average tax rate, whichever is higher. This rate continues until the employer's account is chargeable with claims for unemployment benefits for four complete quarters. This period generally extends six calendar quarters from the date that first wages are paid, but can be as long as eight quarters. At the end of this period and for each year thereafter, the employer's tax rate is computed based upon the amount of unemployment insurance benefits former employees receive along with a number of statewide factors. This computed rate is called the Employer's General Tax Rate. For 2005, the minimum rate was .58% and the maximum rate was 8.02%.

Tax Advantages

Tax advantages of doing business in Texas include:

• no state tax on machinery or equipment utilized in manufacturing,
• no state tax on property used for pollution control,
• no state tax on good in transit, and
• no state tax on electricity used in processing, fabricating, or manufacturing.

Tort Reform

In 2003, Governor Rick Perry and legislators made Texas the model for comprehensive tort reforms. Texas's reforms include:

• new constitutional authority to limit non-economic damages in civil cases,
• reforms to encourage settlement outside the courtroom,
• new product liability protection, including a 15-year statute of limitation,
• punitive damage reforms, and
• new protections to ensure proportionate responsibility for damages.

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