Texas — Corporate Income / Franchise Tax

Texas does not impose a traditional corporate income tax. Instead, Texas imposes a franchise tax on each taxable entity that does business in Texas or that is chartered or organized in Texas. The tax applies regardless of federal tax classification—for example, LLCs and partnerships generally qualify as "taxable entities" even though they are pass-through entities for federal income tax purposes.

A "taxable entity" is broadly defined to include partnerships, limited liability partnerships, corporations, banking corporations, savings and loan associations, limited liability companies, business trusts, professional associations, business associations, joint ventures, joint stock companies, holding companies, and other legal entities. The definition excludes sole proprietorships, general partnerships owned entirely by natural persons without limited liability protection, passive entities meeting specific income composition tests, and entities exempt under specific statutory exemptions.

Combined group rules and special entity treatments

• Combined group composition: If more than one taxable entity is part of an affiliated group engaged in a unitary business, Texas requires combined reporting under Tex. Tax Code § 171.1014. All taxable entities in the unitary group must be included on the combined report, even if not all have Texas nexus.

• Exclusion for foreign entities based on U.S. activity ('80% test'): A foreign (non-U.S.) entity is excluded from the combined group if at least 80% of its property and payroll, assigned using Texas apportionment rules, are located outside the United States. If the entity has no property or payroll, the test instead looks at gross receipts assigned outside the U.S. (§ 171.1014(a)). Entities that do not meet this threshold must be included if otherwise part of the unitary group.

• Disregarded entities (federal treatment): For Texas franchise tax, disregarded entities such as single-member LLCs or Qualified Subchapter S Subsidiaries are not ignored—they are generally treated as part of their owner for state filing purposes. When a disregarded entity is included in a combined group, its activities are consolidated with its owner's for margin and apportionment. Both the disregarded entity and owner are presumed to have nexus if either does, per Comptroller published guidance.

• Series LLCs: A Texas Series LLC is treated as a single legal entity for franchise tax. The Series LLC files a single franchise tax report and Public Information Report. If any individual series within a Texas Series LLC has Texas nexus, the entire Series LLC is considered to have nexus, and all receipts, property, and payroll of every series are reported on the group return.

The franchise tax is imposed to the constitutional limits of federal law.

Source: Tex. Tax Code § 171.001 Source: Tex. Tax Code § 171.0002 Source: Tex. Tax Code § 171.1014(a) Source: Texas Comptroller, Franchise Tax: Taxable Entities FAQ

Not yet human confirmed — statutory and Comptroller authority as of 2026-06-24.

Texas imposes franchise tax at different rates depending on the type of business conducted by the taxable entity.

The standard rate is 0.75 percent of taxable margin for most taxable entities. Taxable entities primarily engaged in retail or wholesale trade pay a reduced rate of 0.375 percent of taxable margin. Both rates are subject to constitutional voter-approval requirements for any future increases and are also subject to the alternative EZ Computation rate under Section 171.1016 for entities that qualify and elect that method.

"Taxable margin" is the tax base and is determined separately under margin computation rules in Chapter 171. The rate is applied to the taxable margin after it has been calculated and apportioned to Texas.

Source: Tex. Tax Code § 171.002

Texas franchise tax law requires a two‑tier margin determination structure, not a simple lowest-of-three choice.

First Tier – Calculate Two Margin Figures

1. Compute the lesser of:

• 70% of total revenue; or
• Total revenue minus $1 million.

1. Separately, compute total revenue minus the greater of:

• Cost of goods sold (COGS); or
• Compensation.

Second Tier – Determine Taxable Margin The taxable margin is the lower of the two results from the First Tier calculations. That is, after performing both computations, the entity uses the smaller result as its margin base for franchise tax. The statute does not permit a direct election between COGS or compensation in isolation for this comparison; the greater of the two must be used in the subtraction, which is then compared with the alternate result from the first computation.

After determining taxable margin, the amount is apportioned to Texas per the single-receipts apportionment formula in Tex. Tax Code § 171.106. Definitions and further rules for COGS and compensation are detailed in §§ 171.1012 and 171.1013, respectively.

No net operating loss (NOL) or negative-margin carryforward under current law Texas franchise tax does not allow traditional net operating loss (NOL) carryforwards or carrybacks in the sense used by federal income tax or most state income taxes. If an entity computes a negative margin under the standard margin calculation, the loss is not usable as a deduction or credit in future years under current law. There is no mechanism to carry forward a deficit margin or negative taxable margin—those losses simply expire.

Limited temporary credit for pre-2008 business loss carryforwards Texas does provide a unique, one-time transition provision for certain business-loss carryforwards generated under the franchise tax law in effect before January 1, 2008. Entities that had a business loss carryforward from years prior to the margin tax could convert this to a "temporary credit" against franchise tax liability, provided they made a one-time, irrevocable election on their 2008 report (or first Texas report, if later). The credit does not reduce taxable margin directly, but is instead applied against tax due as a dollar-for-dollar credit. Each year, an entity can claim up to 10% of the carryforward amount as credit, and unused credits may be carried forward up to 20 Texas reports (not calendar years) from the first eligible year, after which any unused amount expires. Only those entities (or, in a combined group, the specific member) with a preserved business loss from pre-2008 law may claim this temporary credit. The credit cannot be claimed in any year the taxpayer elects the E-Z Computation method.

This business loss carryforward credit is a closed, non-renewing feature of Texas franchise tax law and does not apply to margin losses generated after 2007.

Source: Tex. Tax Code § 171.101 Source: Tex. Tax Code § 171.111 Source: 34 Tex. Admin. Code § 3.594 Source: Texas Comptroller, Franchise Tax FAQ: Credits, No Tax Due, E-Z Computation

Not yet human confirmed — all statements supported by current statute, regulation, and Comptroller FAQ as of July 6, 2026.

For franchise tax reports originally due in 2026 and 2027, the no-tax-due threshold is $2.65 million in annualized total revenue. For reports originally due in 2024 and 2025, the threshold was $2.47 million.

Under Texas Tax Code § 171.006, the Comptroller must adjust the no-tax-due threshold for inflation biennially, effective January 1 of each even-numbered year, using the Consumer Price Index and rounding to the nearest $10,000. This adjustment mechanism is codified in the statute and consistently applied. The threshold for the 2026 and 2027 report years reflects the most recent adjustment, and $2.65 million is confirmed on the Texas Comptroller's official 2026 forms and rates pages.

Taxable entities at or below this threshold are not required to pay franchise tax but may still have filing requirements for other informational reports, such as the Public Information Report or Ownership Information Report, depending on entity type.

Source: Tex. Tax Code § 171.006 Source: Tex. Tax Code § 171.0002 Source: Texas Comptroller, Franchise Tax Thresholds & Rates

Not yet human confirmed — updated to reflect the 2026–2027 threshold and statutory indexing rule.

Texas apportions a taxable entity's margin using a single-factor formula based exclusively on gross receipts—specifically, the entity's gross receipts from business done in Texas (numerator) divided by its gross receipts from its entire business everywhere (denominator).

How receipts are sourced under Texas law:

• Services: Receipts from sales of services are sourced to Texas if the service is performed in Texas, not based on where the customer receives the benefit. When services are performed partly in and partly outside Texas, the receipts are apportioned between Texas and the other states using a method considered fair and reasonable that reflects where the work is performed, as required by Tex. Tax Code § 171.103(a)(2) and detailed in 34 Tex. Admin. Code § 3.591(e)(26). Documentation supporting the chosen method must be retained by the taxpayer.

• Intangibles: Receipts from intangibles are generally sourced as follows:
• Royalties and licensing fees are sourced to Texas if the intangible is used in Texas (Tex. Tax Code § 171.103(a)(4); 34 TAC § 3.591(e)(7)-(9)).
• Receipts from the sale of intangible property are sourced to Texas if the payor is legally domiciled in Texas, or in some circumstances, if the intangible is used in Texas.
• Certain specific intangibles (e.g., patents, trademarks, and Internet hosting) have tailored sourcing rules under 34 TAC § 3.591(e). For example, internet hosting receipts are sourced to the customer’s location, not where the hosting servers are located.

• Mixed services and multi-state activities: When services are performed both in and outside Texas, receipts must be split according to the "fair and reasonable" method that best reflects the location where services are actually performed, as required by both statute and Comptroller rule. The method and allocations must be defensible and well-documented according to 34 TAC § 3.591.

Source support: Source: Tex. Tax Code § 171.103 Source: 34 Tex. Admin. Code § 3.591

Caution / review status: Not yet human confirmed — supported by current statute and Comptroller regulation as of July 12, 2026.

When the Texas Comptroller determines that a taxable entity owes additional franchise tax, the Comptroller issues a deficiency determination under Tex. Tax Code § 111.008. The Comptroller may make this determination based on information in the taxpayer's report or from any other available information. The statute requires the Comptroller to notify the taxpayer of the determination by mail, electronic means, or personal service. When delivered by mail, service is complete when the notice is deposited in a U.S. Post Office, addressed to the taxpayer at the address appearing in the Comptroller's records.

Petition for redetermination deadline

A taxpayer has 60 days from the date the notice of determination is issued to file a petition for redetermination with the Comptroller. This deadline is mandatory; if the taxpayer does not file within 60 days, the right to redetermination is barred. Tex. Tax Code § 111.009(b) states: "A petition for redetermination must be filed before the expiration of 60 days after the date the notice of determination is issued or the redetermination is barred."

Filing a timely petition for redetermination suspends the collection obligation—the taxpayer does not have to pay the assessed tax, penalties, or interest unless and until the dispute is resolved against the taxpayer. The Comptroller typically reviews the deficiency determination in-house first, allowing the taxpayer to provide additional information. If the matter is not resolved administratively, the Comptroller transfers the case to the State Office of Administrative Hearings (SOAH) for a hearing before an administrative law judge.

Jeopardy determinations

Under certain circumstances—when the Comptroller believes state funds are in jeopardy due to insolvency or fraud—the Comptroller may issue a jeopardy determination rather than a standard deficiency determination. For jeopardy determinations, the tax becomes due and payable immediately, and the taxpayer has only 20 days (instead of the standard 60 days) after the notice is issued to file a petition for redetermination. If the taxpayer does not pay the amount of a jeopardy determination by the date specified for submitting the petition, a 10 percent penalty is automatically assessed.

Protest payment alternative

A taxpayer who wants to bypass the administrative redetermination process may pay the deficiency and file a formal protest letter with the Comptroller. The protest letter must fully and in detail explain why the tax is unlawful or why the Comptroller is not legally allowed to collect it. The protest payment must be made by the later of (1) four years after the tax was due and payable, or (2) six months after the deficiency determination becomes final. After submitting the protest payment and letter, the taxpayer has a 90-day window to file suit in Travis County district court seeking recovery of the payment.

Source: Tex. Tax Code § 111.008 Source: Tex. Tax Code § 111.009

Texas franchise tax appeals follow a two-stage path: first through the State Office of Administrative Hearings (SOAH), then to Travis County District Court. This structure contrasts with the three-tier appeals systems used in states such as California and New York.

Stage 1: Petition for redetermination

A taxpayer disputing a franchise tax deficiency determination files a petition for redetermination with the Texas Comptroller of Public Accounts within 60 days of the notice issuance. Tex. Tax Code § 111.009(b) provides that filing must occur "before the expiration of 60 days after the date the notice of determination is issued or the redetermination is barred." The petition suspends collection—the taxpayer does not have to pay the disputed tax, penalties, or interest unless and until the dispute is resolved against the taxpayer.

Internal Comptroller review

After receiving the petition, the Comptroller typically conducts an internal review, giving the taxpayer an opportunity to provide additional information and documentation to resolve the matter administratively. Many cases settle at this stage. If the dispute cannot be resolved, the Comptroller refers the case to the State Office of Administrative Hearings.

State Office of Administrative Hearings (SOAH)

SOAH is an independent agency in the executive branch that conducts contested-case hearings on behalf of more than 50 Texas agencies. An administrative law judge (ALJ) assigned to the tax case holds a hearing (in-person or via videoconference), receives evidence and testimony, and issues a Proposal for Decision (PFD) that includes findings of fact and conclusions of law. The parties may file exceptions and replies to the PFD under SOAH procedural rules.

Critically, the ALJ's PFD is not binding—it is a recommendation. The case is then remanded to the Comptroller, who reviews the PFD, any exceptions filed by the parties, and the ALJ's response to exceptions. The Comptroller then issues a final Decision, which adopts, modifies, or rejects the ALJ's PFD. The Comptroller's Decision becomes final 25 days after it is signed unless the taxpayer timely files a motion for rehearing. If no motion for rehearing is filed or if a motion is denied, the Decision becomes final and a 10 percent penalty is automatically added if the amount due is not paid within 20 days after the Decision becomes final.

Stage 2: Judicial review in Travis County District Court

After the Comptroller's Decision becomes final, either party may appeal to Travis County District Court. Appeals from SOAH final orders or agency final orders generally lie to the Travis County District Court under the Texas Administrative Procedure Act. The taxpayer must check the specific statute governing the tax type for any special appeal deadlines or requirements. Appeals courts may then review Travis County district court judgments.

Bypass option: protest payment and direct suit

A taxpayer may bypass the administrative redetermination process entirely by paying the deficiency under protest and filing suit directly in Travis County District Court within 90 days of the protest payment. Tex. Tax Code § 111.009 and related provisions authorize this alternative path, which allows the taxpayer to obtain de novo judicial review without first exhausting the SOAH administrative process.

Source: Tex. Tax Code § 111.009 Source: Texas Comptroller, Tax Hearings FAQ Source: SOAH General Information

Texas imposes a four-year statute of limitations for both Comptroller assessments of additional franchise tax and taxpayer refund claims, measured from the date the tax becomes "due and payable." The limitations period begins the day after the last day on which payment is required.

General four-year rule for assessments

Tex. Tax Code § 111.201 provides: "Except as otherwise provided by this subchapter, a tax imposed by this title may not be assessed by the comptroller after four years from the date the tax becomes due and payable." For franchise tax purposes, the operative date is May 16 for reports due May 15 (or the next business day if May 15 falls on a weekend or legal holiday). Tex. Tax Code § 111.204 defines "due and payable" as the day after the last day on which payment is required.

Extension impact on statute commencement

When a taxpayer obtains a valid extension to file its annual franchise tax report, the statute of limitations may begin later than May 16. The Comptroller's April 2024 policy memo (STAR Accession No. 202404001M) clarifies that:

• Non-EFT payers who obtain a valid extension to November 15 by remitting either (1) 100% of the prior year's tax by May 15, or (2) at least 90% of the tax eventually reported as due, have a limitations period beginning November 16.
• Electronic funds transfer (EFT) payers who obtain a valid first extension by remitting at least 90% of the tax eventually reported as due by May 15 have a limitations period beginning August 16, even if they obtain a second extension to November 15. This is because EFT payers must remit 100% of the tax reported as due by August 15 to obtain a second extension, making August 16 the day after the last required payment.

If the taxpayer fails to satisfy the extension requirements, the due date reverts to May 15 and the statute of limitations begins May 16.

Exceptions to the four-year assessment limitation

Tex. Tax Code § 111.201(b) provides that the statute of limitations does not apply—and the Comptroller may assess at any time—if the taxpayer:

1. Files a false or fraudulent return with intent to evade the tax;
2. Fails to file a return; or
3. Files a return with a gross error (defined as an understatement exceeding 25% of the correct amount due).

Refund claims: four-year limitation

Tex. Tax Code § 111.107(a) mirrors the assessment limitation: "A person may file a claim for a tax refund with the comptroller if the claim is filed before the expiration of the applicable period of limitation." Taxpayers have four years from the date the tax was due and payable to file a refund claim. For deficiency or jeopardy determinations, the refund claim deadline is the later of (1) four years after the tax was due and payable, or (2) six months after the deficiency or jeopardy determination becomes final.

Tolling provisions

Tex. Tax Code § 111.207 tolls (suspends) the statute of limitations during:

• The pendency of a refund lawsuit with a protest payment;
• The pendency of a judicial proceeding to determine the amount of tax due;
• The pendency of an administrative redetermination or refund hearing before the Comptroller; and
• The pendency of a Title 11 bankruptcy case.

Tolling applies only to the issues contested in the lawsuit or proceeding. The Comptroller and taxpayer may also agree in writing to extend the limitations period under Tex. Tax Code § 111.203; any single extension may not exceed 24 months from the expiration of the period being extended.

Source: Tex. Tax Code § 111.201 Source: Tex. Tax Code § 111.204 Source: Tex. Tax Code § 111.107 Source: Tex. Tax Code § 111.207 Source: Texas Comptroller STAR Memo 202404001M

Texas offers both a Voluntary Disclosure Agreement (VDA) program for taxpayers with previously unreported liabilities and a private letter ruling process for prospective tax guidance. These programs are administered by separate divisions within the Texas Comptroller of Public Accounts.

Voluntary Disclosure Agreement (VDA) program

The Texas Comptroller's VDA program, administered by the Business Activity Research Team (BART), allows taxpayers to report and pay previously unpaid or underpaid franchise tax (and other Texas taxes) with substantial relief from penalties and interest. Publication 96-576, Voluntary Disclosure Program, establishes the program framework.

Eligibility requirements

To qualify for a VDA, the taxpayer must:

1. Have an unpaid or underpaid liability for a tax administered by the Comptroller (other than International Fuel Tax Agreement taxes);
2. Not have been previously contacted by the Comptroller—either verbally or in writing—concerning the liability or estimated liability; and
3. Not have received notification of an audit or examination.

Taxpayers working with BART on a VDA may not simultaneously request a private letter ruling from Tax Policy regarding the same tax type under 34 Tex. Admin. Code § 3.1(c)(3)(C).

Relief provided

Statutory penalties and interest are waived under a VDA, except interest on taxes collected but not remitted (trust fund taxes). The agreement does not limit the Comptroller's ability to audit the disclosed periods within the statute of limitations. Taxpayers must report and pay the tax correctly going forward from the end date of the agreement.

Look-back period and anonymous filing

Publication 96-576 does not specify a statutory look-back period cap; the VDA covers periods within the four-year statute of limitations measured from the date the tax became due and payable. Initial contact with BART may be made anonymously without naming the business; once preliminary approval is obtained, BART prepares a VDA and sends it to the company representative. After the signed VDA is returned and the taxpayer name disclosed, BART completes the review process and obtains the Audit Division director's signature. The taxpayer then has 60 days from execution to submit tax data and payment as specified in the agreement.

Fast-Track VDA option

Taxpayers who have calculated the tax amount due up front may qualify for a Fast-Track VDA. The taxpayer must meet all standard VDA criteria and submit a completed spreadsheet (sales/use tax) or returns (other taxes). Fast-Track VDAs may not include refund claims or requests for a letter ruling from Tax Policy. The Comptroller processes the reports and payment quickly without reviewing for additional taxes.

Private letter rulings (PLRs)

The Comptroller issues private letter rulings under 34 Tex. Admin. Code § 3.1 to provide written determinations of how Texas tax laws, rules, and policies apply to a specific set of facts presented by a taxpayer. PLRs are prospectively binding on the Comptroller for the person and issue identified in the request, subject to detrimental reliance protections under Rule 3.10, Taxpayer Bill of Rights.

When a PLR will not be issued

The Comptroller will not issue a PLR when:

• The issue is the subject of an audit of the same tax type (though separate tax types may be ruled upon during an audit of another tax);
• A voluntary disclosure agreement is pending for the same person and same tax type;
• An administrative hearing or litigation before the Comptroller is pending for the same or a related person and the same or any previous tax period; or
• Taxability guidance in statutes, rules, or other controlling authorities already exists and is clear (in which case the Comptroller will issue a non-binding general information letter instead).

PLR request procedure

A taxpayer requests a PLR by submitting a written request that includes: (1) a complete statement of facts; (2) identification of the specific statutory or regulatory provisions at issue; (3) an explanation of why existing guidance is unclear or contradictory; and (4) the taxpayer's own analysis and conclusion. Sample PLR requests and issued rulings are available on the Comptroller's website. Taxpayers may contact Tax Help before submitting a request to discuss whether the issue is suitable for a PLR.

Binding effect and modification

For franchise tax purposes, a member of a combined group can rely on a PLR issued to the reporting entity to the extent the ruling relates to that member and the member was identified in the PLR request. The Comptroller may modify or revoke a PLR if it is found to be in error or inconsistent with current policy, but the modification or revocation will not apply retroactively to the person identified in the original request.

Source: Texas Comptroller Publication 96-576, Voluntary Disclosure Program Source: 34 Tex. Admin. Code § 3.1, Private Letter Rulings Source: Texas Comptroller, General Information Letters and Private Letter Rulings Source: Texas Comptroller, Private Letter Ruling FAQ

Texas permits certain taxable entities to elect the E-Z Computation method for franchise tax under Tex. Tax Code § 171.1016. This election is available to taxable entities (including members of combined groups) with total annualized revenue from their entire business of $20 million or less in the reporting period. The $20 million revenue threshold applies to franchise tax reports originally due on or after January 1, 2024, and is inflation-adjusted as prescribed by law.

Calculation mechanics

• The taxable entity calculates total revenue (as defined in Tex. Tax Code § 171.1011), apportions it to Texas using the single-factor receipts apportionment (Tex. Tax Code § 171.106), and applies the E-Z Computation rate (currently 0.331%).
• No further deductions, cost of goods sold, compensation deductions, or credits (other than those specifically enumerated in § 171.1016) are allowed under this method. Notably, the E-Z Computation does not allow the standard deductions available in the traditional margin calculation.
• The minimum tax requirement for combined groups is determined at the group level, not the member level; if the combined group's total revenue exceeds the threshold, none of its members may elect the E-Z method.

How tax liability compares

• Entities that elect the E-Z Computation method apply a lower rate (0.331% as of the 2026 report year) to a broader tax base (apportioned total revenue) rather than margin. In contrast, the standard margin calculation permits significant deductions (COGS, compensation, or percentage of revenue), but the applied rates are higher (generally 0.75% for most, 0.375% for retailers/wholesalers; see Tex. Tax Code § 171.002).
• For entities with large deductible expenses, the E-Z method may result in a higher tax due despite the nominally lower rate, but it offers procedural simplicity and a predictable calculation. Entities with few deductions or low operating costs often benefit most from the E-Z option.

Election mechanics

• The election to use the E-Z Computation is made annually with the timely-filed franchise tax report. An entity eligible for "No Tax Due" status may not use the E-Z Computation (they file a No Tax Due Report instead).

Source: Tex. Tax Code § 171.1016 Source: Tex. Tax Code § 171.002 Source: Texas Comptroller, Franchise Tax Reports: E-Z Computation

Not yet human confirmed — based on statutory and Comptroller authority current as of June 15, 2026. (Updated 2026-06-24 to repair official statute links; no material changes in statutory content detected.)

Direct answer: To qualify for the reduced 0.375% franchise tax rate, a taxable entity must be "primarily engaged in retail or wholesale trade" as defined by Tex. Tax Code § 171.002(c). In general, this means:

• More than 50% of the entity’s total revenue must come from retail or wholesale activities (as described by Division F, Major Groups 50–51 or 52–59 of the 1987 Standard Industrial Classification (SIC) Manual).
• No more than 50% of the entity's retail or wholesale revenue may come from the sale of products it or an affiliate produces, unless the entity is classified under SIC Major Group 58 (Eating and Drinking Places), for which this limit does not apply by statute.
• The entity may not provide retail or wholesale utilities, including telecommunications, electricity, or gas.

How to demonstrate qualification:

• Revenue breakdowns must be made according to the SIC classification. The determinative period is the federal tax year upon which the Texas franchise tax report is based (per 34 TAC § 3.584(c)).
• “Primarily engaged” equates to a strict >50% revenue test from retail or wholesale trade, applied each year.
• "Produced" means manufactured, fabricated, or assembled by the entity or an affiliate, with specifics and safe-harbors provided in 34 TAC § 3.584(d).

Why: This rule is grounded in Tex. Tax Code § 171.002(c)-(d), which sets both the majority revenue test and the self-production/affiliate revenue limitation, as well as exclusions for retail/wholesale utilities. The exception for eating and drinking places (SIC Major Group 58) is statutory, not regulatory, and means these entities can have more than 50% of retail revenue from self-produced goods and still qualify if they meet the other requirements. Definitions and further details are specified by Comptroller rule 34 TAC § 3.584, including the required method for calculating revenue and interpreting “produced.” The statutory requirement to qualify is rigid—there is no ad hoc or holistic test; an objective SIC–based threshold applies. Entities must apply the test each year based on the revenue reported with their Texas franchise tax return.

Source support: Source: Tex. Tax Code § 171.002(c)-(d) Source: 34 Tex. Admin. Code § 3.584 Retailers and Wholesalers

Caution / review status: Not yet human confirmed — based on direct statute and TAC rule as of June 15, 2026.

Texas establishes franchise tax nexus for out-of-state entities based on either physical presence or economic presence within the state. The nexus threshold has evolved, with economic nexus rules now the most important test for many remote sellers and service providers. Below, each standard is summarized based on current authority.

Physical presence nexus Any foreign (non-Texas) entity that maintains a physical presence in Texas is considered to be "doing business" and is therefore subject to Texas franchise tax. Physical presence can include, but is not limited to:

• Having employees, representatives, or agents conducting business in Texas;
• Owning or leasing property (including office space, warehouses, or inventory—even at a third-party fulfillment center) in Texas;
• Participating in trade shows or temporary business activities in Texas, unless a specific safe harbor applies.

Physical presence nexus begins as soon as any of these conditions is met. There are specific safe harbors for certain limited in-state activity, such as attendance at a single trade show for five days or fewer, provided no orders are taken or sales made at the show (per 34 TAC § 3.586(e)).

Economic nexus: $500,000 threshold Effective for federal accounting periods ending on or after Jan. 1, 2020, an out-of-state entity with total gross receipts of $500,000 or more "from business done in Texas" during a federal income tax accounting period is considered to be doing business in Texas and has franchise tax nexus, regardless of physical presence. Nexus begins on the first day of the federal accounting period when the threshold is exceeded, or when an entity obtains a Texas use tax permit, or first establishes physical presence—whichever is earliest. The $500,000 threshold is not indexed for inflation as of 2026. This standard is codified in 34 TAC § 3.586(b)(2).

Public Law 86-272 does not apply Public Law 86-272 (which bars states from imposing a net income tax on businesses if their only in-state activity is the solicitation of orders for tangible personal property) does not apply to the Texas franchise tax. The Comptroller has consistently maintained that, because the franchise tax is based on margin, not net income, P.L. 86-272 does not exempt out-of-state entities from Texas franchise tax if they otherwise have franchise tax nexus. This position is expressly stated in 34 TAC § 3.586(i).

Summary

• Physical presence (property, people, representatives, fulfillment, or similar activity) or $500,000 in Texas gross receipts triggers franchise tax nexus.
• The $500,000 receipts test is a bright-line rule and has applied for reports due 2020 and after.
• P.L. 86-272 provides no safe harbor from Texas franchise tax.

Source: 34 Tex. Admin. Code § 3.586 Source: Texas Comptroller, Franchise Tax – Do I Need to File?

Not yet human confirmed — text draws exclusively from regulation and Comptroller authority current as of June 15, 2026.