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Texas Basic Business Taxes

Q1 2014
Corporate income tax:
Texas does not have a corporate income tax.

Texas franchise tax:
The franchise tax is imposed upon all taxable entities that do business in the state or that are chartered or organized in the state.

Sales and use taxes:
A 6.25 percent state sales tax plus local option tax is levied on the sale, rental, or lease of tangible personal property and certain services, and is based on sale price. The tax does not apply to sales for resale, leasing, or renting. Cities, towns, villages, and rapid transit authorities may also impose local taxes up to a maximum combined state and local rate of 8.25 percent.

A 6.25 percent use tax plus local option tax is imposed on the storage, use, or consumption within the state of taxable items purchased, leased, or rented on which sales tax has not been paid. It also applies to taxable items, unless specifically exempt, purchased out of state and used in state, and upon which no state sales tax was paid. Use tax is based on the sales price of the property or rental or lease prices.

A discount of 0.5 percent of the tax collected may be taken by the business for collection. Taxpayers who estimate and prepay may deduct an additional 1.25 percent.

Property (ad valorem) tax:
Texas has no state property tax. Local governments, school districts, and special districts levy property taxes on all real and tangible property. Intangible property, with certain exceptions, is exempt. All property is appraised at full market value by local county assessors on 100 percent of appraised value. The total effective tax rate is the sum of the effective tax rates of all applicable taxing units, including cities, counties, schools, and special districts.

Property (ad valorem) tax abatement:
Local municipalities and counties can designate areas within their jurisdiction as reinvestment zones. Designation of a reinvestment zone may be for five-year periods. Tax abatement agreements have a maximum term of 10 years, and may, based upon established local policies, provide for the exemption of real property and tangible personal property located on the real property, only to the extent that its value for that year exceeds its value for the year in which the agreement is executed.

Property utilized for pollution control is exempt from ad valorem taxation. A facility receives determination from the Texas Commission on Environment Quality (TCEQ) that the property is for pollution-control purposes. The positive determination is then provided to the local appraisal district, which must accept the TCEQ's decision and grant the property an exemption from property taxes. To be eligible for a positive use determination, the property must have been purchased, acquired, constructed, installed, replaced, or reconstructed after January 1, 1994 to meet or exceed federal, state, or local environmental laws, rules, or regulations.

Industrial districts:
Municipalities can designate nearby areas outside their territory, within the extraterritorial jurisdiction, as industrial districts. Companies located within these districts can negotiate with the municipality for a complete or partial exemption on property taxes on land, equipment, and machinery.

Goods in transit:
As of January 1, 1990, the Freeport exemption allows local governing bodies the option to exempt personal property consisting of goods, wares, merchandise, or ores other than oil, natural gas, and petroleum and certain aircraft and aircraft parts. Freeport property qualifies for an exemption from property (ad valorem) taxation only if it has been detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing, or fabricating.

The research and development credit, job creation credit and capital investment credit were repealed for franchise tax reports originally due on or after January 1, 2008. However, a corporation or limited liability company that established a credit on a report due prior to January 1, 2008, may continue to take any remaining installment or unused credit carried forward.

Machinery and equipment:
Texas grants sales and use tax exemptions on machinery and equipment utilized directly in the manufacturing process. Purchases of machinery and equipment, replacement parts, and accessories and that are used or consumed directly in the manufacturing, processing, fabricating, or repairing of tangible personal property for ultimate sale (and if the use or consumption of the property was necessary or essential to the manufacturing, processing, fabrication, repair, or operation, or to a pollution-control process) are exempt from state and local sales and use tax. Natural gas and electricity are exempt from sales taxes when sold to commercial businesses that "predominantly" use the gas or electricity in manufacturing.

Exemptions from the sales tax are also provided for machinery and equipment used by agricultural producers; tangible personal property used outside the territorial limits of the state to explore for or produce gas, oil, sulfur, and other minerals; locomotives and rolling stock, including grain supplies and fuels; aircraft sold to certain carriers or used for instructing pilots, or sold to foreign governments; certain commercial vessels or ships and materials and supplies sold to vessels, including repair services to ships operating in interstate or foreign commerce; persons who overhaul, retrofit, or repair jet turbine aircraft engines, and their component parts.
Manufacturing Exemptions

Energy and fuel conservation measures:
A corporation solely engaged in the business of manufacturing, selling, or installing solar energy devices is exempted from the franchise tax.

A taxable entity may deduct from its apportioned taxable margin 10% of the amortized cost of a solar energy device if the device is used in state; is acquired for heating, cooling, or production of power; and is amortized for a period of at least 60 months.

Natural gas and electricity are exempt from sales taxes when sold used "predominantly" in manufacturing goods for resale.

Natural gas and electricity:
Texas companies are exempt from paying state sales and use tax on electricity and natural gas used in manufacturing, processing, or fabricating tangible personal property. The company must complete a "predominant use study" that shows that at least 50 percent of the electricity or natural gas consumed by the business is used in the manufacturing process.

Data centers:
A data center exemption applies to state sales and use tax on certain items necessary and essential to the operation of a qualified data center. The exemption is for state sales tax only. Local sales taxes are due on purchases of these qualifying items.

Eligible data centers must commit to creating at least 20 qualifying jobs in the county in which the data center is located and making a capital investment of at least $200 million over a five-year period.
Research & Development

Research and development tax exemption/credit:
The research and development tax credit provides companies the option of selecting either a sales tax exemption on property purchased by persons engaged in qualified research activities or the franchise tax credit, but not both. The R&D tax credit goes into effect in January 2014.
  • Sales tax exemption - The bill provides a sales tax exemption for property purchased, stored, or used by a person engaged in qualified research.
  • Franchise tax credit - A company conducting qualified research activities in Texas is eligible for a tax credit equal to 5% of the difference between a company’s qualified research expenses during the tax year for which the credit is claimed and 50% of the average qualified research expenses for the three preceding tax years (base period). A company which has no qualified research expenses in one or more of the base period years may still claim the credit by selecting the reduced credit rate of 2.5% of credit year qualified research expenses. The total credit being claimed is limited to 50% of the company’s franchise tax due.
Research & Development

Texas State Contact:
Office of the Governor Economic Development and Tourism
P. O. Box 12428
Austin, TX 78711
(512) 936-0100

Incentive and tax information is provided to Area Development by each state's economic development or commerce agency for information purposes only and is subject to revision at any time by the state government. Please contact the state agency directly for full requirements and offerings.

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