The margin tax is a type of business tax unique to Texas that was introduced in 2006 when it replaced the franchise tax. It essentially defines what types of business are taxable and at what rate. As a result of the structure of the new tax calculations, manufacturers seem to benefit from the new tax system, while service firms lose out, according to a report by Greenberg Traurig. This has an impact on the hiring decisions of both sectors.
History of the Margin Tax
The margin tax was signed into law in Texas by Governor Perry on May 18, 2006. It replaced the Texas franchise tax. The margin tax differed from the franchise tax as it expanded the number of businesses subject to taxation. The tax also modified the method in which business taxes are calculated. Furthermore, it eliminated the tax loophole that enabled businesses to register their revenue with a Delaware partner entity, in effect avoiding Texas state business taxes.
Margin Tax Rates
As the name suggests, margin taxes tax at the margin. The margin of the business may be defined as its total revenues minus the greatest of the cost of the goods sold, compensation or 70 percent of total revenues. In effect, the maximum tax rate for businesses is 0.7 percent. This rate applies for all businesses except for retail and wholesale traders, who are taxed at a maximum rate of 0.5 percent. If the total tax due is less than $1,000, or total revenues are less than or equal to $300,000, no taxes are due.
Taxable and Non-Taxable Entities
Entities subject to the margin tax include limited liability partnerships, limited liability companies, savings and loans, business trusts and associations, joint ventures and holding companies. Some businesses in Texas are not subject to the margin tax. This includes trusts, estates, real estate investment trusts (REITs), sole proprietorships and general proprietorships owned by natural persons, escrows and joint operating arrangements. Specific rules apply to how businesses may be defined as such non-taxable entities.
Winners and Losers
The businesses that seem to have benefited most from the new margin tax are oil and gas production firms, the Greenberg Traurig report states. This is because they are capital intensive, and as machinery is counted as a business cost, this qualifies as a deduction. The businesses believed to suffer the most from the new tax system are service companies, as they were previously exempt from business taxes when the franchise tax was in place.
- Martens, Seay and Todd: Margin Tax
- Lone Star Land Law.com; Texas Margin Tax; David J. Willis; 2009
- Federal Reserve. "Total Gross Domestic Product for Texas." Accessed June 20, 2020.
- Office of the Comptroller. "Franchise Tax Frequently Asked Questions." Accessed Sep. 27, 2020.
- Office of the Comptroller. "Texas Franchise Tax Forms." Accessed Sep. 27, 2020.