A franchise tax is a government levy (tax) charged by some US states to certain business organizations such as

corporations A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...

and

partnerships A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governm ...

with a nexus in the state. A franchise tax is not based on income. Rather, the typical franchise tax calculation is based on the

net worth Net worth is the value of all the non-financial and financial assets owned by an individual or institution minus the value of all its outstanding liabilities. Since financial assets minus outstanding liabilities equal net financial assets, net ...

of or capital held by the entity. The franchise tax effectively charges corporations for the privilege of doing business in the state.

Nexus

Whether or not a business must pay a franchise tax to a state in which it does business can cause some confusion. Some states report using both the economic and physical presence tests, and in some states, there are no written, public interpretations of their test at all.Baker Tilly, 2016 Midyear State and Local Tax Update. http://www.bakertilly.com/insights/midyear-state-and-local-tax-update-income-and-franchise-taxes/

Physical presence test

The physical presence test is based on

Quill Corp. v. North Dakota ''Quill Corp. v. North Dakota'', 504 U.S. 298 (1992), was a United States Supreme Court ruling, since overturned, concerning use tax. The decision effectively prevented states from collecting any sales tax from retail purchases made over the Inter ...

, ( 504 U.S. 298 (1992)), a United States Supreme Court ruling concerning use tax. Quill Corporation is an office supply retailer. Quill had no physical presence in North Dakota (neither a sales force, nor a retail outlet), but it had a licensed computer software program that some of its North Dakota customers used for checking Quill's current inventories and placing orders directly. North Dakota attempted to impose a use tax on Quill, which was struck down by the Supreme Court, because Quill had no physical presence in North Dakota. The ''Quill'' physical presence test is used by some states to determine whether or not a company must pay franchise tax. Delaware, Hawaii, Massachusetts, Pennsylvania, and Texas report using the physical presence test.

Economic presence test

Many states apply an "economic presence" test to determine whether a business will be subject to state sales or franchise tax. This test, which seems to contradict Quill, implied that States have the right to tax or "nexus" solely on the basis that a company has sales or otherwise derives an economic benefit from activities within their borders.

Amount

, about half the U.S. states do not impose a franchise tax.Journal of Accountancy, Navigating Nexus. http://www.journalofaccountancy.com/issues/2010/nov/20102904.html For states that have a franchise tax, the amount is often either a flat fee or based on the size of the business's total holdings.

Relationship to corporate tax

States with higher

corporate income taxes A corporate tax, also called corporation tax or company tax, is a direct tax imposed on the income or capital of corporations or analogous legal entities. Many countries impose such taxes at the national level, and a similar tax may be imposed ...

usually have low or no franchise taxes and vice versa.

Delaware

The state of

Delaware Delaware ( ) is a state in the Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The state takes its name from the adjacent ...

has a significant franchise tax.State of Delaware, Annual Report and Tax Information. https://corp.delaware.gov/frtax.shtml Other states have either nominal taxes or none at all.

References

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External links

Delaware Corporate Franchise Tax Calculator

Texas Franchise Tax

Louisiana Corporation Franchise Tax

Delaware Franchise Tax
Corporate taxation in the United States State taxation in the United States Business taxes