Texas Franchise Tax vs Texas Sales Tax: What Businesses Owe

Texas franchise tax and Texas sales tax are separate obligations. Franchise tax generally depends on the type of entity, its Texas activity, and its revenue calculation. Sales tax depends on whether a business sells, rents, or leases taxable property or sells taxable services. A business may have obligations under both systems, under only one, or potentially under neither.

The practical takeaway is not to use a sales tax permit as evidence that franchise tax applies—or to assume that forming an LLC automatically answers the sales tax question. Review the business entity and its activities separately, then maintain separate filing and recordkeeping procedures for each applicable tax.

Texas Franchise Tax and Sales Tax at a Glance

Texas franchise tax applies to taxable entities formed or organized in Texas or doing business in Texas. Covered entities include corporations, LLCs, and many partnerships. An ordinary sole proprietorship that is not organized to limit liability is not a taxable entity, although exemptions and other excluded entity categories may affect the analysis.

Texas sales and use tax focuses on transactions rather than entity type. A Texas sales and use tax permit is required for an individual or legal entity engaged in business in Texas that sells taxable tangible personal property, rents or leases that property, or sells taxable services. This means an ordinary sole proprietor may need a sales tax permit even though that proprietor is not a franchise-tax taxable entity. Conversely, an LLC may fall within franchise tax coverage without making sales that require a sales tax permit.

Key Requirements for Each Tax

Sales tax registration and collection

If the business conducts an activity covered by the permit rule, it should address registration before treating taxable transactions as tax-free. Applicants may use the Texas Online Sales Tax Registration Application System or mail Form AP-201, Texas Application for Sales and Use Tax Permit, to the Texas Comptroller. The Comptroller charges no fee for the permit, although it may require a security bond.

Texas imposes a 6.25% state sales and use tax. Cities, counties, special-purpose districts, and transit authorities may impose up to 2% in combined local tax, making 8.25% the maximum combined rate. The applicable local rate depends on the transaction and jurisdiction, so a business should not automatically apply the maximum rate to every taxable sale.

Once registered, a permit holder must collect tax on taxable sales, report and pay sales and use taxes on time, maintain adequate records, and file returns even when there were no taxable sales or purchases during the period. Filing frequency is assigned by the Comptroller, so businesses should follow the schedule associated with their own account rather than assuming that every permit holder follows the same calendar.

Businesses preparing to register can use the Texas Sales Tax Registration Guide for New Businesses to organize the registration process. Businesses selling at fairs, markets, or similar locations may also want to review the Texas Temporary Sales Tax Permit for Events and Markets.

Franchise tax coverage and 2026 figures

For 2026 franchise tax reports, the no-tax-due threshold is $2.65 million. The rates are 0.375% for retail or wholesale entities, 0.75% for other entities, and 0.331% under the E-Z Computation method. E-Z Computation is limited to eligible entities or combined groups with annualized total revenue of $20 million or less.

An entity at or below the $2.65 million threshold for 2026 does not file a No Tax Due Report, but it generally must file either a Public Information Report or an Ownership Information Report. Passive entities and qualifying new veteran-owned businesses have different information-report rules. The annual franchise tax report is due May 15, or the next business day if May 15 falls on a weekend or holiday; extension rules may change an extended filing deadline.

“No tax due” therefore should not be read as “nothing to file.” A taxable entity should identify its applicable report obligations independently from the calculation of any franchise tax amount.

How to Determine What the Business Owes

1. Classify the business for franchise tax purposes. Start with the legal structure. Determine whether the business is a corporation, LLC, partnership, ordinary sole proprietorship, or another form. Then consider whether the entity was formed or organized in Texas or is doing business in Texas.
2. Inventory what the business sells. Separate tangible personal property, rentals or leases of that property, services, and other receipts. The sales tax question turns on whether the specific property or service is taxable, not merely on whether the business earns revenue.
3. Map the sales channels. Identify in-person, website, telephone, marketplace, event, and other sales. This helps the business examine the tax treatment of each transaction and avoid applying one assumption across materially different channels.
4. Evaluate any remote-seller rule carefully. An out-of-state remote seller whose only Texas activity is remote solicitation is not required to obtain a permit and collect use tax when its total Texas revenue is less than $500,000 during the preceding 12 calendar months. The calculation includes taxable sales, nontaxable sales, and marketplace sales. Businesses with other Texas activities should not assume that this remote-seller rule resolves their permit obligation.
5. Register for sales tax when required. Use the online registration system or mail Form AP-201. Keep the permit information with the company’s compliance records and make sure the people handling invoices, checkout settings, and returns know when collection begins.
6. Create separate compliance files. Keep sales tax transaction records apart from franchise tax workpapers. The underlying business records may overlap, but the taxes have different coverage rules and should not be managed as if one filing satisfies the other.
7. Calendar the assigned obligations. Record the sales tax filing frequency assigned to the permit account. Separately calendar the franchise tax annual due date and any applicable information report.

Practical Mistakes to Avoid

• Assuming an LLC only has franchise tax responsibilities. Entity formation is relevant to franchise tax, while sales tax turns on taxable business activities. An LLC that sells taxable property may need to handle both.
• Assuming a sole proprietor cannot need a permit. The permit requirement applies to an individual or legal entity engaged in the covered taxable activities. The exclusion of an ordinary sole proprietorship from franchise-tax taxable entities does not create a sales tax exemption.
• Applying 8.25% to every sale. That percentage is the maximum combined rate, not a universal rate. The applicable local component depends on the transaction and jurisdiction.
• Counting only taxable sales for the remote-seller threshold. For an out-of-state remote seller whose only Texas activity is remote solicitation, the threshold calculation includes taxable, nontaxable, and marketplace sales.
• Ignoring zero-activity sales tax returns. A permit holder must file returns even when there were no taxable sales or purchases for the filing period.
• Treating the no-tax-due threshold as a complete filing exemption. For 2026, entities at or below the threshold generally still have a Public Information Report or Ownership Information Report obligation, subject to the different rules for the specified entity categories.
• Continuing to use an unneeded permit indefinitely. A business that has stopped the covered activities should address the account rather than simply abandoning future returns. The process is explained in How to Close a Texas Sales Tax Permit.

Next Steps for Texas Businesses

Begin with two short written analyses. The first should identify the legal entity, whether it is formed or organized in Texas or doing business in Texas, and which franchise tax reports may apply. The second should list each product, rental, lease, and service sold in Texas and document whether it creates a sales tax permit or collection obligation.

If sales tax registration is required, choose the online application or Form AP-201, prepare the business information needed for a consistent application, and set up transaction records that support tax collection and reporting. After the permit is issued, confirm that invoices and checkout systems use the appropriate treatment for taxable transactions. When shipping or delivery is part of the charge to a customer, consult the separate guide to Texas Sales Tax on Shipping and Delivery Charges.

For franchise tax, do not stop after comparing revenue with the no-tax-due threshold. Determine whether an annual franchise tax report, Public Information Report, or Ownership Information Report applies to the entity. Keeping these decisions separate helps prevent the most important category error: assuming that compliance with one Texas tax automatically resolves the other.