The Comptroller's office publishes this newsletter to keep you informed about Texas taxes. Tax Policy News provides general information and is not a substitute for legal or other professional advice.
The Comptroller’s office understands the tremendous strain the pandemic and its related closures have placed on businesses throughout our state. We’re grateful that virtually all of our taxpayers are doing their best to remain in compliance with Texas tax requirements, and we want to ease this burden whenever possible.
We will continue to extend the payment deadline for the motor vehicle tax due on purchases until the Governor’s state disaster declaration expires. Any tax penalty will be automatically waived if the tax payment is received within 60 days of the expiration of the state disaster declaration.
For businesses struggling to pay the full amount of sales taxes they collect from customers, a short-term payment agreement may be available.
We continue to stand with and assist our Texas businesses during these difficult times.
For more information on these accommodations in addition to other COVID-19 related information, please see
Recent upgrades to the Webfile system make it easier to obtain a Certificate of Account Status online. Taxpayers who don’t owe a report, payment or late fee can file their annual and final reports and then request a Certificate of Account Status the same day. The certificate will be available for immediate download. Using this self-service option is more convenient and avoids the delays of mailing and processing. If you do not owe any outstanding reports or payments, you may still conveniently obtain your certificate using Webfile.
The certificate will be available for immediate download. Using this self-service option is more convenient and avoids the delays of mailing and processing.
Our latest webinar, "Sales Tax Exemptions for Healthcare Items," was held in June and highlighted the sales tax exemptions available for a variety of healthcare items such as medicines, medical equipment and devices. A recording of this webinar is now available.
Our next webinar will be prerecorded and made available on our Tax Training Resources webpage in December. The webinar will discuss topics for Texas purchasers and sellers, focusing on changes after the U.S. Supreme Court decision in Wayfair v. South Dakota (PDF). For more information about the release of the webinar, please check the Tax Training Resources webpage. Information will also be emailed to GovDelivery recipients when the webinar is available.
We also offer video tutorials on filing and paying sales tax through Webfile. View them on our Video Tutorials webpage.
Visit our Tax Training Resources webpage to
This article gives an overview of total revenue, cost of goods sold (COGS) and compensation; how franchise taxpayers should report them; and helpful information on where to find exclusions or deductions for each.
What is total revenue for Texas franchise tax? A taxable entity’s total revenue is tied closely to its Internal Revenue Service (IRS) federal tax return. To determine total revenue, the taxpayer totals the amounts entered on the federal tax return for the following:
Total revenue exclusions for franchise tax are amounts the law allows a taxable entity to subtract from its total revenue, usually to the extent the amounts are included in total revenue. Total revenue exclusions are entered on line 9 of the long form and EZ form, can be claimed by any qualifying entity, and include
Any amount excluded from total revenue cannot be taken as a COGS or compensation deduction.
An entity incurs COGS when acquiring or producing goods the taxable entity sells in the ordinary course of business. For franchise tax purposes, goods include real or tangible personal property (TPP) and do not include services or intangible property.
The COGS reported for franchise tax differs somewhat from the COGS that is reported for federal income tax purposes.
The three types of costs that a taxable entity can include when calculating its COGS deduction are
For more information, see Rule 3.588 – Margin: Cost of Goods Sold.
Certain other costs are not allowed, such as
A taxable entity must produce or acquire goods for sale and own the goods it is selling, with several exceptions for certain industries that can be found in Texas Tax Code Sections 171.1012(i) – (t).
A taxable entity can take a compensation deduction when it pays its employees wages and cash compensation, and/or provides benefits.
Keep in mind that the actual amount of wages and cash compensation paid by a taxable entity to each officer, director, owner, partner and employee may not include more than $390,000, for reports years 2020 and 2021.
Wages and cash compensation include
Wages and cash compensation do not include
Benefits include any benefits allowed by the IRS that the taxable entity pays on behalf of its employees, such as
Benefits do not include
A taxable entity’s total revenue determines which franchise tax report form it may file. If a taxable entity’s total revenue is
Franchise tax rates, thresholds and deduction limits vary by report year. Below are the rates for reports years 2020 and 2021.
|No Tax Due Threshold||$1,180,000|
|Tax Rate (retail or wholesale)||0.375 percent|
|Tax Rate (other than retail or wholesale)||0.75 percent|
|Compensation Deduction Limit||$390,000|
|EZ Computation Total Revenue Threshold||$20 million|
|EZ Computation Rate||0.331 percent|
The law requires an entity that qualifies to file Form 05-163, No Tax Due Franchise Tax Report (PDF), to file this report electronically. A taxable entity can use our Webfile system or an approved third-party software to do so.
When buying holiday decorations, you owe tax unless you buy them from a tax-exempt organization (PDF) during one of its tax-free fundraisers.
Examples of holiday decorations include
People often hire a holiday decorator to help "deck the halls" of their home or business.
You do not owe tax when your decorator
This is because your decorator is only selling their time or labor, which is not taxable when not in conjunction with the sale of a taxable item.
You do owe tax on the full charge for the decorations and time when your decorator
Business windows – If you hire someone to paint holiday images on the windows at your business, you owe tax on the total amount charged. Any charges for removing the images are also taxable. These services are considered taxable nonresidential repair and remodeling services.
Home windows – If you hire someone to paint holiday images on the windows at your home and you provide the paint, you do not owe tax on the charge for the time to paint the windows. This is because residential repair and remodeling labor or services are not taxable.
If the painter provides the paint, and charges you
If the decorator removes the painted images for you, and separately charges for that service, then you owe tax on the charge for removing the images as a real property cleaning service. If the decorator charges one amount for painting the image and later removing it, the charge is not taxable as long as the amount charged for removing the image is not more than 5 percent of the total charge.
A marketplace is a physical or electronic store, internet website, software application, or catalog that marketplace sellers use to make sales. A marketplace provider is an entity that owns or operates a marketplace and processes sales or payments for marketplace sellers. Examples include Amazon, Walmart Marketplace, StubHub and Etsy. Antique malls or other markets with centralized cash registers are also examples of marketplaces. A marketplace seller is an individual who sells through a marketplace provider.
If you are a marketplace seller located in Texas, you are not responsible for collecting and remitting sales and use tax on your sales made through a marketplace that has certified they are collecting tax on your behalf. You must, however, retain records of your marketplace sales for at least four years.
When completing the Texas Sales and Use Tax Return, you will include sales made through a marketplace provider in "Total Texas Sales" (Item 1), but exclude them from "Taxable Sales" (Item 2). As a Texas seller, you must file sales and use tax returns timely even if you do not have any taxable sales to report.
You should collect, report and remit tax on sales made outside a marketplace (through a business website, in person, etc.) as usual.
If you are a remote seller that only sells into Texas through a marketplace provider that has certified they will collect sales and use tax on your behalf, you are not required to hold a Texas tax permit. You must, however, keep required records of your marketplace sales for at least four years.
If you are a remote seller and you sell through a marketplace and your own website, you must have a use tax permit if you cross the $500,000 safe harbor threshold. You must include all sales when making the safe harbor calculation, including marketplace sales, even if the marketplace provider is collecting and remitting the sales tax. When completing the Texas Sales and Use Tax Return, you will include sales made through a marketplace provider in "Total Texas Sales" (Item 1), but exclude them from "Taxable Sales" (Item 2).
The Comptroller’s office proposed the following rules for public comment through the Texas Register:
Rule 3.586 – Margin: Nexus
Publication date – Dec. 4, 2020
Comment period end date – Jan. 3, 2021
Rule 3.591 – Margin: Apportionment
Publication date – Nov. 13, 2020
Comment period end date – Dec. 13, 2020
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Help is just a click away! Use our website to take care of business.
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We host free taxpayer seminars across the state about the tax responsibilities of buyers, sellers and service providers.
Our Video Library has online tutorials on tax-related topics as well as information about our office.
The Practitioners’ Corner is a one-stop resource for information about filing and paying taxes, links to tax research sources and searchable databases.