Corporate Close-Up: State Franchise Tax Roll Call


 

As if corporate taxation weren’t complicated enough, over half of the states have at least one franchise tax somewhere in their tax codes. These taxes run the gamut from actual separate taxes to corporate income taxes in disguise to industry-specific taxes. Some, like Idaho, were created to close potential loopholes. Don’t let the many types of franchise taxes catch you unaware! Here is our handy guide to state franchise taxes in 2017.

Idaho: Home of the Two-Headed Corporate Income Tax

Idaho is an example of a state with a franchise tax that is, for all intents and purposes, an income tax. Corporations new to Idaho may find themselves scratching their heads when they see Idaho Code § 63-3025 imposes an income tax on corporate income, while § 63-3025A imposes a franchise tax. 

The franchise tax statute is only a few paragraphs long. “A practitioner might ask: ‘What’s going on? Am I being taxed twice on the same income?’” John McGown, Jr., Of Counsel at Hawley Troxell’s Boise, Idaho, office and coauthor of the Idaho Corporate Income Tax Navigator (subscription required) told Bloomberg BNA, “Upon closer inspection, there is no meaningful difference between the Idaho corporate income tax and the franchise tax. Generally speaking, the statutes and administrative rules that apply to the Idaho corporate income tax apply equally to the Idaho franchise tax.”

Both taxes are measured by income and apply the same tax rate. Moreover, both taxes are reported on the same form, Idaho Form 41, Corporation Income Tax Return Instructions, and neither the form itself nor its instructions distinguish between the two taxes. Note that both the Idaho income tax and franchise tax cannot be applied simultaneously to the same taxpayer.

“The state was concerned that corporations would argue that income generated from interstate commerce might not be taxable under the regular Idaho corporate income tax. So § 63-3025A(1) was added to clarify Idaho’s position on the taxability of income from interstate commerce,” McGown added.

Wolf in Sheep’s Clothing: the Corporate Income/Franchise Tax

Similar to Idaho, several states simply call their corporate income tax a franchise tax. These faux franchise taxes aren’t to be confused with traditional franchise taxes; they look, smell, walk and talk like income taxes.

As discussed in my earlier blog post, the Texas Supreme Court is currently deciding whether or not its franchise tax is an income tax. Other states that have corporate income taxes called franchise taxes are:

  • California,
  • Minnesota,
  • New Jersey,
  • New York,
  • Utah and
  • The District of Columbia.

Good Ol’ Franchise Tax

In most cases, state franchise taxes are separate taxes based on capital stock or net worth. Depending on the state, these can be imposed on a company in addition to the corporate income tax. It’s difficult to determine the future of “traditional” franchise taxes because, while several states have recently repealed their traditional franchise tax or let it expire, namely,

  • Missouri,

  • North Dakota,

  • Pennsylvania,

  • Rhode Island and

  • West Virginia,

many states have traditional franchise taxes that are alive and well:

  • Alabama,

  • Arkansas,

  • Connecticut,

  • Delaware,

  • Georgia,

  • Illinois,

  • Louisiana,

  • Mississippi,

  • Nebraska,

  • North Carolina,

  • Oklahoma,

  • South Carolina,

  • Tennessee,

  • Vermont and

  • Wisconsin.

Industry-Specific “Franchise” Tax

The next type of franchise taxes target business in one industry, typically banks, and are commonly referred to as excise taxes. They belong in their own category because they typically don’t apply to most corporate taxpayers.

  • Delaware,

  • Florida,

  • Hawaii,

  • Indiana,

  • Iowa,

  • Kansas,

  • Kentucky

  • Maine,

  • Maryland,

  • Michigan,

  • Nebraska,

  • Pennsylvania,

  • Texas,

  • Vermont and

  • Virginia.

Flat-Rate Fee Franchise Tax

Finally, New Mexico charges all corporate entities a flat rate fee of $50 to do business in the state. All businesses operating in New Mexico must pay the franchise tax even if they don’t owe any income tax to the state.

You may have noticed that a few states appear on these lists multiple times and that is because, you guessed it, they have multiple franchise taxes.

If state franchise taxes make you fret and feel frazzled, you are not alone. Luckily, there are many tools out there to help you keep straight which states have which types of franchise taxes and for which years. Get a free trial to Premier State Tax Library, a comprehensive research service that delivers deep, unique analysis and time-saving practice tools to help practitioners make well-informed decisions.

Did you know that some states have franchise taxes that act as corporate income taxes? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn

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