State franchise taxes exist in just under half of the states in the U.S. An odd stepchild of the state corporate income tax, franchise taxes are a catch-all for taxes that don’t fit the old categories of levies such as income, excise, property or sales. Some states have recently retired their franchise tax, while others have shown a continued commitment to it.
Most state franchise taxes are calculated based on the capital stock or net worth of companies, often in one specific industry. Several states have repealed their franchise taxes in recent years, with Missouri, Pennsylvania, Rhode Island and West Virginia being the most recent cases.
Missouri just finished a five-year phaseout of its corporate franchise tax. The Missouri franchise tax was a tax on corporations with assets of $10 million or more for the privilege of doing business in the state.
Pennsylvania both repealed and let expire its franchise tax for tax years beginning after Dec. 31, 2015. The tax was a capital stock tax on corporations and dates back to 1844.
In 2014, Rhode Island repealed its capital stock tax on all corporations for tax years beginning after Jan. 1, 2015. The tax was a capital stock tax that either created tax liability for corporations or was an additional liability to the extent it exceeded the business corporation tax.
West Virginia’s franchise tax expired Jan. 1, 2015. The tax was imposed on any corporation doing business and owning or leasing real or tangible property in the state; the amount owed was based on the corporation’s capital.
But not all states are doing away with their franchise tax. In 2013, Oklahoma voters decided to reinstate its franchise tax after a three-year moratorium. With so many changes happening to franchise taxes, it is important for companies operating in multiple states to keep track of franchise taxes and their possible tax liability, or change in tax liability, under them.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do state franchise taxes create confusion for taxpayers as to their state tax liability?
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