Introduction
Texas imposes two different franchise-tax rates—0.375 % and 0.75 %—depending on whether your business is primarily engaged in retail or wholesale trade. Getting the rate wrong can lead to under-payment penalties or over-paying unnecessarily. This guide will help you determine which rate applies, illustrate with examples, and walk you through how to report the correct rate on your 2025 franchise-tax return.
Applicable Tax Authority & Code References
- General Rate (0.75 %): Applies to all taxable entities except those primarily engaged in retail or wholesale trade.
- Reduced Rate (0.375 %): Applies only to entities “primarily engaged in retail or wholesale trade” as defined in Tex. Tax Code § 171.002(b).
- “Primarily Engaged” Test: A business meets the test if (1) retail/wholesale revenue > non-retail/wholesale revenue, and (2) less than 50 % of retail/wholesale revenue is from products produced by the entity or its affiliates (§ 171.002(c)).
- Comptroller Confirmation: The Texas Comptroller confirms 0.375 % for retail/wholesale and 0.75 % for all others for report years 2024–2025.
Who Pays Which Rate?
| Rate | Applies To |
|---|---|
| 0.375 % | Entities primarily engaged in retail or wholesale trade (§ 171.002(b)). |
| 0.75 % | All other taxable entities (§ 171.002(a)). |
Detailed Examples
- Retailer – MetroBooks, LLC
- Total Revenue: $5,000,000
- COGS Deduction: $2,000,000 → Margin: $3,000,000
- Rate: 0.375 % ⇒ Tax Due: $3,000,000 × 0.00375 = $11,250
- Service Provider – CloudServe, LLC
- Total Revenue: $5,000,000
- Elect 70 % Method: Margin = $5,000,000 × 0.70 = $3,500,000
- Rate: 0.75 % ⇒ Tax Due: $3,500,000 × 0.0075 = $26,250
By selecting the correct rate—and the most advantageous margin method—you optimize your tax outcome.
Step-by-Step Compliance Guide
- Determine Revenue Mix
- Break out total revenue into retail/wholesale vs. non-retail streams.
- Apply “Primarily Engaged” Test
- Retail/wholesale revenue > non-retail revenue?
- < 50 % of retail/wholesale revenue from in-house or affiliate-produced products?
- Select Applicable Rate
- If both answers “Yes” → 0.375 %; otherwise → 0.75 %.
- Compute Margin
- Choose your margin method (70 % of total revenue; or revenue minus COGS; or revenue minus compensation; or revenue minus $1 M).
- Complete Form 05-158
- On the Long-Form return, enter the rate (0.00375 or 0.0075) in the tax-rate field.
- File & Pay
- Submit the report and any payment voucher (Form 05-170) by May 15, 2025.
- Retain Documentation
- Keep detailed revenue breakdowns and your “primarily engaged” test workpapers.
Conclusion
Selecting the correct franchise-tax rate—either 0.375 % for retail/wholesale or 0.75 % for all other activities—is critical to accurate Texas filings. Follow the “primarily engaged” test, compute your margin, and report the proper rate on Form 05-158 by May 15, 2025 to avoid penalties or over-payment.
Schedule a Meeting to verify your rate eligibility and ensure your 2025 return is spot-on.
About Our CPA
Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States and admitted to practice before the IRS as an Enrolled Agent. He represents clients in tax litigation, specializes in cross-border tax compliance for U.S. businesses and Indian nationals residing in the U.S., and delivers tailored tax planning strategies.
Disclaimer
This blog is for general informational purposes only and does not constitute tax, legal, or accounting advice. Consult a qualified professional regarding your specific circumstances before taking any action. Anshul Goyal, CPA, EA, FCA, and Kewal Krishan & Co. disclaim any liability for actions taken based on this information.
FAQs
1. How do I know if I’m “primarily engaged” in retail or wholesale?
Compare your retail/wholesale revenue to non-retail revenue and ensure < 50 % comes from in-house or affiliate-produced products (§ 171.002(c)).
2. What exactly counts as retail or wholesale trade?
Defined by Divisions F and G of the 1987 Standard Industrial Classification Manual; see Tex. Tax Code § 171.002(c).
3. Where do I enter the tax rate on the franchise-tax report?
On Form 05-158 (Long Form), enter 0.00375 for 0.375 % or 0.0075 for 0.75 % in the designated rate field.
4. Can combined-group members have different rates?
No—they must each apply the same rate determined by their individual “primarily engaged” status.
5. What are the penalties for under-paying due to the wrong rate?
A $50 late-filing fee per report, plus a 5 % penalty if paid 1–30 days late (10 % if over 30 days) and interest beginning 61 days after the due date.