Starting a business in Texas? You’ll likely face two major state-level taxes: the Franchise Tax and the Sales and Use Tax. But which one applies first? Which one costs more? This guide will break down how each tax works, when it kicks in, and what startups, e-commerce sellers, and service providers need to prioritize in 2025.
The Basics: Two Different Taxes, Two Different Triggers
| Tax Type | Applies To | Administered By |
|---|---|---|
| Franchise Tax | Entities doing business in Texas | Texas Comptroller |
| Sales & Use Tax | Sellers of taxable goods/services | Texas Comptroller |
Franchise Tax:
- Annual tax on gross receipts (margin)
- Applies to LLCs, Corporations, S-Corps, and Partnerships
Sales Tax:
- Collected at the point of sale
- Applies to goods, SaaS, digital products, and some services
When Does Each Tax Kick In?
Franchise Tax Timing:
- Applies starting the year after formation
- First return due May 15 of the year after you register
- No minimum tax if revenue is under $2.47 million (2025 threshold)
Sales Tax Timing:
- Applies as soon as you start selling taxable goods/services in Texas
- Must register before collecting sales tax
- No revenue threshold starts with first taxable transaction
Conclusion:
- Sales tax hits first, especially for sellers
- Franchise tax comes later, but applies even to pre-revenue businesses
Example: SaaS Startup Timeline
Startup: DevDash.io
Launch Date: July 2024
Sales Begin: August 2024
Revenue in 2024: $80,000
Revenue in 2025: $400,000
Tax Obligations:
- Sales Tax:
- Must register and collect on all Texas customer subscriptions starting August 2024
- File Form 01-117 (monthly or quarterly)
- Franchise Tax:
- First due May 15, 2025
- Files Form 05-163 (No Tax Due) if under $2.47M
Step-by-Step: What New Texas Businesses Should Do
- Assess your offering – Is it taxable in Texas (goods, SaaS, services)?
- Register for sales tax using Form AP-201
- Collect and remit tax from the start of operations
- Track annual gross receipts to determine franchise tax liability
- File franchise tax and Public Information Report by May 15 of the following year
- Forms You’ll Need
| Tax Type | Key Forms |
|---|---|
| Sales Tax | AP-201 (Registration), 01-117 (Return) |
| Franchise Tax | 05-163 (EZ Computation), 05-158-A (Long Form), 05-102 (PIR) |
Conclusion
In Texas, sales tax comes first triggered by your first sale. Franchise tax comes next, based on your first calendar year of operation. Knowing the order and impact of each tax ensures your startup avoids penalties and stays compliant from day one.
Call to Action
Schedule a compliance review with Anshul Goyal, CPA, EA, FCA to evaluate your sales tax and franchise tax obligations and avoid missing early filing deadlines that apply even before profitability.
Disclaimer:
This blog is for educational purposes only. Texas tax laws are enforced separately by the Comptroller and vary depending on business activity, structure, and timing. Always consult a qualified professional for entity-specific guidance.
Top 5 High-Searched FAQs
1. Do I have to collect Texas sales tax before making a profit?
Yes. Sales tax applies at the first sale, regardless of profit status.
2. When is my first Texas Franchise Tax due?
By May 15 of the calendar year after your entity is formed.
3. What is the revenue threshold for franchise tax in 2025?
$2.47 million. Below that, you can file a No Tax Due Report.
4. Can I owe both taxes at the same time?
Yes. Many businesses pay both, especially product or SaaS sellers.
5. What happens if I don’t register for sales tax?
You may owe back taxes, interest, and penalties and be flagged in audits.
About Our CPA
Anshul Goyal, CPA, EA, FCA is a cross-border and state tax specialist who helps startups and e-commerce sellers understand and manage their Texas tax responsibilities from day one. He provides hands-on support for sales tax registrations, filings, and franchise tax returns.