A report to the Governor and the
77th Texas Legislature, January 2001
Franchise Tax Credit Claims under SB 441
This report provides information on franchise tax credits enacted by SB 441, 76th Legislature, 1999.
To date, the Comptrollers Office has received only a handful of tax reports with a tax credit claim. The small number of credit claims received represents an insufficient quantity for an accurate or meaningful analysis of the likely fiscal impact, geographical dispersion, or industry distribution of the credit claims. Due to the lack of reliable credit data, this report draws no conclusions about credit amounts and distributions, or about the economic and fiscal impacts on the state.
Included in this report are an overview of franchise tax features and computation methods, historical data on franchise tax collections and the number of companies paying the tax, overviews of how the credits work, and a map of the Strategic Investment Area for 2001.
Additional franchise tax credit information, including credit computation examples, is available online at http://www.cpa.state.tx.us.
Franchise Tax Overview
Of all Texas major revenue sources, the franchise tax is the second longest-lived. Originally implemented in 1879 as a fee for corporate charters and amendments, the levy took on its current forman annual tax on the net worth of domestic and foreign corporationsin 1907. Only the insurance premium tax, which traces its origin to 1862, has served the state longer.
Franchise Tax Collections
Fiscal Years 1992-2000
Dollar amounts in thousands
1992 $1,090,050 1993 1,193,300 9.5% 1994 1,260,745 5.7 1995 1,425,077 13.0 1996 1,642,134 15.2 1997 1,796,605 9.4 1998 1,938,265 7.9 1999 2,077,633 7.2 2000 2,065,276 -0.6
The franchise tax has been a privilege tax since its inception. Corporations pay the tax in exchange for certain privileges granted by the State of Texas. These privileges include access to the states legal system and limitation of personal financial responsibility for corporate officers.
Today, foreign and domestic corporations, S corporations, and limited liability companies doing business in Texas pay the tax. Non-corporate business entities such as partnerships, associations, and proprietorships are excluded from taxation.
In 1991, the 72nd Legislature, 1st Called Session, adopted HB 11, which transformed the franchise tax into a two-part computation. The legislation retained the net worth computation and added a second step. Beginning in 1992, taxpayers have been required to compute a tax on "earned surplus" and pay the higher of the two alternatives. The earned surplus tax base is derived from the taxpayers federal taxable income, with certain modifications.
Recent changes have excused small businessesi.e., firms with a tax liability of $100 or less, and firms with total gross receipts everywhere of less than $150,000from paying the tax. Instead, these firms file an abbreviated information card. For everyone else, tax payments and tax reports are due to the Comptroller of Public Accounts on May 15 of each year. A report extension to November 15 is available for taxpayers that remit sufficient payment by May 15.
Franchise Tax Details
Corporations make two sets of tax calculations: one for their "net worth" (or taxable capital) tax base, and another for their "earned surplus" tax base. The results are then used to determine final tax liability.
Number of Taxpayers by Report Type
Tax Years 1992-99
Total 1992 265,420 36,088 111 301,619 1993 278,205 35,337 8,181 321,723 1994 288,498 38,045 9,498 336,041 1995 301,981 41,393 7,936 351,310 1996 319,390 43,660 8,632 371,682 1997 335,266 45,880 8,926 390,072 1998 352,543 48,284 9,441 410,268 1999 378,882 60,071 11,213 450,166
The "net worth" tax base is computed by summing the corporations stated capital and surplus. Stated capital is the par value of the firms outstanding shares of stock. Surplus is the remainder of the firms net worth. Net worth is defined as the firms total assets minus debts. For franchise tax purposes, debts must be time-certain, date-certain, and legally enforceable.
Firms apportion their total net worth tax base to Texas using a single-factor gross receipts computation. A tax rate of 0.25 percent is applied to the apportioned tax base to determine the tax on net worth.
The "earned surplus" tax base is calculated by summing the firms federal taxable income and any compensation paid to officers and directors excluded from federal taxable income. Deductions are allowed for certain foreign income and dividends received. Small corporations (i.e., those with 35 or fewer shareholders) are not required to include officer and director compensation in their earned surplus tax base.
Firms also apportion their earned surplus tax base to Texas using a single-factor gross receipts method. Non-unitary income must be allocated to Texas if the firms commercial domicile is in Texas. A Texas business loss carryover may be used to reduce apportioned earned surplus. The tax rate on earned surplus is 4.5 percent.
Number of Taxpayers
by Tax Liability Status
Tax Years 1992-99
No Tax Due Total 1992 138,803 162,816 301,619 1993 136,978 184,745 321,723 1994 141,471 194,570 336,041 1995 146,992 204,318 351,310 1996 153,412 218,270 371,682 1997 160,353 229,719 390,072 1998 168,455 241,813 410,268 1999 179,706 270,460 450,166
Taxpayers remit the higher of the two tax levies, minus any available credits. The tax report covers business done during the firms accounting year that ended in the prior calendar year. The tax privilege year is the calendar year containing the payment due date.
Tax Credit Overview
In 1999, the 76th Legislature adopted SB 441, which authorized a set of five franchise tax credits, including three economic development credits and two child-care credits. The economic development credits consist of a research credit, a job creation credit, and an investment credit. The child-care credits include a credit for employer-provided child care and a credit for donations to an accredited institution for before- and after-school care.
The research credit is available to firms conducting qualified research anywhere in the state. The credit is based on the taxpayers increase in research spending compared to a historical spending norm. The credit is patterned closely after the federal research credit.
The job creation and investment credits are available to firms that create jobs or make capital investments in Texas. These two credits are targeted credits: they are limited to taxpayers located in certain geographic regions of the state that are engaged in certain business activities. The counties in which the credits are available are collectively known as the "Strategic Investment Area." Companies engaged in manufacturing, warehousing, wholesale trade, computer services, and laboratory research are permitted the job and investment credits.
The two child-related credits are available statewide to taxpayers in any industry sector. The child-care credit is available to taxpayers that fund child care for children of employees, either through the establishment of an on-site child-care center, or through the purchase of employees child-care expenditures. The credit is equal to 50 percent of actual expenses, 90 percent of tax liability, or $50,000, whichever is least.
The after-school credit is available to taxpayers that donate funds to an accredited school for the purpose of funding a before- or after-school care program for school-age children. The credit is equal to the lesser of 30 percent of donations, or 50 percent of tax liability.
Research Credit Details
The research credit is a statewide credit that is available to firms conducting qualified research in Texas. The credit is based on the taxpayers increase in research spending compared to a established spending pattern. The Texas research credit closely follows the guidelines of the federal research credit.
For tax reports due through the end of 2001, the research credit will be equal to 4.0 percent of the qualified research expenses. For tax reports due in 2002 and after, the credit rate will increase to 5.0 percent of qualified research expenses.
Tax Liability and Number of Taxpayers
Tax Year 1999
Dollar amounts in thousands
Agriculture $ 14,447 0.7% 9,275 2.1% Mining 96,844 4.9 10,501 2.3 Construction 77,881 3.9 25,172 5.6 Manufacturing 487,611 24.5 22,189 4.9 Transportation & Utilities 297.174 14.9 12,614 2.8 Wholesale 199,002 10.0 27,926 6.2 Retail 171,823 8.6 45,325 10.1 FIRE 220,364 11.1 45,594 10.1 Services 254,564 12.8 91,572 20.3 Non Coded 169,168 8.5 159,998 35.5 Total $1,988,908 100.0% 450,166 100.0% Note: Percentages may not sum because of rounding
Taxpayers may receive a research credit bonus if their research is performed in an area of the state designated as part of the Strategic Investment Area (SIA). Research performed in the SIA will be multiplied by 1.5 for reports due in 2001, and by 2.0 for reports due in 2002 and after.
The research credit is limited to 25 percent of the firms tax liability for reports due in 2001 and to 50 percent of the firms tax liability for reports due in 2002 and after. Unused credits may be carried over for up to 20 years.
Job Creation and Investment Credit Details
The job creation and investment credits are available to all taxpayers that meet three criteria: a business activity test, a geographic test, and an economic activity threshold.
The business activity test requires that the taxpayer be primarily engaged in one of the following industries: manufacturing (SIC 2011-3999), warehousing (SIC 4221-4226), wholesale distribution (SIC 5012-5199), computer services (SIC 7371-7379), or research laboratories (SIC 8731). The geographic test prescribes that the taxpayer be located in the Strategic Investment Area. Finally, the economic activity threshold dictates that the taxpayer must create 10 new jobs annually to qualify for the job credit, or invest at least $500,000 annually to qualify for the job or investment credit.
The job credit is equal to 25 percent of the wages paid to new hires in their first year of employment. The investment credit is equal to 7.5 percent of the investments made during the year. Investment in depreciable tangible assets, excluding buildings and structures, will qualify for the credit.
The job creation and investment credits must be taken in five equal installments over a five-year period. Installments are discontinued if the taxpayers employment level falls after the credit is established or if the investments are scrapped or sold.
Each of these two credits is limited to 50 percent of the firms tax liability in the year the credits are claimed. Unused credits may be carried over for up to five years.
Overall Credit Limitations
The credits are available only for research conducted, jobs created, investments made, child care provided, or child-care funds donated on or after January 1, 2000. The sum of the research, job creation, and investment credits may not exceed 100 percent of the firms tax liability.
A taxpayer may not establish a job creation credit for wages paid for which a research credit is claimed. A taxpayer may not establish an investment credit for an investment on which an enterprise zone deduction is claimed under the Tax Code, Section 171.1015.
Strategic Investment Area Selection
An area of the state may qualify for inclusion in the SIA on any of three separate determinations.
First, all counties in the state that have an annual county unemployment rate higher than the statewide rate and an annual per-capita income lower than the state amount are included in the SIA. To merit inclusion in the SIA, a county must meet both criteria.
Second, all sub-county areas in the state that are designated as federal urban enterprise communities are included in the SIA. The remainder of the county would be excluded from the SIA unless it met the unemployment rate and per-capita income criteria.
Finally, all counties with a population of less than 50,000 are included in the SIA for limited purposes. Taxpayers located in a county having only a limited-purpose designation are eligible for credits only if the firm is engaged in agricultural processing (SIC 2011-2099, 2211, 2231, 3111-3199).
The Comptrollers Office is assigned the task of determining the composition of the SIA each September, and results are announced by October 1 of each year. The designation is valid for the subsequent calendar year.
Tax Credit Claims in 2000
For the vast majority of taxpayers, the credits can be claimed beginning with tax reports due on May 15, 2001. Companies that have had occasion to file a tax credit claim timely enough for inclusion in this report are few. Only two groups of firms could conceivably file a tax credit claim timely for inclusion in this reporti.e., a tax report due between January 1, 2000 and December 1, 2000.
First, companies that ceased business operations between January 1, 2000 and September 30, 2000 would have had a tax report due within the appropriate time period for inclusion in this report and also could have had creditable expenses. In reality, it is unlikely that a firm ceasing business operations would create jobs or make investments.
Number of Taxpayers
by Basis of Tax Payment
Tax Years 1992-99
Total 1992 96,763 204,856 301,619 1993 97,236 224,487 321,723 1994 100,192 235,849 336,041 1995 103,096 248,214 351,310 1996 107,615 264,067 371,682 1997 112,656 277,416 390,072 1998 120,326 289,942 410,268 1999 126,748 323,418 450,166
Second, firms that started a business between December 3, 1998 and September 3, 1999 would have had a tax report due within the appropriate time period for inclusion in this report, and they could have had creditable expenses as well. Firms in this category make up the bulk of the valid credit claims received to date.
As of the date of this report, the Comptrollers Office has received only a handful of tax credit claims. The small number of credit claims received represents an insufficient quantity for an accurate or meaningful analysis of the likely fiscal impact, geographical dispersion, or industry distribution of the credit claims.
Further, insufficient credit claims exist to allow a report of this information by geographic area or by industry distribution without revealing taxpayer data that is confidential by law. Because of the small number of credit claims, this report can provide no conclusions about credit amounts and distributions, or about the economic and fiscal impacts on the state.
Strategic Investment Area for 2001
One hundred fourteen (114) counties qualify for the full-purpose SIA designation based on their relative unemployment rate and per-capita income. This designation will permit certain corporations located in these counties to apply for job creation and investment credits as well as the research credit bonus.
Anderson Andrews Angelina Aransas Bailey Bee Bowie Brazoria Brooks Calhoun Cameron Camp Cass Cochran Coleman Cottle Crane Crockett Crosby Culberson Dawson Deaf Smith Dickens Dimmit Duval Eastland Ector Edwards El Paso Fannin Floyd Frio Gaines Galveston Garza Gray Gregg Grimes Hale Hall Hardeman Hardin Harrison Hidalgo Hockley Howard Hutchinson Jasper Jefferson Jim Hogg Jim Wells Kinney Kleberg Knox Lamar Lamb La Salle Leon Liberty McCulloch McMullen Marion Martin Matagorda Maverick Mitchell Morris Newton Nolan Nueces Orange Panola Pecos Polk Potter Presidio Reagan Red River Reeves Refugio Robertson Runnels Rusk Sabine San Augustine San Patricio San Saba Schleicher Scurry Shackelford Shelby Starr Stonewall Sutton Terry Titus Trinity Tyler Upshur Upton Uvalde Val Verde Waller Ward Webb Wharton Wichita Willacy Winkler Wood Yoakum Young Zapata Zavala
Sub-County Areas Included in the SIA
Five sub-county areas qualify for inclusion in the Strategic Investment Area because of their status as a federal urban enterprise community. Those five federal zones are found in the cities of Dallas, El Paso, Houston, San Antonio, and Waco.
Because El Paso county is included in the SIA based on its unemployment and per-capita income, the entire county is included in the SIA. Dallas, Harris, Bexar, and McLennan counties are included in the SIA only to the extent of the sub-county zone boundaries.
Limited Purpose SIA for Agricultural Processors
Another 106 counties qualify for the limited purpose SIA designation based on a county population of less than 50,000. Corporations engaged in agricultural processing in these counties can apply for the job creation and investment credits.
Archer Armstrong Atascosa Austin Bandera Baylor Blanco Borden Bosque Brewster Briscoe Brown Burleson Burnet Caldwell Callahan Carson Castro Chambers Cherokee Childress Clay Coke Collingsworth Colorado Comanche Concho Cooke Dallam Delta DeWitt Donley Erath Falls Fayette Fisher Foard Franklin Freestone Gillespie Glasscock Goliad Gonzales Hamilton Hansford Hartley Haskell Hemphill Hill Hood Hopkins Houston Hudspeth Irion Jack Jackson Jeff Davis Jones Karnes Kendall Kenedy Kent Kerr Kimble King Lampasas Lavaca Lee Limestone Lipscomb Live Oak Llano Loving Lynn Madison Mason Medina Menard Milam Mills Montague Moore Motley Navarro Ochiltree Oldham Palo Pinto Parmer Rains Real Roberts Rockwall San Jacinto Sherman Somervell Stephens Sterling Swisher Terrell Throckmorton Van Zandt Washington Wheeler Wilbarger Wilson Wise
Agricultural processing is defined as the manufacturing of food (SIC codes 2011-2099), cotton fabric (SIC 2211), wool fabric (SIC 2231), or leather products (SIC 3111-3199).