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Ezel / Tax Rulings / TX
TX 9702416L Franchise Tax (PRIOR TO 01/01/2008) 1997-02-25

Did forming a Texas corporation create former franchise-tax liability even before considering its business activity?

Short answer: Yes. Section 171.001 subjected a Texas-chartered corporation to the former franchise tax. The corporation calculated taxable capital and earned surplus, apportioned each, and paid the greater amount at the historical rates. If the result was below $100, no tax was due but a report still had to be filed.

Apply this to your situation

This page answers the general question as of 1997. Ezel answers yours, under current Texas tax law, with citations.

Currency note: this ruling is from 1997
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Texas Comptroller of Public Accounts letter published on the State Tax Automated Research (STAR) system. Letters on STAR can be the basis of a detrimental reliance claim only for the taxpayer to whom the letter was directly issued (see 34 Tex. Admin. Code Rules 3.1 and 3.10); documents on STAR may no longer represent current policy even if not marked superseded. This 1997 response uses historical taxable-capital and earned-surplus components, tax rates, and a $100 no-tax-due threshold. It is not current margin-tax filing guidance. Confirm current law and forms. Taxpayer-identifying details are redacted. This summary is informational only and is not legal or tax advice. Consult a licensed Texas tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A Texas charter by itself placed the new corporation under the former franchise tax.

Section 171.001 imposed the tax on corporations doing business in Texas or chartered or authorized there. Because the requester planned to form a Texas corporation, the Comptroller said it would be liable.

Under the 1997 system, taxable capital measured corporate equity and earned surplus began with federal taxable income with modifications. Each component was apportioned and taxed at the historical rates of 0.25% and 4.5%, and the corporation paid the greater amount.

If the calculated tax was less than $100, no tax was due, but a franchise-tax report still had to be filed.

What this means for you

New Texas corporations reviewing historical obligations

The charter created tax status even before any separate nexus-by-activity analysis.

Tax professionals

Treat the rates, threshold, and two-component structure as historical rather than current margin-tax mechanics.

Common questions

Q: Did the Texas charter create liability?
A: Yes.

Q: Which component did the corporation pay?
A: The greater of taxable capital and earned surplus.

Q: Was a report required below $100?
A: Yes.

Citations and references

  • Texas Tax Code Sec. 171.001

Source

Original ruling text

February 25, 1997

Dear ***:

Thank you for your letter dated February 11, 1997 regarding the state tax
responsibilities of your soon to be formed corporation.

Section 171.001 of the Texas Tax Code imposes a franchise tax on "each
corporation that does business in this state or that is chartered or authorized
to do business in this state." Because you are forming a Texas corporation,
you will be liable for the Texas franchise tax.

The franchise tax consists of two components: Taxable Capital and Earned
Surplus. The taxable capital component is based on the equity (i.e. assets
minus debts) of the corporation. The earned surplus component is based on
federal taxable income with modifications. Both components are apportioned and
multiplied by the appropriate tax rates (.25% for taxable capital and 4.5% for
earned surplus). A corporation will pay the greater of the two taxes. If the
calculated tax due is less than $100, no tax is due, but a franchise tax report
must be filed.

I have mailed to you, under a separate cover, copies of certain tax
publications regarding your new business

If you have any questions about this or any other franchise tax matters, please
call me at
1-800-531-5441, extension 34612. My direct number is (512) 463-4612.

Sincerely,

Janet Spies
Tax Policy Division

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