Were S corporations subject to the former Texas franchise tax?

Plain-English summary

S-corporation status did not exempt a corporation from the former Texas franchise tax.

Texas imposed the tax on each corporation that did business in Texas or was chartered or authorized to do business there. The Comptroller therefore said the taxpayer was liable even though it was an S corporation.

The letter explained that 1991 legislation had added an income-sensitive component for reports originally due on or after January 1, 1992. A bill filed in 1993 would have removed S corporations from the tax, but it did not pass.

For this taxpayer, the penalty on its 1997 report would be waived once the interest due was paid.

What this means for you

S corporations reviewing historical Texas obligations

Federal S-corporation treatment did not by itself remove a corporation from the former Texas franchise tax.

Tax professionals

Treat the penalty statement as taxpayer-specific correspondence, not as a generally available waiver.

Common questions

Q: Did S-corporation status create an exemption?
A: No.

Q: Had the Legislature considered an exemption?
A: Yes, but the cited 1993 bill did not pass.

Q: Was the taxpayer's penalty waived automatically?
A: No. The letter conditioned the waiver on payment of the interest due.

Citations and references

• Texas House Bill 11, 72nd Legislature, First Called Session (1991)
• Texas House Bill 302 (1993, not enacted)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9709268L

Original ruling text

September 10, 1997

Dear Mr. **:

Thank you for your recent letter about the franchise tax liability of your
company.

The franchise tax is imposed on each corporation, including an S corporation,
that does business in Texas or that is chartered or authorized to do business
in Texas. Because COMPANY A is a corporation, it is liable for the Texas
franchise tax. I have enclosed a copy of our franchise tax brochure for your
information.

The franchise tax law was changed by the Legislature during 1991, effective for
reports originally due on or after January 1, 1992. The major change was the
expansion of the tax base to include an income-sensitive component.

The bill was HB 11, sponsored by Representative James Hury, passed during the
First Called Session of the 72nd Legislature in 1991. There is not an
"official title" of the bill. The bill caption, which describes the bill,
reads as follows:

An Act relating to raising revenue for the operation of state and local
government; to the imposition, application, rates, collection, and
administration of various fees and taxes and to the allocation of revenue from
fees and taxes; to liability for the costs of certain state and local services;
providing penalties; making appropriations.

HB 302, filed in the 1993 legislative session, would have amended the franchise
tax so that it would no longer apply to an S corporation, but the bill did not
pass.

Penalty on your 1997 report will be waived once interest due on the report is
paid. You will receive additional correspondence in the near future from our
Revenue Accounting Division about your waiver request.

If you have additional franchise tax questions, please call Teresa Comer,
supervisor of our franchise tax policy section, at 1-800-531-5441, extension
3-3958.

Sincerely,

JOHN SHARP
Comptroller of Public Accounts

Enclosure

cc: Teresa Comer