Quick overview
State franchise and gross receipts taxes are state-level levies that operate differently from federal income tax. Franchise taxes typically charge for the privilege of operating or incorporating in a state; gross receipts-style taxes (often called commercial activity taxes, B&O taxes, or commerce taxes) tax total revenue rather than net income. Because each state sets its own rules, the same business can owe little or nothing in one state and face a sizeable bill in another (see the state examples and authoritative links below).
Sources: IRS (business taxes overview), National Conference of State Legislatures (NCSL) state tax guides, and individual state tax agencies (e.g., California Franchise Tax Board, Texas Comptroller, Washington Department of Revenue).
Why this matters
These taxes can affect cash flow and margins. Unlike income tax, gross receipts taxes apply before expenses, so low-margin businesses and startups often feel a heavier burden. Franchise taxes can be fixed minimums that hit small corporations or LLCs even in loss years. Planning for them early prevents surprise liabilities, penalties, and interest.
How franchise and gross receipts taxes work
- Franchise tax: A fee for the privilege of doing business or being incorporated in a state. States use different bases: net worth, capital stock, taxable income, or a flat minimum fee. For example, many states charge a minimum annual franchise tax to corporations and some LLCs.
- Gross receipts tax (or similar): A tax on the total revenue of a business, often applied with industry-specific rates or classifications. These taxes ignore deductions for cost of goods sold, wages, or capital expenses, so they hit businesses with thin profit margins harder.
Tax triggers to watch for
- Nexus: Whether the business has sufficient contacts with the state to create tax duties (see our internal guide on business nexus). A physical presence, employees, property, or substantial sales into the state can create nexus. (See: “Business Nexus Explained: When States Can Tax Your Activities” on FinHelp: https://finhelp.io/glossary/business-nexus-explained-when-states-can-tax-your-activities/)
- Entity type: C corporations, S corporations, LLCs, partnerships, and disregarded entities can be treated differently. Some states tax LLCs as corporations or impose separate LLC fees.
- Revenue thresholds: Many gross receipts-style taxes assess only after a revenue floor (for example, some states exclude very small businesses).
- Apportionment and filing rules: Multistate businesses use apportionment formulas to determine taxable amounts in each state. See our guide on multistate compliance for remote workers and contractors for related filing challenges: https://finhelp.io/glossary/multistate-tax-compliance-for-remote-employees-and-contractors/
Real-world state examples (illustrative — check current state pages)
- California: Historically, most corporations and many LLCs pay an annual minimum franchise tax (commonly $800) even in low-income years; special rules and temporary relief can apply, so confirm current guidance with the California Franchise Tax Board (https://www.ftb.ca.gov/).
- Washington: Uses a Business & Occupation (B&O) tax — a gross receipts–style tax — with multiple rate classes and no deduction for most business expenses (Washington Department of Revenue: https://dor.wa.gov/).
- Nevada: Imposes a Commerce Tax on gross revenue for businesses with Nevada gross revenue above a state threshold (Nevada Department of Taxation: https://tax.nv.gov/). Small businesses under the threshold are exempt.
- Ohio: Uses the Commercial Activity Tax (CAT), a gross-receipts–style tax with a relatively low rate applied to gross receipts above an exemption level (Ohio Department of Taxation: https://tax.ohio.gov/).
- Texas: Important correction — Texas imposes a franchise tax (commonly called the margin tax), not a statewide gross receipts tax; it is computed on a business’s margin with specific deduction and rate rules (Texas Comptroller: https://comptroller.texas.gov/).
Because state tax rules change, always verify rates, thresholds, and relief provisions directly with state tax authorities or through updated state summaries (NCSL: https://www.ncsl.org/).
Who is affected
- Corporations: Most states subject corporations to franchise tax or similar filing obligations. Some also exempt small or newly formed corporations temporarily.
- Partnerships and LLCs: These entities may face entity-level fees or franchise taxes depending on state rules and classification for state tax purposes.
- Single-owner and pass-through entities: Even if income flows to owners’ personal returns, the business may still face state entity-level taxes.
- Multistate businesses and remote providers: Businesses operating in multiple states must determine nexus and apportion revenue to each state.
In my practice as a CPA and financial strategist, I repeatedly see small businesses overlook state-level entity taxes when expanding sales or hiring remote employees. That surprise bill often comes with penalties.
Common filing pitfalls and mistakes
- Confusing franchise taxes with income tax: Franchise or gross receipts taxes are separate obligations and often require separate state returns.
- Assuming no tax because the company showed a loss: Minimum franchise fees or gross receipts taxes may still apply regardless of profitability.
- Ignoring multistate filing thresholds: Remote sales, employees, or property can trigger nexus and filing needs in unexpected states.
- Missing local or city-level gross receipts taxes: Some cities or counties impose their own gross receipts or business privilege taxes in addition to state taxes.
Practical planning and compliance tips
- Review nexus and revenue thresholds before expanding sales or adding remote staff. Use your accounting system to track state-by-state revenue and employee locations.
- Incorporate tax forecasts into cash-flow models. Gross receipts taxes can be due quarterly and may require estimated payments.
- Consider entity structure reviews. In some situations, changing how an entity is organized or where it’s registered reduces duplicative filings or exposure; this should be evaluated with a tax advisor and lawyer to avoid other tax or legal consequences.
- Use apportionment planning legitimately. Where allowed, apportionment planning can shift taxable receipts between states — document business purpose and be conservative.
- File and pay on time. States commonly assess penalties and interest for late filings or payments.
- Keep written evidence of business activity and nexus determinations. If a state audits nexus or tax calculations, contemporaneous records help your case.
Example scenarios
- Startup SaaS company selling nationwide: Even with minimal physical presence, significant in-state sales and employees may create nexus and require annual filings in several states. Many SaaS companies face B&O–style taxes in states that view receipts from services as taxable.
- Brick-and-mortar retailer opening a new location: The physical location immediately creates nexus for franchise or gross receipts liabilities; local gross receipts taxes or business license taxes may also apply.
FAQs (short answers)
- Do I pay franchise and gross receipts taxes instead of income tax? No — these are separate. You might owe both a state income tax and an entity-level franchise or gross receipts tax in some states.
- Can these taxes be deducted on my federal return? Generally, state business taxes that are ordinary and necessary may be deductible as business expenses on federal returns; confirm with your tax preparer and the IRS guidance (https://www.irs.gov/).
- What happens if I miss a payment? States typically charge penalties and interest and may assess additional enforcement actions. File promptly and consider voluntary disclosure programs if you discover prior noncompliance.
Where to look for authoritative guidance
- IRS — Business Taxes: https://www.irs.gov/businesses
- NCSL — Summaries of state business taxes: https://www.ncsl.org/
- California Franchise Tax Board: https://www.ftb.ca.gov/
- Texas Comptroller (franchise/margin tax): https://comptroller.texas.gov/
- Washington Department of Revenue (B&O tax): https://dor.wa.gov/
- Ohio Department of Taxation (CAT): https://tax.ohio.gov/
Related FinHelp articles
- Franchise Tax (FinHelp glossary): “Franchise Tax” — https://finhelp.io/glossary/franchise-tax/
- Business nexus and multistate obligations: “Business Nexus Explained: When States Can Tax Your Activities” — https://finhelp.io/glossary/business-nexus-explained-when-states-can-tax-your-activities/
- Multistate compliance for remote workers: “Multistate Tax Compliance for Remote Employees and Contractors” — https://finhelp.io/glossary/multistate-tax-compliance-for-remote-employees-and-contractors/
Professional disclaimer
This article explains general rules and common planning ideas and is for educational purposes only. It does not replace tailored tax advice. State tax rules and rates change; consult a licensed CPA or state tax attorney and the relevant state tax agency for decisions affecting your business.
Author: FinHelp editorial team (senior financial content editor)
Last reviewed: 2025
Sources: IRS; NCSL; California Franchise Tax Board; Texas Comptroller; Washington Department of Revenue; Ohio Department of Taxation.
