Franchise Tax Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Franchise Tax, written in plain English, along with examples of how it is used.
What is Franchise Tax?
(n) Franchise Tax is the tax or levy charged from a person or entity for granting of a particular right to do a business or commercial operation as per a special sanction or authority to do such business.
History and Meaning of Franchise Tax
Franchise tax is a tax levied by some states on businesses for the privilege of operating within that state. The tax is usually based on a percentage of the company's income or net worth. It is not related to the franchise that most people associate with the term, such as Subway or McDonald's restaurants.
The idea of a franchise tax has been around since the early 1900s, but it was not widely used until later in the century. Some states use the franchise tax as their primary source of revenue, while others use it to supplement other taxes.
Examples of Franchise Tax
Company A operates in State X and is subject to the state's franchise tax. The company's tax liability is based on its net worth, which is calculated by subtracting liabilities from assets.
In State Y, businesses must pay a franchise tax based on the amount of capital they have invested in the state. Company B invested $1 million in the state and must pay a franchise tax of 0.1% on that amount, or $1,000.
If Company C operates in both States X and Y, it must pay franchise tax in each state. However, the tax rate and calculation methods may differ between the two states.
- Income Tax - a tax on the income earned by an individual or business.
- Sales Tax - a tax on the sale of goods and services.
- Property Tax - a tax on the value of real estate or personal property.
- Capital Gains Tax - a tax on the profits earned from the sale of an asset.
- Excise Tax - a tax on specific goods and services, such as tobacco or gasoline.