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Definition of Franchise Tax

Franchise Tax

What is a Franchise Tax?

A franchise tax is a levy charged by some states in America. The franchise tax is placed on corporations that possess a filing obligation with the underlying states in which they operate.

The primary and common feature of a state’s franchise tax is that the levies is not calculated, deliver, nor based on the income of the paying corporation or franchise.

Instead of income, the franchise tax calculation is established based on the “net worth” of the responsible franchise. This calculation, meaning the level of taxation, is based on the number of shares the franchise issues to the general public. In some cases; however, the amount of the franchise’s assets can also be used to determine the franchise tax calculation.

The purpose of the franchise tax is to raise revenue for the state in which the franchise or corporation operates out of.

The presence and corresponding rate attached to the franchise tax is dependent on the individual state. For instance, the state of Delaware has a significant franchise tax, while other regions or states, such as Nevada, possess no franchise tax or a mitigated one.

In most cases, states with higher corporate income taxes typically have decreased franchise taxes and vice versa. This relationship can be observed in the case of Delaware, who has no corporate income tax for companies that are listed as operating within the boundaries of the state. Although no corporate income tax is present, the state of Delaware places a substantial tax to those businesses who operate outside of the state.

NEXT: What to Know About US Sales Tax

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