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  1. #1

    Texas Franchise Tax

    Hey guys,

    I have a Canadian incorporation and I'm renting a server from SoftLayer. Am I subject to pay the Texas Franchise Tax?

    Before you answer a quick no, please have a look at some of the documents and what it is.

    Here's one good read I found about it http://www.gtlaw.com/pub/Alerts/2006/0601.pdf also http://window.state.tx.us/taxinfo/fr...t_revised.html
    Last edited by megamx; 02-01-2008 at 10:19 PM.

  2. #2
    Having read those links it seems you should pay it, but I know Sl don't charge it to european companys.

    I'd suggest asking them and see what response you get.
    Last edited by DATARTIM; 02-02-2008 at 12:20 AM.
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  3. #3
    Well that implies 1% of your REVENUE not rental cost. So if my incorporation is making $1 million technically I have to pay texas $10,000 for the privilege of doing business in their state.

  4. #4
    That would seem to be the case, however I see it very unlikely that renting a server from a company in texas means you should pay a percentage of your overall revenue ?

    Customers of SL are leasing a server on a monthly basis where each month is a new contract effectively.

    If that is the extent of you "doing business" in texas, then I doubt any tax applies.

    As if it did you might as well just take a percentage of the planet and softlayers customer base away.
    Last edited by DATARTIM; 02-02-2008 at 12:33 AM. Reason: sp
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  5. #5
    Right, what I'm worried about is that 5 years down the line the state will come after me (in Canada) and demand a large sum of money for unpaid taxes.

  6. #6
    Anybody else have any thoughts on this? Technically everybody here who's incorporated and has a server in texas would seem would have to pay this.

  7. #7
    Join Date
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    I'm not sure what exactly to make of this. My quick glancing through this isn't it more for companies who are selling something in Texas to actual people in Texas? So more along the lines of retail sales from a company?

    Of course if I am wrong what exactly would they do to a company in another country? Go to SoftLayer and shut down your servers?
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  8. #8
    There is a treaty between Canada and the US so they could easily file a law suite. Also, this would technically affect everyone who's not in Texas but is renting from SoftLayer, not just companies outside of texas.

  9. #9
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    No, you don't have to pay that.

    Renting a server located in Texas will not qualify as "doing business" in Texas for you.

    Also, you'd only have to pay if your revenues you're reporting are greater than $100,000 for the year, which I'm guessing isn't the case.
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  10. #10
    Quote Originally Posted by Lightwave View Post
    No, you don't have to pay that.

    Renting a server located in Texas will not qualify as "doing business" in Texas for you.

    Also, you'd only have to pay if your revenues you're reporting are greater than $100,000 for the year, which I'm guessing isn't the case.
    renting a server in Texas certainly qualifies as doing business in Texas.

    many businesses do more then $100k in annual revenue - and this legislation can be of concern to alot of companies who host out of texas (as we do).

    However, there is alot of gray area here. First off, the number isnt $100k - the number is $300k. Secondly, this legislation isnt new - the positioning of it is.

    here is the most relevant section:

    page 3 paragraph 3
    Businesses with no more then $300,000 in total revenue, indexed for inflation, are exempt from the tax, as are businesses that owe less then $1,000 in taxes.

    paragraph 4
    The revised franchise tax is computed by determining a taxable entity's total revenue. From this amount, the entity will choose to deduct either its cost of goods sold or total compensation, upto $300,000 per employee, indexed for inflation.
    This really is a target for larger corporations. However, there are complexities here. A massive company may only be using those services in texas for internal, non revenue generating projects - and may not be deriving any money what so ever from their presence in Texas. There is also come confusion around companies with multiple locations and multiple registered businesses (we fall under that definition by the way). This can become very complicated very quickly. There are inbuilt loopholes for each employee, there are circumstances where having contractors vs employees is more beneficial.

    End of the day, these sorts of tax concerns exist pretty much anywhere. A company is constantly required to change its structure and its methods of operating in order to achieve more favourable tax positions. The average person hosting in Texas does not need to worry about this. However, mid to large sized hosting providers with infrastructure in Texas certainly need to plan for this - but, this is nothing new. Large end user businesses hosting in Texas also need to plan for this - but, this is nothing new to companies earning more then $300k per annum. This sort of planning exists regardless of where and how you are operating a business of this size or larger.

    Quote Originally Posted by megamx View Post
    Well that implies 1% of your REVENUE not rental cost. So if my incorporation is making $1 million technically I have to pay texas $10,000 for the privilege of doing business in their state.
    this is not an accurate picture of things.

    page 3 paragraph 4
    The business then will apportion to Texas the amount of revenue from business done in the state and will subtract any other allowable deducations to determine the entity's taxable margin
    So, if you were a business generating $1M in revenue, but had 3 employees for example, your taxable margin would be $100k and you would need to pay $1000 in Texas taxes. Actually pretty cheap when you consider some of the tax laws that exist in other states or in Canada for example. (and by the way, you can then write off that $1000 in Canada against your corporate taxes here as a legitimate business expense - meaning, you get that money back anyway)
    Last edited by cartika-andrew; 02-04-2008 at 04:34 PM.

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