Texas Tax Guide for Startups
No personal income tax, 0.75% franchise tax, a $2.65M no-tax-due threshold, 6.25% sales tax, and why companies like Tesla and Hewlett Packard Enterprise have moved headquarters to Texas.
Updated October 2026 • 23 min read
Texas Tax Quick Facts
Personal Income Tax
Franchise Tax Rate
No-Tax-Due Threshold (2026-2027)
Base Sales Tax
Why Tech Companies Are Moving to Texas
The Texas Tech Boom
Texas has become a major destination for tech companies and relocations. Tesla moved its headquarters to Austin, Hewlett Packard Enterprise moved its headquarters to the Houston area, and many startups have opened significant operations in Austin, Dallas, and Houston.
Major Advantages
- • No personal income tax (0%!)
- • No corporate income tax
- • Low franchise tax (0.75% on margin)
- • $2.65M no-tax-due revenue threshold (2026-2027 reports)
- • Lower cost of living vs. CA/NY
- • Business-friendly regulatory environment
- • $125,000 business personal property tax exemption (from 2026)
- • Aggressive economic development incentives
Considerations
- • R&D credit only offsets franchise tax (no income tax to offset)
- • Higher property taxes than CA
- • Sales tax on SaaS/data processing and some other services
- • Less venture capital than CA/NY
- • Smaller talent pool (growing fast)
- • Must still pay CA taxes if have CA nexus
The Tax Savings Story
Example: Founder earning $300K/year in salary moves from California to Texas (2025 rates, single filer, approximate):
Texas Franchise Tax (Margin Tax)
0.75% on Taxable Margin
Texas doesn't have corporate income tax, but it does have a "franchise tax" (also called margin tax). It's 0.75% of taxable margin for most businesses (0.375% for retail/wholesale). Entities with total revenue at or below $2.65M (2026-2027 reports; $2.47M for 2024-2025) owe no franchise tax.
Who Pays Franchise Tax?
No Franchise Tax Report Required
- • Revenue at or below $2.65M (2026-2027 reports): no tax due, but file a Public Information Report or Ownership Information Report instead
- • Sole proprietorships (not subject to franchise tax)
- • General partnerships owned entirely by natural persons (not subject)
- • Qualifying passive entities (not subject; no PIR/OIR required)
Most early startups owe $0 (but still file a PIR/OIR)
Must File a Franchise Tax Report (If Revenue > $2.65M)
- • Corporations (C-corp, S-corp)
- • LLCs
- • Limited partnerships
- • Professional associations
- • Business trusts
Franchise Tax Rates
| Business Type | Rate |
|---|---|
| Most businesses | 0.75% |
| Retail/wholesale | 0.375% |
| Revenue at or below $2.65M (2026-2027 reports) | $0 (no tax due) |
| Revenue up to $20M (optional EZ computation) | 0.331% of apportioned revenue, no deductions |
How Margin is Calculated
"Taxable margin" isn't profit. Unless you elect the EZ computation, it's the lowest of four amounts, so you effectively choose the method that gives you the lowest tax:
1. Total Revenue - COGS
Cost of goods sold deduction (best for product companies)
2. Total Revenue - Compensation
Deduct wages and benefits, capped at $480K per person for 2026-2027 reports (often best for service/SaaS)
3. Total Revenue × 70%
Simple calculation, no deductions needed
4. Total Revenue - $1M
Flat $1M deduction, available to any taxable entity (separate from the EZ computation)
Calculation Examples
Example 1: SaaS Startup ($3M revenue, $2M compensation, all Texas receipts)
Method 2: Revenue - Compensation (lowest here; EZ computation would be $9,930)
Example 2: Early Startup ($800K revenue)
No franchise tax report required at or below $2.65M; file a PIR or OIR by May 15
Example 3: Growing Startup ($5M revenue, all Texas receipts)
EZ Computation (revenue up to $20M; $1M-deduction method would be $30,000)
No Personal Income Tax
0% State Income Tax on Personal Income
Texas is one of nine states with no broad-based personal income tax on wages. This is the single biggest reason founders and employees relocate from high-tax states.
What This Means
- • No state tax on salary or wages
- • No state tax on capital gains (stock sales)
- • No state tax on stock option exercises
- • No state tax on QSBS gains (federal exclusion applies up to its cap)
- • No state tax on investment income
- • Texas constitution prohibits a personal income tax
Tax Savings Comparison
$150K Salary (2025, single, approx.)
$300K Salary (2025, single, approx.)
$10M QSBS Stock Exit (within federal cap)
Constitutional Protection
In 2019, Texas voters approved a constitutional amendment (Proposition 4) prohibiting a state personal income tax. Reversing it would require another constitutional amendment approved by voters, which provides long-term certainty.
Texas Sales and Use Tax
6.25% State Rate + Local
Texas has a 6.25% state sales tax, with localities adding up to 2% more. Total rates range from 6.25% to 8.25%.
Sales Tax by Major City
| City | Total Rate | Breakdown |
|---|---|---|
| Austin | 8.25% | 6.25% state + 2% local |
| Dallas | 8.25% | 6.25% state + 2% local |
| Houston | 8.25% | 6.25% state + 2% local |
| San Antonio | 8.25% | 6.25% state + 2% local |
What's Taxable for SaaS?
Generally Not Taxable
- • 20% of each data processing / SaaS charge (statutory exemption)
- • Most professional services (legal, accounting, consulting)
- • Items bought for resale (with a resale certificate)
- • Sales delivered to customers outside Texas
Note: Texas is not SaaS-exempt. SaaS is generally taxed as a data processing service on 80% of the charge
Generally Taxable
- • SaaS / cloud software (6.25% + local on 80% of the charge)
- • Data processing and information services (80% of the charge)
- • Downloaded and packaged software
- • Tangible personal property
Relocating from California to Texas
The Great Tech Migration
Many tech workers and companies have relocated from California to Texas in recent years, including Tesla (Austin) and Hewlett Packard Enterprise (Houston area).
Tax Savings Breakdown
Hypothetical: Startup with 10 employees relocating CA → TX (approximate, 2025 rates)
California Annual Costs
Texas Annual Costs
Savings depend on income, salaries, and revenue. A company that keeps CA customers or employees may still owe CA franchise tax on CA-apportioned income after moving.
How to Establish TX Residency
Requirements to Leave CA Tax Jurisdiction
California aggressively audits people claiming to move. You must truly relocate, not just claim TX residency:
- • Physically move to Texas (spend majority of time there)
- • Get TX driver's license within 90 days
- • Register to vote in Texas
- • Claim a Texas homestead exemption if you buy a home
- • Update all professional licenses to TX
- • Move bank accounts, credit cards to TX addresses
- • Join TX clubs, organizations (establish ties)
- • Move valuable property (cars, boats) to TX
- • Keep detailed records of time spent in each state
Warning: CA Will Audit High-Earners
California's Franchise Tax Board aggressively audits high-income individuals claiming to move out of state. They look at cell phone records, credit card statements, social media, and more. Document everything and truly relocate. Don't just pretend.
Texas Economic Development Incentives
Business-Friendly Incentive Programs
Texas offers a range of incentives to attract and retain businesses, especially in tech and manufacturing.
Texas Enterprise Fund
Deal-closing cash grants for projects creating significant jobs in Texas, typically where Texas competes with other states.
- • Negotiable based on job creation
- • Can be $millions for large projects
- • Requires maintaining employment levels
JETI Program (successor to Chapter 313)
Chapter 313 school property tax limitations expired December 31, 2022 (existing agreements continue). The Jobs, Energy, Technology and Innovation (JETI) Act, created by HB 5 in 2023, now offers school property tax incentives for qualifying large projects.
Skills Development Fund
Grants for employee training programs. Tech companies can get funding to train new hires.
Research & Development Franchise Tax Credit
SB 2206 (2025) replaced the old R&D credit effective January 1, 2026: 8.722% of QREs above 50% of the prior three-year average (10.903% for research with Texas higher-education institutions; lower rates with no prior QREs), capped at 50% of franchise tax due with a 20-year carryforward. The R&D sales tax exemption for equipment was repealed as of January 1, 2026.
Texas Nexus Rules
When You Have Texas Tax Obligations
Understanding nexus is critical. You may owe TX taxes even if not based in Texas.
Franchise Tax Nexus
- • Incorporated or organized in Texas
- • Doing business in Texas through physical presence
- • Economic nexus: $500K+ in gross receipts from Texas sources (tax is apportioned by TX receipts)
Sales Tax Economic Nexus
Annual TX sales threshold
Remote sellers with $500K+ in TX revenue over the previous 12 calendar months must register and collect TX sales tax, even with no physical presence.
Texas Filing Requirements
Franchise Tax Report
Form 05-158 (Long Form) or 05-169 (EZ Computation): Texas Franchise Tax Report
Who Files:
- • Taxable entities with revenue above $2.65M (2026-2027 reports)
- • Even if owe $0 tax after deductions
Deadline:
- • May 15 annually
- • Generally based on the accounting year ending in the prior calendar year
- • Extension available (Form 05-164)
Annual Report (Separate from Tax)
Public Information Report (PIR, Form 05-102) or Ownership Information Report (OIR, Form 05-167): Filed with Texas Comptroller
- • Due: May 15 annually
- • Reports officers, directors, managers, registered agent (PIR) or owners (OIR)
- • Required even at or below the no-tax-due threshold (No Tax Due Report discontinued from 2024)
- • No fee, but required for compliance
Common Texas Tax Mistakes
Mistake #1: Thinking "No Income Tax" = "No Taxes"
Texas has NO personal income tax, but does have franchise tax, sales tax, and property tax.
Solution: Understand all TX tax obligations. Still much lower than CA overall.
Mistake #2: Not Filing Franchise Tax (Thinking You're Exempt)
If revenue exceeds $2.65M, you must file a franchise tax report even if you owe $0 after deductions. Below the threshold you still must file a PIR or OIR, or risk forfeiting your right to do business.
Solution: File the annual report every May 15. Over the threshold, compare the EZ computation with the margin methods.
Mistake #3: Incomplete CA Exit (Still Paying CA Taxes)
Claiming TX residency but not truly relocating. CA audits and proves you still live in CA.
Solution: Truly relocate. Document everything. Minimize and log CA days (CA has no safe-harbor day count).
Mistake #4: Using Wrong Margin Calculation
Not comparing all four margin calculation methods, which could lead to overpay significantly.
Solution: Calculate all four methods (and the EZ computation if eligible) annually. The compensation method often wins for SaaS.
When to Hire Professional Help
Need Help If:
- ✓ Revenue over $2.65M (franchise tax report)
- ✓ Relocating from high-tax state (CA, NY)
- ✓ Multi-state operations
- ✓ Complex margin calculations
- ✓ Significant property holdings (property tax)
DIY Might Work If:
- ✓ Revenue at or below $2.65M (no tax due; PIR/OIR only)
- ✓ TX-only operations (no multi-state)
- ✓ Simple business structure
- ✓ No relocation tax issues
Illustrative Scenario: SaaS Company Relocates to Austin
What Changes When a Team Moves from SF to Austin
Hypothetical example: 15-person SaaS company, $5M revenue, profitable (not a client result)
Year 1 Costs (Before Move - SF)
Year 1 Costs (After Move - Austin)
Multi-Year Impact
Keep in mind: Employees who stay in California still owe CA income tax, and the company may still owe CA franchise tax on CA-apportioned sales. Cost-of-living and recruiting effects vary by team.
Frequently Asked Questions
Does Texas really have no income tax?
Yes! Texas has NO personal income tax. It's protected by the state constitution. No tax on salary, capital gains, stock options, or any personal income. This is the biggest draw for relocating founders.
What is Texas franchise tax?
0.75% tax on "taxable margin" (0.375% for retail/wholesale), or 0.331% of revenue under the optional EZ computation for revenue up to $20M. No tax is due if revenue is at or below $2.65M (2026-2027 reports). Unlike CA's 8.84% tax, it is not an income tax, so it can apply even to unprofitable companies above the threshold.
Can I avoid CA taxes by moving to Texas?
Yes, but you must TRULY relocate. CA audits high-earners aggressively. Spend majority of time in TX, get TX driver's license, register to vote, move valuable property. Keep detailed records. Just claiming TX residency without relocating won't work.
Is SaaS subject to Texas sales tax?
Yes. Texas generally treats SaaS as a taxable data processing service: 20% of the charge is exempt, so sales tax (6.25% state plus up to 2% local) applies to 80% of the charge. Downloaded and packaged software is also taxable.
Does Texas offer R&D tax credits?
Yes. Texas offers a franchise tax R&D credit, reworked by SB 2206 for reports from 2026: 8.722% of QREs above 50% of the prior three-year average, capped at 50% of franchise tax due. You can also claim the federal R&D credit (and, for qualified small businesses, apply up to $500K/year against payroll taxes).
What if my revenue is at or below $2.65M?
You owe no franchise tax and, starting with 2024 reports, no longer file a No Tax Due Report, but you must still file a Public Information Report or Ownership Information Report by May 15. Once above $2.65M (2026-2027 reports), you must file a franchise tax report and calculate the tax.
Are property taxes high in Texas?
Yes. Texas effective property tax rates are among the highest in the US and well above California's, where Proposition 13 limits assessments. Home prices are often lower in TX, and for many high earners the income tax savings outweigh higher property taxes, but run your own numbers.
Should I incorporate in Texas or Delaware?
For VC-backed startups, still incorporate in Delaware (investors prefer it). You'll qualify as foreign corporation in TX but benefit from DE legal framework. If bootstrapped TX-only business, incorporating in TX is fine.
Considering Moving to Texas?
Our tax specialists help startups relocate from high-tax states to Texas, ensuring clean exit from CA/NY tax jurisdiction and proper TX compliance setup.
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