The franchise tax is a kind of tax that is imposed by state law on businesses or corporations chartered within that state. The states charge this tax for the right of the business or corporation to exist as a legal entity and to do business within a particular state.
In American Family Mut. Ins. Co. v. Department of Revenue, 222 Wis. 2d 650, the Supreme Court of Wisconsin held that “A state franchise tax is a charge made by the state against a corporation for the privilege of doing business in the state, and the items included in calculating the franchise tax are used to measure the value of that privilege.”
Franchise tax is implemented in 13 states and Washington D.C. on most or all businesses that operate or are registered in the state (not just franchises). The tax is not the same as the income taxes owed by the business and must be paid no matter if the business makes a profit. The amount and calculation of the tax comes in many different forms such as a small flat-rate tax, a percentage of gross receipts, or even a percentage of the business net worth. The businesses subject to the tax vary as well. Some states only use the tax on small businesses while others use the tax on large corporations as well. If a business operates in multiple states, it is possible that they may be subject to more than one franchise tax.
The tax is typically a flat fee or based on the net worth of the taxpaying entity (as a percentage), rather than on income (as in the case of the income tax).
[Last updated in May of 2022 by the Wex Definitions Team]