Franchise and Excise Tax: What Business Owners Need to Know

Income tax. Sales tax. Franchise tax. Excise tax. If you own a business, you’ve probably heard all of these terms—but they don’t all mean the same thing.

Understanding the differences can help you stay compliant, avoid unexpected tax bills, and better understand your business’s tax responsibilities.

Income Tax vs. Sales Tax

Let’s start with the two taxes most business owners are likely familiar with: income tax and sales tax.

Income tax is generally based on your taxable income or profit. Depending on your business structure, that income may be reported on your personal tax return, your business tax return, or both. Federal income taxes are paid to the IRS, and many states also impose their own income tax.

Sales tax works very differently. Sales tax is not based on your business’s profit. Instead, it is generally collected from customers when you sell taxable products or services.

That money is collected on behalf of the state, so it is not business income. Depending on the state and the amount of sales tax collected, businesses may file sales tax returns monthly, quarterly, or annually.

What Are Franchise and Excise Taxes?

Franchise and excise taxes are generally state-level business taxes, but the rules can vary significantly from one state to another. Some states may call them franchise taxes, excise taxes, privilege taxes, or something else entirely.

It’s also important to understand that franchise tax and excise tax are two separate types of taxes.

Excise Tax

For state business taxes, excise tax is generally based on net earnings or taxable income after allowable deductions and state adjustments.

Because it looks at what the business earned, excise tax is more similar to an income tax than a sales tax.

Generally, if your business earns more taxable income, you may owe more excise tax. If your business has little or no taxable income, the excise tax may be very low or even zero.

This is different from taxes that may be based on gross receipts or revenue before expenses, which is one reason understanding your state’s specific rules is so important.

Franchise Tax is generally a tax for the privilege of doing business in a state.

Unlike income tax, it isn't necessarily based solely on your business's profit. Each state establishes its own formula for determining how much is owed.

Depending on the state, the calculation may consider:

• Net worth or owner's equity

• Capital employed in the state

• Assets located in the state

• Gross receipts or revenue

• A flat annual fee

If your business operates in multiple states, your tax filing obligations can become even more complicated because the rules may be different in each state.

When Are Franchise and Excise Taxes Paid?

Franchise and excise taxes are often reported on an annual return, but payment schedules vary by state. Some businesses may also be required to make estimated payments throughout the year.

For example, in Tennessee, businesses that meet certain tax liability thresholds are required to make quarterly estimated franchise and excise tax payments, even though the return is filed annually.

Requirements vary from state to state, so don't assume that the rules applying to one business will apply to another.

A Simple Way to Remember the Difference

Here’s an easy way to keep these taxes straight:

Income tax: Generally based on your profit.

Sales tax: Collected from customers and remitted to the state.

Excise tax: Generally a state tax based on your business earnings.

Franchise tax: Generally based on a state-defined measure of your business, which could include net worth, capital, assets, revenue, or another state-established formula.

One of the best things you can do as a business owner is maintain a tax compliance calendar.

Consider including:

• Payroll tax deposits

• Sales tax filings

• Estimated tax payments

• Income tax deadlines

• Annual reports

• Franchise tax requirements

• Excise tax requirements

Keeping these deadlines in one place can help you avoid missed filings, unnecessary penalties, and last-minute stress. Most importantly, remember that tax laws vary by state and can change over time. If you're unsure which taxes apply to your business or when they are due, don't guess. Talk with your accountant or tax professional before the deadline.

A little clarification now can save you from a much bigger problem later.