Franchise Tax Law and Legal Definition

A franchise tax is a tax paid by a corporation or business to the state for doing business in that particular state. Franchise tax is levied on businesses irrespective of the fact whether the business is being run as a franchise or nonfranchise. Franchise tax is not related to the size of the business. This is not a mandatory requirement in all states and information on whether a state requires franchise tax payment can generally be found on the website of a particular state's Secretary of State or Franchise Tax Office.

Franchise taxes are subject to the Commerce Clause of the U.S. Constitution, which prohibits state taxation from discriminating against interstate commerce. To avoid violation of the Commerce Clause, a state's franchise tax must also be fairly apportioned and relate substantially to services provided by the taxing state. There are different methods of assessing the amount of franchise tax to be paid. While some states require a flat fee upon incorporation, some others calculate the franchise tax amount on the basis of the number of outstanding shares of corporate stock. Some states use the company’s income or assets as the criterion. Also, there are disparities among states regarding the filing date of franchise tax. While s some states set a fixed date for franchise tax filling, others will ask for filing on the anniversary of the company's date of startup or incorporation in-state. Nonpayment of franchise taxes may invite monetary penalties based on the amount of franchise tax left unpaid, and suspension or revocation of a company's charter.