Author | TaxDAO
1. Introduction to Texas
Texas is the second largest state in the United States in terms of land area and population (about 690,000 square kilometers, second only to Alaska; about 30 million people, second only to California), located in the south-central region of the United States. It is known as the "Lone Star State" because it was once an independent republic.
Picture self-made, data source: Wikipedia
U.S. GDP and Population
Texas' economy in 2022 will be $2.4 trillion, accounting for 9.4% of the U.S. GDP. Its main industries include energy, agriculture, high-tech manufacturing and financial services. Texas is rich in natural resources. Oil and natural gas are the main minerals in Texas, with known oil reserves exceeding 8 billion barrels, accounting for about 1/3 of the known supply in the United States. Many large international oil companies are headquartered in Texas, including ExxonMobil and BP. Texas is also one of the main hubs in the United States for the development of computer components and systems and software. Austin, Dallas and Houston are the main centers of the industry in Texas, and the Austin area is often called the "Silicon Hills". The average electricity price in Texas is about 10.50 cents per kilowatt-hour, and the production capacity accounts for 25.5% of the country, making it a free place to use electricity.
Image self-made, data source: EIA, electricity price and share
2. The Basic Tax System in Texas
When investors enter the United States to invest and start a business, they mainly consider the investment environment, market size and operating costs. In January this year, Wall Street released a report on the best and worst states for starting a business in 2023, which comprehensively evaluated the 50 states in the United States, including key indicators of entrepreneurship such as financing, affordability, and tax rates. The evaluation results show that Texas is rated as the third most suitable state for starting a business in the United States due to its good employment environment, friendly regulations and policies, and low state taxes.
The Texas government advocates a low tax rate and a relaxed management model that avoids excessive intervention. A survey of small and medium-sized enterprise friendliness in various U.S. states showed that, looking at the overall friendliness, talent benefits, government regulations, etc. of each state, Texas has reached the A-level standard in terms of entrepreneurship convenience, labor talent employment and taxation.
Texas is known for its low taxes, but the reality is more complicated. Texas has no state income tax (but federal income tax still applies to all residents), and to make up for this, Texas relies more on other forms of taxation, such as sales and property taxes. A 2020 report by Ernst & Young found that individuals in Texas pay a total of 3.5% of their income in state and local taxes, which is far lower than the national average of 5.8%. Relative to economic output, Texas' effective tax rate on businesses is 5.6%, which is higher than the national average of 4.7% and ranks 11th among states.
Image source: TTARA Team Research Report June
2.1 Tax types and tax rates
According to the official website, Texas currently has 29 major tax categories, including sales tax, franchise tax, property tax, etc.
Sales and Use Tax: Texas imposes a 6.25% state sales and use tax on all retail sales, rentals and leases of most goods, and taxable services. Local taxing jurisdictions (cities, counties, special purpose districts, and transportation authorities) may also impose sales and use taxes up to 2%, for a maximum combined rate of 8.25%. Sales tax applies to most goods and services, with some groceries (such as flour, sugar, milk, eggs, etc.), prescription drugs, etc. being exempt. In addition, Texas imposes sales tax on digital goods (such as online subscription services).
Property tax: Texas does not have a state-level property tax. Property taxes are levied by local governments. Tax rates vary from region to region, ranging from 1.5% to 3%, with an average of 1.65%. Texas property taxes mainly apply to real estate, including residential properties, commercial buildings, and land owned by individuals and businesses.
Franchise tax: Every taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include: corporations; limited liability companies (LLCs), banks; state banking associations; savings and loan associations; partnerships, etc. Sole proprietorships (except single-member LLCs), general partnerships, etc. do not file or pay franchise tax. Depending on the type of business, the tax rate is 0.375% for retail and wholesale industries and 0.75% for other industries.
Vehicle fuel tax: 20 cents per gallon for diesel and gasoline, and 15 cents for liquefied natural gas.
In addition, there are hotel occupancy taxes, tobacco taxes, etc.
Form created by yourself, content: Texas tax details
2.2 Taxpayers
Under the tax system of Texas, taxpayers include individuals, enterprises and other legal entities. The specific tax burden is concentrated in many aspects.
Individuals do not need to pay state-level personal income tax, but they are required to pay sales tax on daily consumption. The state tax rate is 6.25%, and local governments can add up to 2% additional tax, bringing the total sales tax rate to 8.25% in some areas. In addition, if an individual owns real estate (such as houses, land, etc.), he or she must pay property taxes levied by local governments. The average property tax rate in Texas in 2023 is about 1.63%. Property tax revenue is mainly used for local public services, such as education and infrastructure construction.
For businesses, Texas does not impose traditional corporate income tax, but all businesses operating in Texas are subject to franchise tax, which is based on the company's gross revenue or profit. The tax rate varies by industry type, with a rate of 0.375% for retail and wholesale industries and 0.75% for other industries. Even tax-exempt companies are still required to file annual tax returns. In addition, companies are required to collect and pay sales tax on the taxable goods and services they sell, which applies to most goods and some digital goods, such as software, media subscriptions, etc.
2.3 Taxable Objects
Taxable objects are specific acts, properties, or types of transactions that tax laws are based on. They form the basis of government taxation. In the Texas tax system, various acts, properties, and transactions have corresponding tax types. Generally speaking, they include goods, services, real estate, business revenues, and certain consumer products.
2.4 Major tax incentives and incentive policies
Texas has been named the "Best State for Business" by CEOs for 20 consecutive years and has unique economic incentives and tax breaks.
Texas does not impose corporate or personal income taxes, making it one of the states with the lowest tax burdens in the nation. The state also offers many tax incentives for businesses, including sales tax exemptions for manufacturing machinery and equipment, research and development-related materials, software and equipment, and franchise tax exemptions for solar equipment manufacturers, sellers or installers. The state also offers property tax abatements, permit fee waivers, local cash grants and local funding to help businesses relocate or expand in the state.
The Texas Enterprise Zone Program (EZP) is a state sales and use tax rebate program designed to encourage private investment and job creation in economically distressed areas of the state.
Texas' economic development incentives are strong and extensive. The state is continually working to diversify its industries to keep commercial enterprises thriving. For example, the Texas Enterprise Fund (TEF) is one of the largest "deal-making" funds of its kind in the U.S. and is a performance-based incentive. There are also additional incentives for major event funding, university research initiatives, job creation, new product development, skills training, and education for relocating employees and their families. Incentives are designed to reward companies whose projects contribute significant capital investment and job creation to the state's economy.
Companies relocating or expanding in Texas may qualify for asset-backed loans, leveraged loans, or tax-exempt bonds. These include: the Texas Industrial Revenue Bond Program, the Texas Military Value Revolving Loan Fund, and others. There are also various types of grants available to Texas communities, certain Texas higher education institutions, and businesses.
In recent years, Texas has attracted a large number of cryptocurrency-related companies and projects. Large cryptocurrency mining companies such as Riot Blockchain and Argo Blockchain have set up mines in Texas. Blockchain technology companies such as Blockcap have also moved their headquarters to Austin, Texas. So, why is Texas so popular among cryptocurrency companies? Next, we will conduct a more detailed analysis of crypto companies from the perspective of taxation and regulation.
3. Texas Crypto Asset Taxation System
The status and regulation of crypto assets have undergone phased changes in Texas bills, and new issues and new viewpoints have been constantly raised. So far, there is no special law in Texas that stipulates how crypto assets should be taxed. The taxation of crypto assets is mainly based on the existing tax system. Due to its characteristics as an asset, different tax rates are levied according to different uses and scenarios. This also allows the taxation of crypto assets to enjoy the unique tax system advantages of Texas.
Self-made image, content: Changes in Texas encryption law
3.1 Definition and characterization of crypto assets
Texas' legal definition of cryptocurrency was mainly established through the H.B. 4474 bill passed in 2021. The bill clarifies the legal status of cryptocurrency, defining it as "a representation of value in electronic form intended to be used as a medium of exchange, unit of account, or store of value." The bill amended the Texas Uniform Commercial Code (UCC) to make cryptocurrency a recognized digital asset, similar to other financial assets. This definition ensures that cryptocurrency can be used in legitimate commercial transactions and provides legal protection and a regulatory framework.
In addition, H.B. 4474 also provides for the concept of "control" of cryptocurrency, giving holders exclusive rights to their cryptocurrency, including the right to use, transfer, and hold, which ensures the legal status of digital asset holders in transactions. Through this framework, Texas has laid the foundation for the legal application of cryptocurrency in the commercial and financial fields and provided legal protection for businesses and individuals.
3.2 Taxes on Crypto Assets in Texas
The IRS classifies cryptocurrency and other "virtual currencies" as property. Any cryptocurrency received must be reported as "income" and a "capital gain" paid on the appreciation when sold. Cryptocurrency and cryptocurrency-related activities in Texas must be carefully reported on the U.S. Individual Income Tax Return Form 1040 (f1040) to accurately record cryptocurrency transactions during the tax year.
