City, State, and Federal Tax Regulations
All businesses must pay taxes to the local, county, state, and federal government. Taxes are a significant expense that can not be overlooked in any business plan. The following section will provide some information about taxes for which you may be responsible, but please keep in mind that tax laws are constantly changing and tax professionals should be consulted regularly while you are in business. The is section was created by TMO legal fellowship intern Austin Hegarty during the summer of 2009.
Disclaimer: The Texas Music Office does not intend for this advice to provide or replace professional legal advice in any way. These suggestions are only intended to provide a short-answer reference guide to the basic legal and business practices associated with the music industry. In your own interest, consult with an attorney before entering into any contractual agreement or taking any action against copyright infringement.
Local, County, and State Taxes
Both local and county governments in the state of Texas have the authority to tax real property. In Austin, both local and county property taxes are collected through the Travis County Tax Assessor’s office. In 2008, the total amount of property tax in Austin was 2.1787%. This includes a 0.4122% county tax, a 0.4012% city tax, a 1.2020% school district tax, a 0.0954% community college tax, and a 0.0679% other tax.
Property taxes are paid based on the appraised full market value of a property. To calculate your approximate property tax for a given year, multiple the total tax rate by the full market value of your property. For example, if you owned a $100,000 property in Austin you would owe approximately $2178.70 ($100,000 x .021787) in property taxes in 2008.
Sales & Use Taxes2
The local, county, and state governments have the authority to collect sales and use taxes in the state of Texas. The combined total sales and use tax for 2008 could not exceed 8.25%. For businesses in Austin, the sales taxes for 2008 were a 6.25% state sales tax, a 1.00% Austin city sales tax, and a 1.00% Metro Transit Authority sales tax. It is up to local businesses to collect sales taxes on sales of tangible personal property and certain services. Groceries, over-the-counter medicines, and prescriptions are exempt from Texas sales taxes. Each business is responsible for collecting sales and use tax on the goods and services sold which are subject to the state sales tax and remitting the total amount to the state. Based on the amount of sales tax collected, payments must be remitted to the state monthly, quarterly, or yearly.
To get a sales tax permit for the first time, complete the application at https://comptroller.texas.gov/taxes/permit/. To complete the application you will need either a) the social security number of the sole owner of the business if you have a sole proprietorship, b) the social security number or federal employer’s identification number for each partner if you have a partnership, or c) the social security number of each officer or director if you have a corporation. In addition, Texas corporations must have their file number from the Texas Secretary of State. Each business is also required to have a North American Industry Classification System (NAICS) code to apply for a sales tax permit. To find the code for your business, visit:
The NAICS code of 722120 is currently used for the “Drinking Places (Alcoholic Beverages)” industry and includes bars, taverns, nightclubs, or drinking places that are primarily in the business of preparing alcoholic beverages for consumption on site. These businesses may also serve a limited menu of food and will still be considered under code 722120. Most live music venues should fall into this category unless the business is primarily engaged in serving food in addition to serving alcoholic beverages.
Businesses primarily engaged in food services are included under either NAICS code 722110 or 72221. Code 722110 for "Full-Service Restaurants” includes restaurants where patrons order and are served while they are seated and then pay after eating. NAICS code 72221 is for "Limited-Service Restaurants" where patrons generally order and pay for their food before eating. Questions about which industry code should apply to a particular business can be directed to the North American Industry Classification System via email at firstname.lastname@example.org.
Sales taxes may be paid either monthly, quarterly, or yearly and are due on the 20th day of the month following the end of the business's applicable reporting period. Whether a business pays monthly, quarterly, or yearly will depend on the amount of sales tax that the business is collecting. Sales taxes can now be paid online at http://www.window.state.tx.us/
Businesses in Texas that employ one or more persons may be subject to the state unemployment tax. As a general rule, employers that pay more than $1,500 in wages in a quarter or has at least one employee during twenty weeks in a year. Unemployment tax is only calculated based on the first $9,000 of an employee’s wages. When a business opens, it pays the higher of a set rate or the NAICS industry average, based on the NAICS, for approximately the first 18 months it is in operation. In 2008 the set rate for new businesses was 2.7%. The industry average is based on the tax rates paid by each of the businesses in an NAICS industry. After 18 months of paying either the set rate or the industry average rate, a business’s unemployment tax rate will stay at that original rate until the employer’s account is charged with unemployment claims for four complete quarters. This time period during which the unemployment rate can remain at the original rate can last as long as eight quarters. Once this time period has passed, an employer will pay unemployment taxes based on the amount that is being paid out in unemployment claims to the employer’s past employees as well as other statewide factors. This rate is known as the Experience Tax Rate. For 2008, this rate ranged from 0.10% to 6.10%, with an average of 0.99% for experienced employers.
Employers must register with the Texas Workforce Commission within ten days of becoming subject to the unemployment tax and can register online at https://www.twc.texas.gov/businesses/unemployment-tax-registration. Employers are responsible for making their unemployment tax payments quarterly with payments due on the last day of the month following the end of each quarter. For example, the first quarter of each year includes January, February, and March and unemployment tax payments are due on April 30.
The Texas Franchise Tax applies to all taxable entities which conduct business in the state. Sole proprietorships and general partnerships that are not taxable entities are not subject to the franchise tax. Most businesses which are subject to the tax pay a 1% tax on the business's margin, unless they are qualifying wholesalers or retailers. If a business makes less than $300,000 of total revenue per year it will not owe any franchise tax. In addition, if an entity, other than a tiered partnership, owes less than $1,000 in franchise tax the state does not require that the tax be paid.
All taxable entities in Texas must file a franchise tax report even if they do not owe any tax. The franchise tax can now be paid online and reports can be completed at http://www.window.state.tx.us/taxinfo/franchise/webfile_franchise.html.
Mixed Beverages Tax5
Under Texas Tax Code §183.021, businesses must pay a tax of 14% on gross receipts which result from the sale or service of mixed beverages, or nonalcoholic beverages and/or ice that are sold for the purpose of being mixed with alcohol, which are to be consumed on the business’s premises. This tax is charged on the business which sells the drink and should not be imposed on the customer. If the business chooses to pass the tax along to its customers by including the tax as an additional item on customers' bills it must clearly label the amount on the customers' bill as a reimbursement and pay taxes on that amount as well.
This tax is collected each month on the 20th day following the end of each month and can be paid online at http://www.window.state.tx.us/webfile/.
Exemption from City Ad Valorem Taxes
In Austin, the city council may approve historic landmark properties which have been recommended by the Historic Landmark Commission for partial exemption from property taxes. A property which has been designated as “Historic” and which is used for commercial purposes will generally be allowed an exemption of up to 50% of the accessed value of the historic structure and 25% of the accessed value of the portion of land that is deemed necessary for access to and use of the historic structure.
Historic Area District
Austin also grants tax abatements to certain business properties which are not designated as “Historic” by the Historic Landmark Commission but are included in the Historic Area District. Such an abatement may only be granted for a structure once in a 15-year period and is equal to the amount of taxes for the structure less the amount of taxes which would have been owed if the structure had not been improved. To qualify for an abatement, a commercial property must be (1) income-producing, (2) a contributing structure or a potentially contributing structure, (3) the cost of completed restoration must be less than 40% of the pre-restoration value of the structure itself, (4) at least 5% of the pre-restoration value must be spent on improvements to the structure’s exterior, and (5) the improvements must comply with historic area combining district preservation plan. After an abatement is verified, it takes effect on the first day of the tax year following the verification and lasts for ten years.7
A contributing structure is defined in this section of the Code as “a structure that contributes to the historic character of a historic area (HD) combining district, was built during the period of significance for the district, and which retains its appearance from that time.” An altered structure may qualify as a contributing structure if “the alterations are minor and the structure retains its historic appearance and contributes to the overall visual and historic integrity of the district.” Whether a structure is to be considered a contributing structure is based on the ordinance establishing the historic area (HD) combining district.8
Revitalization Area Program9
The Revitalization Area under the Austin City Code is defined as the area which is included by the following boundaries: Interstate 35 from Manor Road to Riverside Drive, Riverside Drive from Interstate 35 to Highway 71, Highway 71 from Riverside Drive to Highway 183, Highway 183 from Highway 71 to Manor Road, and Manor Road from Highway 183 to Interstate 35. An abatement which qualifies for this program may only be granted for a structure once in a 15-year period and is equal to the amount of taxes for the structure less the amount of taxes which would have been owed if the structure had not been improved. To qualify for this abatement, a commercial property must be (1) income-producing, (2) a contributing structure or a potentially contributing structure (as defined above), (3) the cost of completed restoration must be less than 30% of the pre-restoration value of the structure itself, (4) at least 5% of the pre-restoration value must be spent on improvements to the structure’s exterior, and (5) the improvements must comply with historic area combining district preservation plan. After an abatement is verified, it takes effect on the first day of the tax year following the verification and lasts for ten years.
FICA and Medicare10
Employers are responsible for paying half of their employees’ tax obligation for social security and Medicare. In 2008, employers were responsible for contributing an amount equal to 6.2% of each employee’s taxable income in social security taxes and 1.45% of each employee’s taxable income in Medicare taxes. Employers also withhold 6.2% of each employee’s income for social security and 1.45% of each employee’s income for Medicare from their earnings. The total amount withheld from the employees’ paychecks and the employer’s contribution constitutes the total Federal Insurance Contributions Act (FICA) tax and is remitted to the federal government quarterly.
In 2009, employers are subject to the federal unemployment tax if the employer paid wages of $1,500 or more in any quarter of 2008 or 2009 or if the employer had one or more employees for at least part of a day in 20 or more different weeks in both 2008 and 2009. If an employer qualifies, the tax rate for both 2008 and 2009 is 6.2% of the first $7,000 of wages for each employee. However, employers are entitled to offsets up to 5.4% for payments made to state unemployment funds. Therefore, if an employer contributed 5.4% in state unemployment funds, it would then owe 0.8% in federal unemployment taxes.
If you decide to organize your business as a corporation, you will incur corporate income taxes. This tax will be paid on your taxable income and will result in this income being taxed twice; once at the corporate level and once at the personal tax level when your corporation makes profit distributions to stakeholders . If you organize your business as an entity other than a corporation, such as a partnership or a limited liability corporation, you can avoid such double taxation. Taxation is one of the many issues that should be considered when deciding how to structure your business.
If you decide not to organize your business as a corporation, the income from your business will be treated as personal income for tax purposes. If you have a sole proprietorship, all of your business income will flow through directly to your personal income tax filing. If you have a partnership, you will have to file a Form 1065 with the Internal Revenue Service to report your partnership income.
For further information on the Austin City Code, visit http://www.austintexas.gov/business/taxes. For further information on Texas statutes, visit http://statutes.legis.state.tx.us/. For further information on the federal taxes, visit http://irs.gov/.
1 The Greater Austin Chamber of Commerce website: http://www.austin-chamber.org/DoBusiness/TaxesAndIncentives/TxProperty.html, last visited on April 25, 2009.
2 The Greater Austin Chamber of Commerce website: http://www.austin-chamber.org/DoBusiness/TaxesAndIncentives/TxSales.html, last visited on April 26, 2009; Texas Comptroller's Office: Sales and Use Tax, http://www.window.state.tx.us/taxinfo/sales/index.html, last visited on April 30, 2009.
3 Texas Workforce Commission Tax Department, http://www.twc.state.tx.us/ui/tax/uitaxrates.html, last visited on April 26, 2009 and http://www.twc.state.tx.us/ui/tax/subject.html, last visited on April 30, 2009.
4 Revised Tax Franchise Rates, http://www.window.state.tx.us/taxinfo/franchise/rates.html, last visited on April 26, 2009.
5 Mixed Beverage Tax, http://www.window.state.tx.us/taxinfo/mixbev/index.html, last visited on April 26, 2009.
6 Austin City Code §§11-1-21 and 11-1-22.
7 Austin City Code §11-1-83.
8 Austin City Code §11-1-52(4).
9 Austin City Code §11-1-83.
10 Social Security website, http://www.ssa.gov/pubs/10003.html, last visited on April 26, 2009.
11 Internal Revenue Service website, http://www.irs.gov/publications/p15/ar02.html#en_US_publink100011801, last visited on April 26, 2009.
12 Internal Revenue Service, http://irs.gov, last visited April 26, 2009.