Franchise tax and excise tax are two separate state taxes that often get confused because they're sometimes listed together on business tax forms
Franchise tax is a state tax you pay for the right to do business in that state. It's not based on what you earn — it's based on the value of your business itself, usually measured by assets, revenue, or net worth depending on the state. Excise tax, which you arrived here from, is a tax on specific products or activities: gasoline, cigarettes, alcohol, gambling, or in some states, the act of doing business itself.
The key difference: franchise tax is about your business existing in a state. Excise tax is about specific things your business does or sells. A business might owe both, or just one, or neither — it depends on what the business is and where it operates.
Key Takeaways
- Franchise tax is a yearly fee to operate a business in a state, based on business size or value, not profit.
- Excise tax applies to specific products (fuel, alcohol, tobacco) or activities (gambling, certain services) and varies by state.
- Some states call their business excise tax a "franchise tax" or vice versa, which creates confusion even among business owners.
- A business can owe franchise tax, excise tax, both, or neither depending on its structure, location, and what it sells.
- State tax departments publish lists of what activities and products trigger excise tax in that state.
How franchise tax works in practice
Franchise tax is a recurring annual or biennial payment that most states require from businesses registered to operate there. The amount varies by state and by how the state measures business size. Some states base it on gross revenue, some on net income, some on the value of assets, and some on the number of employees. A few states don't charge franchise tax at all.
You typically file a franchise tax return with your state's department of revenue or secretary of state at the same time you file your regular income tax or corporate tax return. The return asks for the metric your state uses — usually revenue from the previous year. The state then sends you a bill. If you don't pay, the state can revoke your business license or registration.
Franchise tax is not deductible as a business expense on your federal income tax return, though some states allow you to deduct it on your state return. The amount is usually modest — often a flat fee of $50 to $500, or a percentage of revenue that caps out at a certain amount — but it's a real cost that doesn't go away even if your business loses money.
How excise tax applies to specific products and activities
Excise tax is a per-unit or percentage tax on goods or services that the state has decided to tax at a higher rate than general sales tax. Common examples are fuel (per gallon), cigarettes (per pack), and alcohol (per bottle or by alcohol content). Some states also tax services like hotel stays, rental cars, or phone service.
If your business sells or provides something that's subject to excise tax, you collect the tax from the customer at the point of sale, hold it, and send it to the state on a schedule — usually monthly or quarterly. You file an excise tax return showing how much of the taxed product or service you sold and how much tax you collected. The state then verifies that the amount matches what you owe.
Unlike franchise tax, excise tax is only owed if your business actually sells or does the taxed thing. A business that doesn't sell fuel, alcohol, or tobacco doesn't owe excise tax on those items. But if your business does sell them, excise tax is mandatory and the rates are set by state law.
Why the names cause confusion
Different states use the terms "franchise tax" and "excise tax" differently, which is the main source of confusion. Some states call their general business tax a "franchise tax" even though it functions like an excise tax. Other states call a specific-activity tax an "excise tax" when it looks like a franchise tax. A few states use both terms for different taxes on the same business.
The best way to know what your business owes is to look up your state's tax code or contact your state's department of revenue directly. Tell them your business type and location, and they can tell you whether you owe franchise tax, excise tax, both, or neither. Many state revenue departments have online tax calculators or worksheets that walk you through it.
Which businesses owe which tax
A corporation doing business in a state almost always owes franchise tax in states that have it. A sole proprietorship or partnership may or may not, depending on the state — some states only charge franchise tax to corporations and LLCs, while others charge it to all business structures. A nonprofit organization usually doesn't owe franchise tax, though it may owe excise tax if it sells taxed products.
Excise tax depends entirely on what the business sells or does. A gas station owes excise tax on fuel. A bar owes excise tax on alcohol. A bookstore doesn't owe excise tax unless the state taxes something the bookstore sells. A business can owe both taxes at the same time — for example, a corporation that sells gasoline owes both franchise tax (for the right to operate) and excise tax (on each gallon sold).
How to find out what your business owes
Start by identifying your state and your business structure (sole proprietorship, LLC, corporation, partnership, or nonprofit). Then visit your state's department of revenue website and search for "franchise tax" and "excise tax." Most states publish a guide or worksheet that lists which businesses owe which tax.
If the website isn't clear, call the department of revenue directly. Have your business type, location, and a description of what you sell ready. They can tell you the exact taxes you owe, the filing deadline, and where to file. Some states also offer free tax clinics or small-business tax assistance programs that can walk you through it.
If you work with an accountant or bookkeeper, they should know your state's tax requirements and can handle filing for you. But it's worth understanding the difference yourself so you know what you're paying for and why.
Frequently Asked Questions
Can I deduct franchise tax or excise tax from my federal income taxes?
Franchise tax is not deductible on your federal return, though some states allow you to deduct it on your state return. Excise tax you collect from customers is not a business expense — it's money you're holding on behalf of the state. However, if you pay excise tax on goods you buy for resale, that cost is part of your cost of goods sold and reduces your taxable profit.
What happens if I don't pay franchise tax?
Most states will revoke your business license or registration if you don't pay franchise tax. This means you can't legally operate. The state may also charge penalties and interest. If you're having trouble paying, contact your state's department of revenue to ask about payment plans or hardship relief.
Do I owe excise tax if I sell something online to customers in other states?
You owe excise tax in the state where the product is delivered or used, not where your business is located. If you sell gasoline online (which is rare), you'd owe excise tax in the state where it's delivered. For most online businesses, excise tax only applies if you're selling a product the customer's state taxes, like alcohol or tobacco, and the state requires you to collect it.
Is franchise tax the same as a business license fee?
No. A business license fee is a one-time or annual cost to register your business with your city or county. Franchise tax is a state-level tax on the right to do business in that state. You may owe both, and they're filed separately with different government bodies.
What if my state doesn't have a franchise tax?
Some states don't charge franchise tax at all — they rely on income tax, sales tax, and excise tax instead. If your state doesn't have franchise tax, you don't owe it. But you may still owe excise tax if you sell taxed products. Check your state's revenue department website to confirm.