As a business owner, there are a number of taxes you may be subject to paying or remitting. One of these taxes is privilege tax. So, what is privilege tax, and are you required to pay it? Get the facts straight about the different types of privilege tax below.
What is privilege tax?
So, what is privilege tax in business? The privilege tax definition can vary depending on your state and industry. For example, some businesses may have to pay privilege tax to conduct and operate in certain states. However, in other areas, like Arizona, privilege tax works similarly to sales tax.
Types of privilege tax
Again, privilege tax can vary depending on what state you do business in. Check out the common types of business privilege tax below.
Franchise tax
For many businesses, privilege tax may also be referred to as franchise tax. Franchise or privilege tax is a tax certain business owners have to pay to conduct business and operate in a state. Some states charge this tax for the privilege of doing business in a state.
The following states have franchise (aka privilege) tax:
- Alabama
- Arkansas
- California*
- Delaware
- Georgia
- Illinois
- Louisiana
- Mississippi
- New York
- North Carolina
- Oklahoma
- Tennessee
- Texas
*California’s franchise/privilege tax only applies in certain situations.
Some states, including Kansas, Missouri, Pennsylvania, and West Virginia, have done away with the tax.
Who needs to pay it
Certain entities, like nonprofits, are exempt from franchise taxes. However, many businesses, including corporations and limited liability companies (LLC), have to pay it if the state imposes it.
Check with your state for more information about whether or not your business is exempt from privilege tax.
Rates
Franchise tax rates can vary depending on the business and state’s rules. States may calculate franchise tax rates based on:
- Assets
- Gross receipts
- Net worth
- Taxable capital
- Net income
- Value of the company’s stock
Some states may also charge a flat rate (e.g., $100) to each business operating in its jurisdiction.
When it’s due
Generally, you need to submit payments to the state taxation department each year for franchise tax. And if you operate in multiple states, you may need to pay privilege taxes to multiple states.
Transaction privilege tax
Transaction privilege tax (TPT) is another type of privilege tax in Arizona. This tax works kind of like a sales tax for sellers. TPT applies to certain purchases, and the seller is responsible for paying it instead of the customer.
Arizona’s transaction privilege tax has a similar purpose as “regular” privilege tax: to tax a vendor for the privilege of doing business and making sales in the state.
If your business sells a product or engages in a service subject to TPT, you need to get the appropriate business licenses from the Arizona Department of Revenue (ADOR) and your locality.
Who needs to pay it
Most businesses in Arizona need to pay transaction privilege tax. Again, only vendors are responsible for paying it, not the customers.
Sales to certain customers, such as government agencies or members of a recognized tribe, may be exempt from Arizona TPT.
Rates
TPT rates vary depending on the business activity (e.g., type of transaction), the city, and the county. And, they are generally a percentage of the transaction.
To find out your TPT rate, check out Arizona’s rate table. Keep in mind that rates are subject to change monthly.
When it’s due
The TPT filing frequency can vary depending on the amount of the business’s total TPT liability. Here are Arizona’s TPT filing frequencies:
- Annual: Less than $2,000 estimated annual combined tax liability
- Quarterly: $2,000 – $8,000 estimated annual combined tax liability
- Monthly: More than $8,000 estimated annual combined tax liability
- Seasonal: Businesses operating 8 months or less during the year
You must submit a TPT return even if you don’t owe any transaction privilege taxes.
For more information on TPT due dates, check out the ADOR’s website.
State privilege tax
State privilege tax, also known as professional privilege tax, is a tax in Tennessee that certain professions must pay in order to practice.
Who needs to pay it
You must pay Tennessee’s professional privilege tax if your profession is under Tennessee’s Code Ann. §67-4-1702. Some examples of professions who may need to pay the privilege tax include:
- Attorneys
- Physicians
- Agents
- Lobbyists
Keep in mind that the above is not an all inclusive list and can change. And, a bill in the works may potentially eliminate the tax for more professions. Check Tennessee’s Department of Revenue website for additional information on who needs to pay the tax.
Rates
The professional privilege tax in Tennessee is a flat $400 per year. If you’re registered or licensed in more than one qualifying profession, you only need to pay the fee once per year.
When it’s due
The Tennessee privilege tax is due annually on June 1 each year. You must pay the tax if you’re licensed or registered to practice in Tennessee under the Tenn. Code Ann. §67-4-1702.
Occupational privilege tax
Colorado has an occupational privilege tax that is essentially a head tax. With the Colorado occupational privilege tax (OPT), most workers within the jurisdiction must pay the tax. And, the tax may be imposed on certain businesses operating in jurisdictions.
Not all cities in Colorado have an occupational privilege tax. The following cities in Colorado have an OPT:
- Aurora
- Denver
- Glendale
- Greenwood Village
- Sheridan
For the employees, the tax is based on the city where work or services are performed, not the business location or where the employee lives.
Who needs to pay it
Again, depending on the jurisdiction, businesses and employees may be required to pay Colorado OPT. Each qualifying employee and business must pay the tax if they’re in one of the participating jurisdictions.
Rates
Each OPT city in Colorado sets an income threshold (e.g., earning $500 in a month) to determine which employees are subject to the tax. Once the employee reaches the threshold, the employee and employer are subject to the OPT for the month.
OPT is generally a flat rate and can vary by jurisdiction. This means if your business or employee is responsible for the tax, you must contribute a set dollar amount instead of a percentage.
When it’s due
Due dates can vary by jurisdiction. For example, in Denver, the OPT return is due on the last day of the month following the period in which the liability was incurred.
If your business or employee is in one of the Colorado jurisdictions, check with your city for more information about the tax and due dates.
Privilege tax types: Comparison chart
Having a hard time keeping up with all of the privilege taxes? Use our handy chart to keep them straight:
| Type of Privilege Tax | Participating State(s) | Who Pays It | Rate | When It’s Due |
|---|---|---|---|---|
| Franchise tax | Alabama Arkansas California* Delaware Georgia Illinois Louisiana Mississippi New York North Carolina Oklahoma Tennessee Texas | Businesses | Can be a percentage or flat rate. Can vary based on net income, assets, gross receipts, etc. | Typically due annually to the state |
| Transaction privilege tax (TPT) | Arizona | Businesses (vendors and sellers) | Varies depending on the business activity, city, and county | Can be annual, monthly, quarterly, or seasonal depending on the business’s total TPT liability |
| State privilege tax (or professional privilege tax) | Tennessee | Qualifying professionals (e.g., attorneys) | Flat $400 per year | June 1 |
| Occupational privilege tax (OPT) | Colorado | Employers and employees | Typically a flat rate and varies by jurisdiction | Varies by jurisdiction |
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This is not intended as legal advice; for more information, please click here.
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