The term franchise tax refers to a tax that is levied against companies which are incorporated or do business in a particular state. Franchise taxes are a source of revenue for state governments, and the amount owed is typically based on the assets, market capitalization, or net worth of the company.
Also known in some states as a registration fee, a franchise tax is paid by businesses that are chartered with the state. States may also charge a franchise fee to companies for the privilege of operating in their state. The rules for determining the amount of tax owed varies greatly from state-to-state. Some states charge businesses a flat fee, which is usually referred to as a registration fee. More commonly, states will charge a fee that is based on the capital stock issued, net worth, or total assets of the company.
States charge franchise fees in order to raise revenues. Generally, states that charge relatively high corporate income taxes have lower franchise taxes, while states that charge relatively low corporate income taxes have higher franchise taxes. Delaware is a commonly cited example of a state that does not charge chartered companies that operate out-of-state a corporate income tax but do charge relatively high franchise fees.