Q
What does Texas SB2774 do?
SB2774 amends the Texas Tax Code to reclassify industrial laundry and linen supply entities (specifically SIC 7213 and 7218) as "Retail Trade," effectively halving the franchise tax rate from 0. 75% to 0. 375%.
SB2774
Regular Session
Relating to the classification of certain entities as primarily engaged in retail trade for purposes of the franchise tax.
ModeratePlan for compliance
Low Cost
Effective:2027-01-01
Enforcing Agencies
SB2774
ModerateRelating to the classification of certain entities as primarily engaged in retail trade for purposes of the franchise tax.
Moderate Compliance Urgency
Requires near-term attention
Cost Impact
Low
Effective
2027-01-01Enforcing Agencies
Texas Comptroller of Public Acco...
Primary Author: Sen. Adam Hinojosa
89th Texas Legislature
jdkey.com
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Compliance Analysis
Key implementation requirements and action items for compliance with this legislation
Implementation Timeline
- Effective Date: January 1, 2027.
- Compliance Deadline: May 15, 2027 (The due date for the 2027 Annual Franchise Tax Report). You must apply the new classification to the tax year covered by this report.
- Agency Rulemaking: The Texas Comptroller is expected to update Franchise Tax instructions and potentially issue guidance on revenue segmentation prior to the 2027 filing season. Monitor the Comptroller’s "Tax Policy News" in late 2026 for specific definitions regarding bundled services.
Immediate Action Plan
- Q4 2025: Conduct a revenue analysis to confirm your "rental" revenue exceeds 50% of total gross receipts. If you are borderline, consult counsel regarding entity restructuring.
- Q1 2026: Audit client contracts for tax reimbursement clauses and prepare to notify billing departments of the rate change for Jan 1, 2027 invoices.
- Q4 2026: Explicitly instruct your tax preparer to select the "Retail Trade" classification for the 2027 Texas Franchise Tax Report.
- Ongoing: Separate revenue codes in your General Ledger for "Rental/Leasing" vs. "Sales/Service" to create an audit trail for the Comptroller.
Operational Changes Required
Contracts
Review Master Service Agreements (MSAs) immediately. If your contracts contain "tax pass-through" clauses allowing you to bill customers for gross receipts or direct taxes, you must adjust these calculations downward starting January 1, 2027. Failure to reduce the pass-through amount reflects an overcharge and invites breach of contract claims or audits by sophisticated clients.
Hiring/Training
No new hiring is required. However, you must instruct your internal tax team or external CPA to disregard standard NAICS defaults in tax software for the 2027 filing. They must manually override the entity classification to select the "Retail Trade" box based on the 1987 SIC crosswalk.
Reporting & Record-Keeping
To survive a Comptroller audit, you must maintain a "Revenue Segmentation Ledger." You must prove that more than 50% of your gross revenue is derived specifically from rental/leasing of linens and uniforms (SIC 7213/7218), distinct from the direct sale of goods or facility services.
- Required Document: A memo to file cross-referencing your current NAICS codes (likely 812331/812332) to the mandated 1987 SIC codes.
Fees & Costs
This legislation results in a net savings (tax rate reduction). There are no new state fees. Administrative costs are limited to one-time accounting adjustments and contract reviews.
Strategic Ambiguities & Considerations
The "Primarily Engaged" Threshold: The statute requires the entity to be *primarily engaged* in the specific retail trade activities.
- Risk: If your business is a hybrid (e.g., 40% linen rental, 60% janitorial supply sales), you do not qualify for the lower rate on *any* revenue.
- Bundled Services: The law is silent on how to treat bundled "facility service" fees (e.g., a flat fee for mats, trash, and cleaning). The Comptroller may attempt to disqualify bundled revenue if the rental portion is not clearly itemized.
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Schedule ConsultationInformation presented is for general knowledge only and is provided without warranty, express or implied. Consult qualified government affairs professionals and legal counsel before making compliance decisions.
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Legislative Timeline
This bill's path through the Texas Legislature
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Senate Authors
Fiscal NoteView Original
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More from Sen. Adam Hinojosa
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Related by Topic
- HB3486Relating to a deduction from the amount of taxable sales used to calculate the amount of sales and use taxes that the owners of restaurants that purchase Texas farm-raised oysters are required to remit to the comptroller of public accounts.
- HB23Relating to the exemption from ad valorem taxation of property owned by certain nonprofit corporations, located in a populous county, and used to promote agriculture, support youth, and provide educational support in the community.
- HB9Relating to an exemption from ad valorem taxation of a portion of the appraised value of tangible personal property that is held or used for the production of income.
- HJR1Proposing a constitutional amendment to authorize the legislature to exempt from ad valorem taxation a portion of the market value of tangible personal property a person owns that is held or used for the production of income.
- HB1056Relating to the recognition of gold and silver specie as legal tender and the establishment of a transactional currency based on gold and silver; authorizing a fee.
Quick Reference
Frequently Asked Questions
Common questions about SB2774
Q
Who authored SB2774?
SB2774 was authored by Texas Senator Adam Hinojosa during the Regular Session.
Q
When was SB2774 signed into law?
SB2774 was signed into law by Governor Greg Abbott on May 24, 2025.
Q
Which agencies enforce SB2774?
SB2774 is enforced by Texas Comptroller of Public Accounts.
Q
How urgent is compliance with SB2774?
The compliance urgency for SB2774 is rated as "moderate". Businesses and organizations should review the requirements and timeline to ensure timely compliance.
Q
What is the cost impact of SB2774?
The cost impact of SB2774 is estimated as "low". This may vary based on industry and implementation requirements.
Q
What topics does SB2774 address?
SB2774 addresses topics including taxation, taxation--franchise, business & commerce and business & commerce--general.
Legislative data provided by LegiScanLast updated: November 25, 2025
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