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%.
Signed Into Law
Signed May 24, 2025Effective 2027-01-01
SB2774
Regular Session
Relating to the classification of certain entities as primarily engaged in retail trade for purposes of the franchise tax.
Government Affairs & Regulatory Compliance Analysis
SB2774: Government Affairs Overview
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%.
Sen. Adam Hinojosa·Senate Bill·Regular Session
ModeratePlan for compliance
Low Cost
Effective:2027-01-01
Enforcing Agencies
Business Impact
Who SB2774 Affects
This legislation has regulatory implications for the following Texas businesses and organizations:
Regulatory Priority: moderate
Notable regulatory updates (effective 2027-01-01). Consider how these changes may affect your operations.
🏭
Manufacturing & Business
Affected business types:
- Manufacturers
- Industrial facilities
- Supply chain companies
- Logistics providers
Key Operational Considerations
- 1Required Document: A memo to file cross-referencing your current NAICS codes (likely 812331/812332) to the mandated 1987 SIC codes.
Estimated Cost Impact
lowMinimal cost impact anticipated.
Enforcing Agencies
Need Government Relations Support?
JD Key Consulting provides government affairs and regulatory strategy services. We help businesses navigate Texas agencies, understand legislative impacts, and advocate for their interests.
Need Help Navigating This Legislation?
JD Key Consulting provides strategic guidance on Texas regulatory compliance and legislative impact for your business.
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
01
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.
Need Compliance Guidance on This Legislation?
JD Key Consulting specializes in Texas regulatory compliance strategy. Work directly with James Dickey—former Chairman of the Republican Party of Texas—to understand this bill's impact on your operations and develop an actionable compliance plan.
Schedule a 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.
02
Legislative Timeline
This bill's path through the Texas Legislature
03
Senate Authors
Fiscal NoteView Original
Related Legislation
Explore more bills from this author and on related topics
More from Sen. Adam Hinojosa
- SB1169Relating to the provision of water or sewer service by public entities operating jointly or concurrently.
- SB1351Relating to the designation of a portion of U.S. Highway 281 in Hidalgo County as the U.S. Border Patrol Agent Jose Rodriguez-Lua Memorial Highway.
- SB1352Relating to the deadline for filing an application for certain ad valorem tax exemptions or allocations and the calculation of the penalty for filing a late application for such an exemption or allocation.
- SB1353Relating to the licensing and regulation of pilots in the jurisdiction of the pilot board of a navigation district located in Cameron County.
- SB1706Relating to the authority of the governing board of a state governmental body to conduct a closed meeting to deliberate an issue involving certain defense, military, or aerospace issues.
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 significant are the changes in SB2774?
The regulatory priority for SB2774 is rated as "moderate". Businesses and organizations should review the legislation to understand potential impacts.
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.
Q
What are the key dates for SB2774?
Key dates for SB2774: Effective date is 2027-01-01. Consult with legal counsel regarding applicability.
Q
Which Texas businesses are affected by SB2774?
SB2774 primarily affects Texas businesses and commercial enterprises. These businesses should review the legislation with their legal and compliance teams to understand potential impacts.
Need Strategic Guidance on This Legislation?
JD Key Consulting is an Austin, Texas-based government affairs firm led by James Dickey, former Chairman of the Republican Party of Texas. We specialize in Texas regulatory compliance and legislative strategy for data centers, energy, banking, and manufacturing.
Legislative data provided by LegiScanLast updated: January 11, 2026