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
Texas Comptroller of Public Accounts
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 Help Understanding Implementation?
Our government affairs experts can walk you through this bill's specific impact on your operations.
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.
02
Legislative Timeline
This bill's path through the Texas Legislature
03
Official Analysis
BILL ANALYSIS
| Senate Research Center | S.B. 2774 |
| 89R6021 JBD-F | By: Hinojosa, Adam |
| Finance | |
| 4/8/2025 | |
| As Filed |
AUTHOR'S / SPONSOR'S STATEMENT OF INTENT
Many companies engaged in the business of renting work uniforms are not properly classified for franchise tax purposes because the industry groups under which they operate are not expressly listed in the definition of "retail trade" in the Tax Code. This has resulted in an inequity, where businesses that functionally operate like retailers are excluded from the lower retail franchise tax rate simply because they rent, rather than sell, their goods.
To correct this, S.B. 2774 seeks to amend Section 171.0001(12) of the Tax Code to include uniform rental activities classified under Industry 7213 and Industry 7218 of the 1987 Standard Industrial Classification Manual, as published by the federal Office of Management and Budget. The goal is to ensure fair tax treatment for industrial uniform and linen rental companies by aligning their classification with the nature of their business operations.
As proposed, S.B. 2774 amends current law relating to the classification of certain entities as primarily engaged in retail trade for purposes of the franchise tax.
RULEMAKING AUTHORITY
This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Section 171.0001(12), Tax Code, to include activities involving the rental of industrial uniforms, industrial garments, and industrial linen supplies that are classified as Industry 7213 or 7218 of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget in the definition of "retail trade."
SECTION 2. Makes application of this Act prospective.
SECTION 3. Effective date: January 1, 2027.
Senate Authors
Bill Text(with markup)
| S.B. No. 2774 | ||
|
|
||
| relating to the classification of certain entities as primarily | ||
| engaged in retail trade for purposes of the franchise tax. | ||
| BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: | ||
| SECTION 1. Section 171.0001(12), Tax Code, is amended to | ||
| read as follows: | ||
| (12) "Retail trade" means: | ||
| (A) the activities described in Division G of the | ||
| 1987 Standard Industrial Classification Manual published by the | ||
| federal Office of Management and Budget; | ||
| (B) apparel rental activities classified as | ||
| Industry 5999 or 7299 of the 1987 Standard Industrial | ||
| Classification Manual published by the federal Office of Management | ||
| and Budget; | ||
| (C) the activities classified as Industry Group | ||
| 753 of the 1987 Standard Industrial Classification Manual published | ||
| by the federal Office of Management and Budget; | ||
| (D) rental-purchase agreement activities | ||
| regulated by Chapter 92, Business & Commerce Code; | ||
| (E) activities involving the rental or leasing of | ||
| tools, party and event supplies, and furniture that are classified | ||
| as Industry 7359 of the 1987 Standard Industrial Classification | ||
| Manual published by the federal Office of Management and Budget; | ||
| [ |
||
| (F) heavy construction equipment rental or | ||
| leasing activities classified as Industry 7353 of the 1987 Standard | ||
| Industrial Classification Manual published by the federal Office of | ||
| Management and Budget; and | ||
| (G) activities involving the rental of | ||
| industrial uniforms, industrial garments, and industrial linen | ||
| supplies that are classified as Industry 7213 or 7218 of the 1987 | ||
| Standard Industrial Classification Manual published by the federal | ||
| Office of Management and Budget. | ||
| SECTION 2. This Act applies only to a report originally due | ||
| on or after the effective date of this Act. | ||
| SECTION 3. This Act takes effect January 1, 2027. | ||
| TO: | Honorable Joan Huffman, Chair, Senate Committee on Finance |
| FROM: | Jerry McGinty, Director, Legislative Budget Board |
| IN RE: | SB2774 by Hinojosa, Adam (Relating to the classification of certain entities as primarily engaged in retail trade for purposes of the franchise tax.), As Introduced |
Estimated Two-year Net Impact to General Revenue Related Funds for SB2774, As Introduced: an impact of $0 through the biennium ending August 31, 2027.
Additionally, the bill will have a direct impact of a revenue loss to the Property Tax Relief Fund of ($2,860,000) for the 2026-27 biennium. Any loss to the Property Tax Relief Fund must be made up with an equal amount of General Revenue to fund the Foundation School Program.
General Revenue-Related Funds, Five- Year Impact:
| Fiscal Year | Probable Net Positive/(Negative) Impact to General Revenue Related Funds |
|---|---|
| 2026 | $0 |
| 2027 | $0 |
| 2028 | $0 |
| 2029 | $0 |
| 2030 | $0 |
All Funds, Five-Year Impact:
| Fiscal Year | Probable Revenue (Loss) from Property Tax Relief Fund 304 |
|---|---|
| 2026 | $0 |
| 2027 | ($2,860,000) |
| 2028 | ($3,000,000) |
| 2029 | ($3,130,000) |
| 2030 | ($3,270,000) |
Fiscal Analysis
The bill would redefine activities involving the rental of industrial uniforms, garments, and linen supplies-classified as Industry 7213 (Linen Supply) or 7218 (Industrial Launderers) of the 1987 Standard Industrial Classification Manual; published by the federal Office of Management and Budget-as “retail trade,” for franchise tax purposes.
The bill would take effect January 1, 2027.
The bill would take effect January 1, 2027.
Methodology
This estimate is based on franchise tax liabilities of entities currently classified as SIC Industry 7213 or 7218 (NAICS 812331 or 812332), adjusted for the lower tax rate applicable for retail trade, and extrapolated to subsequent years based on rate of franchise tax growth the 2026-2027 Biennial Revenue Estimate.
Local Government Impact
No fiscal implication to units of local government is anticipated.
| Source Agencies: | 304 Comptroller of Public Accounts |
| LBB Staff: | JMc, KK, SD |
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 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
Need Strategic Guidance on This Bill?
Need help with Government Relations, Lobbying, or compliance? JD Key Consulting has the expertise you're looking for.