Corporate Tax: What Tech Companies in Delaware Should Know

The state in which a corporation operates or places its headquarters has a major impact on its tax bill. For example, states like New Jersey, New York, and California are known for having exceptionally high taxes, which can make them undesirable places to open a new business – according to the Tax Foundation’s 2024 State Business Tax Climate Index.

But, with its many tax breaks and other benefits, Delaware is often viewed as a tax haven – especially for tech companies. Let’s explore what technology companies based in Delaware need to know about their tax bill.

Why is Delaware so Popular for Tech Companies?

There are a few reasons why many technology companies choose to register their company in the state of Delaware. Let’s explore a few of the pros and cons of Delaware incorporation for tech companies.

Pros of Delaware Incorporation for Tech Companies

• Headquarters Flexibility: Delaware corporations are legally allowed to base their HQ in any US state, allowing them to pick states with no state income tax, such as Nevada, South Dakota, and Wyoming (as of 2024, per the Tax Foundation). This is especially attractive for tech companies, which are typically not bound by physical requirements.
• Additional Privacy: In some cases, businesses registering in Delaware might not have to disclose who their officers and directors are at the time of formation. This can be a value-add for tech startups looking to move quickly and secretly.
• No Sales Tax: Delaware does not have a sales tax, regardless of whether the company’s physical location is in the state or not.
• No State Income Tax: There is no state corporate income tax on goods and services provided by Delaware corporations operating outside of Delaware.
• No Personal Property Tax: No personal property tax means that corporations can own their own office spaces and reduce the amount of property tax compared to other states.
  

Additionally, Delaware does not require the following taxes: value-added, use, inventory, unitary, inheritance, capital shares, or stock transfer. With such a lack of corporate taxes, it’s no wonder why companies flock to Delaware over other states.

But, even the tax-safe haven of Delaware is not entirely immune to taxes. If you register your company in Delaware, then there are still a few taxes that you’ll need to be aware of.

Cons of Delaware Incorporation for Tech Companies

1. Franchise Tax: According to Delaware’s Division of Revenue, you must pay an annual Franchise Tax if you want to form a corporation in Delaware. This fee is based on the number of authorized shares within the corporation.
2. Corporate Income Tax: Although it’s lenient on other taxes, Delaware still requires an annual corporate income tax of 8.7%, based on an equally weighted three-factor method of apportionment. The factors are property, wages, and sales in Delaware as a ratio of property, wages, and sales everywhere.
3. Business License: Although Delaware does not have a state or local sales tax, it does have an annual business license requirement, as well as a gross receipts tax that is imposed on the seller of goods or provider of services.

Key Tax Rates Applicable to Tech Companies

Delaware still has a corporate tax rate of 8.7% as of January 2024. This tax is already on the lower end compared to other states. But, for many tech companies, there are still ways around paying this tax.For example, the payment processing company Stripe notes that corporations that conduct tax within the state of Delaware are subject to federal corporate income tax. But, this is only for income generated within the state. So, a Delaware-incorporated company that doesn’t conduct business within the state is not required to pay Delaware’s corporate income tax.

Since many tech companies have a national or even global reach, this small contingency is an easy way to add at least 8.7% to their bottom line. For example, if Netflix were incorporated in Delaware, then it would only have to pay income tax for its customers in Delaware who use its service – not its entire customer base.

We hope you’ve found this article valuable when it comes to learning a few things that tech companies in Delaware need to know regarding their tax bill. If you are in search of a team of talented tax professionals, please reach out to the Tarsus team to learn more.