Executive Summary

Texas Senate Bill 1058 (“SB 1058”), enacted in May 2025 and effective January 1, 2026, is a pro-business tax reform designed to attract and accommodate stock exchange operations in Texas. SB 1058 amends the Texas franchise tax to exclude certain securities transaction-related payments – specifically, “transaction rebate” payments – from the taxable revenue of stock exchanges.[1] In practical terms, this means a stock exchange operating in Texas will not pay state franchise tax on those portions of its revenue that it rebates to brokers or dealers as part of its trading fee structure.[2] The goal is to ensure exchanges are taxed only on their true net revenues, thereby removing a potential tax disincentive for establishing exchanges in Texas. Key points include:

• Clarifying Tax Treatment: SB 1058 allows a taxable entity that is a registered securities market operator to exclude “transaction rebate payments” (amounts paid to incentivize a broker or dealer to provide liquidity) from its total revenue when calculating its taxable margin.[3] However, this exclusion applies only to the exchange’s revenue and does not extend to any broker or dealer receiving such rebates. This adjustment aligns the tax base with actual net income rather than gross transaction fees.
• Legislative Intent: The bill’s authors noted that Texas currently has no active stock exchange and that uncertainty in tax law could deter one from locating in the state.[4] By clarifying and reducing the franchise tax burden on exchanges, Texas aims to become more competitive in attracting a major stock exchange or other securities trading platforms.
• Pro-Business Climate: SB 1058 was part of a broader package of 2025 measures intended to “boost Texas’ capital market environment and cement Texas as the best state for business,” as noted in a press release from Governor Greg Abbott’s office.[5] It complements other recent corporate law reforms (such as codifying a business judgment rule via SB 29) and a proposed constitutional amendment (HJR 4) to ban certain financial transaction taxes, all of which signal Texas’s commitment to a business-friendly, finance-friendly climate.
• Effective Date and Scope: The franchise tax exemption for transaction rebates takes effect January 1, 2026.[6] Exchanges planning to operate in Texas should prepare to adjust their tax reporting for tax years 2026 and beyond. While the exemption is narrow – applying only to specific securities transaction payments – it can significantly reduce tax liability for high-volume trading operations.

Overall, SB 1058 is an important development for corporate and financial entities. It provides tax certainty and incentives for any stock exchange or trading venue considering Texas as a base of operations. Businesses in the financial sector should factor this change into their strategic planning, as it enhances Texas’s attractiveness relative to other jurisdictions and may warrant compliance updates to maximize the available tax benefit.

Background

Texas’s push to become a financial hub: Texas has long promoted itself as a pro-business state, and recent years have seen deliberate moves to expand its profile in the financial services and capital markets arena. As of early 2025, Texas did not yet host a major stock exchange,[7] but interest in establishing one was growing. In fact, in January 2025 a consortium of investors led by TXSE Group Inc. (headed by James H. Lee) announced plans to launch the Texas Stock Exchange (TXSE), a fully electronic national securities exchange to be headquartered in Dallas by 2026.[8] Major financial players – including Charles Schwab, BlackRock, Citadel Securities, and others – are backing this venture, underscoring the credible momentum behind Texas as a new center for securities trading.[9] Additionally, Intercontinental Exchange (owner of the New York Stock Exchange) made headlines by opening “NYSE Texas” in Dallas in March 2025, marking the first securities exchange to operate in Texas.[10] These developments reflect a strategic shift: Texas is positioning itself to rival traditional financial centers by offering a hospitable regulatory and tax environment.

The role of state taxes in exchange operations: One potential barrier to attracting exchanges was uncertainty in Texas’s tax code regarding how an exchange’s unique revenue model would be taxed.[11] The Texas franchise tax (a type of margins-based business tax applicable to most businesses in the state) is calculated on a taxable entity’s total revenue with certain deductions to arrive at taxable “margin.” Prior to SB 1058, it was ambiguous how “total revenue” would be determined for a stock exchange, particularly given the industry’s prevalent fee structure. Most national stock exchanges use a maker-taker pricing model, where the exchange charges fees on certain trades and pays rebates on others to incentivize liquidity.[12] For example, an exchange might charge a trader a fee of $0.0030 per share for taking liquidity, while rebating $0.0025 per share to liquidity-providing traders (the “makers”).[13] The exchange’s net revenue per share in that scenario is only the difference (here, $0.0005 per share, or $0.50 per 1,000 shares), as it pays out the bulk of the gross fee in rebates. Without clarification, Texas’s tax law might have treated the gross fees as part of the exchange’s revenue, potentially inflating the taxable base with funds that the exchange doesn’t actually retain.[14] This could create a disproportionately high tax burden relative to the exchange’s true earnings – a clear disincentive for any exchange considering locating in Texas.

Legislative leaders recognized this issue and its significance for attracting financial exchanges. SB 1058 was introduced by Sen. Tan Parker (with Rep. Giovanni Capriglione sponsoring in the House) specifically to address the franchise tax treatment of stock exchange revenues.[15] The author’s statement of intent highlighted that clarifying the tax code would remove uncertainty that “could deter potential entrants” in the exchange industry.[16] In committee discussions, Texas lawmakers and stakeholders emphasized that adjusting the tax rules would bolster Texas’s competitiveness. The effort aligned with a larger narrative of making Texas a “safe harbor” for public companies and capital markets innovation, positioning the state to capture businesses that might otherwise remain in New York or relocate to more tax-friendly jurisdictions.[17]

SB 1058’s journey and companion reforms: SB 1058 moved through the 89th Texas Legislature in 2025 alongside other high-profile business legislation. Governor Greg Abbott held a public signing ceremony touting three bills as transformative for Texas’s business climate.[18] These included SB 29 (codifying robust protections for corporate officers and the business judgment rule), SB 1058 (the franchise tax exemption for stock exchanges), and House Joint Resolution 4 (proposing a constitutional ban on stock transaction taxes, discussed in the second white paper below). At the signing ceremony, TXSE Group CEO James H. Lee characterized these measures as positioning Texas to become “the premier destination for securities listings” and “the center of gravity for American capitalism”. [19] Texas Association of Business CEO Glenn Hamer lauded the package as a “trifecta” that would ensure Texas remains the nation’s best state for jobs and investment.[20]

SB 1058 was passed by the Legislature on May 13, 2025, and signed by Governor Abbott on May 14, 2025. The law is scheduled to take effect January 1, 2026. This lead time provides the Texas Comptroller and affected businesses an opportunity to prepare for implementation. In summary, the background of SB 1058 is one of targeted legislative fine-tuning in service of a broader economic development goal: encouraging the establishment of stock exchanges and related financial market infrastructure in Texas by ensuring the state tax system recognizes the nuances of how those businesses operate.

Analysis

Key provisions of SB 1058: SB 1058 amends Chapter 171 of the Texas Tax Code (the franchise tax chapter) to exclude certain securities transaction–related payments from the taxable revenue of qualifying “registered securities market operators” (as defined in the bill). The core change is the addition of new Subsections (y) and (z) to Tax Code § 171.1011. In effect:

• Exclusion of Exchange Rebates from Revenue: If a taxable entity is a registered securities market operator (essentially, a stock exchange or similar trading venue), it must exclude from its total revenue any “transaction rebate payments” made by the operator to a broker or dealer as part of a securities transaction.[21] In other words, when a Texas-based stock exchange calculates its gross revenue for franchise tax purposes, it can subtract all the rebates it has paid out to brokers or dealers on its platform. This ensures that those rebated amounts – which the exchange does not profit from – are not counted as part of its income for tax calculations.
• No Exclusion for Rebates Received by Exchange Members: In the enacted SB 1058, no provision allows an exchange member (e.g., a broker or dealer) to exclude rebate payments received from an exchange. Any such rebate credits must still be included in the broker’s own total revenue for franchise tax purposes. In short, only the exchange (as the payor of the rebates) can exclude the rebated amounts – the brokers or dealers receiving those payments do not get a special deduction for that income.
• Definitions: SB 1058 provides definitions for key terms in new Subsection (z) to ensure clarity in application.[22] It defines a “registered securities market operator” as an entity engaged in the activities described by NAICS code 523210 (Securities and Commodity Exchanges) and subject to registration with and regulation by the SEC or CFTC; “broker” and “dealer” as those terms are defined under federal securities law; “securities transaction” as the purchase or sale of a security by a broker or dealer; and “transaction rebate payment” as an amount paid to incentivize a broker or dealer to provide liquidity to the market. These definitions likely align with federal regulatory definitions or common industry usage. By defining these terms, the statute delineates exactly who and what transactions qualify for the exclusion.

Effect on taxable margin: By excluding rebate payments from “total revenue,” SB 1058 effectively lowers the taxable margin for affected entities. Texas’s franchise tax generally applies to a business’s margin, which can be computed as total revenue minus certain statutory deductions (such as cost of goods sold or compensation) or as a simplified percentage of total revenue. Removing potentially large rebate amounts from the revenue side means the starting figure for calculating margin is smaller. For a high-volume exchange, the difference is significant. Illustration: Suppose in a given quarter a Texas exchange charges $10 million in transaction fees to traders but pays out $8 million in liquidity rebates. Without SB 1058, the exchange’s gross revenue might be counted as $10 million for tax purposes. With SB 1058, the $8 million in rebates is excluded, so only the net $2 million is considered revenue. The franchise tax (which for most entities is 0.375% or 0.75% of taxable margin, depending on the business type) would then apply only to that $2 million net, rather than the gross $10 million. This ensures the exchange is taxed on actual earnings retained, not on pass-through amounts.[23]

It is important to note that SB 1058 does not create a blanket tax exemption for stock exchanges’ overall activities, but a targeted exemption for specific “certain tax liabilities,” namely those arising from the portion of trading fees that are rebated. Exchanges will still owe franchise tax on other revenue streams (for instance, listing fees, market data sales, technology services, etc., if applicable) and on any portion of transaction fees that is not rebated. Similarly, broker-dealers remain fully taxable on all their income streams (trading profits, commissions, and any rebates received). What SB 1058 avoids is the double-counting of rebate amounts: those fees rebated by the exchange are not counted as the exchange’s revenue (so they are only taxed once – as income to the receiving broker or dealer, and not also as income to the exchange). This nuanced approach aligns taxation with economic reality.

Motivation and policy considerations: The rationale behind SB 1058 is grounded in competitiveness and fairness. From a competitiveness perspective, Texas lawmakers wanted to eliminate any state-tax disadvantage that might discourage a stock exchange from setting up operations in-state. Other states with major exchanges, like New York, do not impose a special financial transactions tax at the state level (New York historically had a stock transfer tax but has rebated it for decades) and typically tax exchanges under normal corporate tax rules. Even though Texas’s franchise tax rate is relatively low, the prospect of taxing gross transaction fee revenue (without accounting for rebates) could have made Texas more expensive for an exchange than necessary. SB 1058 sends a clear signal that Texas is attuned to the business model of modern exchanges and is tailoring its laws to welcome them.

From a fairness or tax policy perspective, SB 1058 prevents what would essentially be an overstatement of an exchange’s revenue for tax purposes. The legislative analysis explicitly notes that without this change, an exchange could be taxed on an “inflated figure that includes rebate payments” rather than on its actual net revenue.[24] Such an outcome would conflict with fundamental tax fairness principles, since taxes should correspond to a company’s real income. In economic terms, the rebate portion of a trade fee is a liability or pass-through cost for the exchange, not profit. By excluding it, Texas acknowledges the unique structure of trading fees. This approach can be analogized to other tax provisions that exclude pass-through funds from taxable income (for example, sales taxes collected by a business and remitted to the government are generally not counted as the business’s revenue). Here, rebates are akin to the cost of generating trades, and SB 1058 ensures they are treated as such in the tax base.

Broader legislative context: SB 1058’s enactment alongside HJR 4 (a proposed constitutional amendment to ban transaction taxes) and other business reforms highlights an integrated policy strategy. Texas is not only making immediate statutory changes (like SB 1058) but also seeking to lock in a long-term competitive advantage through constitutional provisions (as discussed in the next white paper). The legislative history of SB 1058 was notably uncontroversial – it aligns with the pro-growth ethos dominant in the Texas Capitol. The Governor’s office lauded SB 1058 for helping to “solidify our status as the best state for doing business for many years to come.”[25] During hearings, proponents likely cited the bill as a cost-free way (from the state’s perspective, since no exchanges are currently paying these taxes) to lure high-value businesses. There was little to no organized opposition reported, presumably because the fiscal impact in the near term is negligible (no existing revenue to lose) while the potential economic impact (future jobs and trading activity) is substantial.

In summary, SB 1058’s legal effect is to fine-tune the franchise tax calculation for a specific industry in anticipation of that industry’s arrival in Texas. It exemplifies responsive lawmaking – addressing a niche but important issue (securities transaction rebates) to remove an impediment to growth. The statute’s design is precise: it identifies the relevant entities (exchanges), the relevant transactions (securities trades and associated rebates), and adjusts the tax base accordingly. By implementing this change, Texas positions itself as a jurisdiction that understands and accommodates the mechanics of modern electronic markets.

Implications and Strategic Considerations

SB 1058 carries significant implications for corporate and financial clients, particularly those in the securities trading and exchange space, as well as any business contemplating an expansion into Texas’s capital markets. Below, we outline the key implications and recommended considerations:

1. Incentives for Exchanges to Relocate or Launch in Texas: For any company operating a securities exchange or alternative trading system, SB 1058 makes Texas a highly attractive domicile from a tax perspective. The law effectively eliminates franchise tax on a major portion of an exchange’s operational revenue (i.e., the volume-based fees that are rebated). This could translate into substantial tax savings. For example, an exchange handling large trading volumes – which might generate hundreds of millions of dollars in gross fees annually but pay out a similar magnitude in rebates – would, under Texas law, only be taxed on the net difference. By contrast, in a state without such an exclusion, the exchange could be taxed on the gross receipts, resulting in a much higher tax bill. Corporate decision-makers should weigh this advantage when considering where to establish or license an exchange. It is advisable to perform a comparative analysis of total tax obligations in Texas versus other states (like New York, which has a corporate franchise tax, or states with higher business taxes) to quantify SB 1058’s benefit. This is especially timely for new ventures like the Texas Stock Exchange (TXSE) – SB 1058 materially improves the exchange’s projected post-tax profitability, strengthening the business case for launching in Texas.

2. Compliance and Accounting Adjustments: Companies that will be affected (or hope to be affected in the future) must adjust their accounting and tax compliance processes to capture the benefits of SB 1058. Accurate tracking and documentation of “transaction rebate payments” will be essential. Exchanges will need to ensure their financial systems clearly distinguish between gross trading fees collected and the amounts rebated to members, so that only the net is reported as Texas revenue. Broker-dealers should note that SB 1058 does not permit them to exclude rebate payments from their taxable revenue, so any rebates received must still be reported in their Texas franchise tax filings. We recommend updating chart of accounts and tax reporting templates in 2025, in preparation for the law’s January 2026 effective date. Importantly, companies should stay tuned for guidance from the Texas Comptroller – it is possible that the tax authority will issue rules or forms updates implementing SB 1058. Ensuring compliance with any such guidance (for example, a dedicated line item for rebate exclusions on the franchise tax report) will be necessary.

3. Effective Date Planning: Although 2026 might seem distant, businesses should begin planning now. For existing Texas taxpayers, the first franchise tax report affected by this law will likely be the one due in 2027 (covering the 2026 accounting year) given the January 1, 2026, start date. Any exchanges or trading firms contemplating Texas operations have a window to align their launch or incorporation with this timeline. For instance, an exchange that commences operations in Texas in early 2026 will immediately reap the benefit of the rebate exclusion for the entirety of that tax year. Those launching in 2025 will not yet enjoy the exclusion (as it is not in effect) but could potentially structure their initial operations knowing relief is on the horizon. New entrants might aim to ramp up trading volumes (and associated rebates) once the law is effective, to maximize early-stage tax efficiency. Additionally, out-of-state companies considering a move to Texas can factor in SB 1058 when calculating the cost of relocation: the potential tax savings in 2026 and beyond could offset relocation expenses.

4. Enhanced Competitive Position vs. Other Jurisdictions: SB 1058, in combination with other Texas initiatives, enhances the state’s appeal relative to traditional financial centers. Corporate clients should recognize that Texas is intentionally crafting a holistic ecosystem for capital markets – one that includes not just tax benefits but also legal infrastructure (e.g., the new Texas Business Courts and updated corporate statutes) and political commitments to free enterprise. For companies historically accustomed to Delaware corporate law and New York finance culture, Texas is making a bid to offer the “best of both” – modern laws with fewer taxes. This could lead to a long-term shift in where companies choose to incorporate, list their securities, or base their trading operations. As a strategic matter, firms should not ignore these trends. For example, a public company considering where to list its stock may find value in Texas-based exchanges that come with lower transaction costs for investors (if those cost savings are passed on) or simply with the branding of being in a business-friendly environment. We advise our clients in the financial industry to stay engaged with Texas’s developments – including the outcome of HJR 4 – as these policies may open new opportunities (or create pressure to adapt if competitors move to Texas to capitalize on advantages).

5. No Immediate Downside – but Monitor Future Tax Policy: From a client perspective, SB 1058 is unalloyed good news: it reduces taxes and adds certainty, with no new burdens. The fiscal note for Texas is minimal in the short term (since no exchanges are currently headquartered in Texas, the state is not losing existing revenue). However, as exchanges do move in and benefit, there could be future political scrutiny if it appears Texas is forgoing significant revenue. Companies enjoying SB 1058’s benefits should be mindful of the broader tax environment. While the provision itself is now law, any future efforts to repeal or limit it would likely arise only if Texas’s fiscal situation changes drastically. The current legislature’s simultaneous pursuit of a constitutional amendment banning transaction taxes (HJR 4, discussed next) suggests a strong long-term commitment to keeping these tax burdens off the table. Still, businesses should remain engaged with policymakers and industry groups to support maintaining this pro-business tax stance. Active participation in legislative review processes (for example, if any technical amendments to SB 1058 are proposed) can help sustain a favorable climate.

In conclusion, SB 1058 is a targeted but meaningful reform that clients in the securities and financial services sector should capitalize on. It lowers the operational tax cost for exchanges and trading firms in Texas and reinforces the state’s message that it welcomes the financial industry. The law firm’s role in this context includes helping clients navigate compliance (ensuring they properly implement the tax exclusion), advising on structural changes to leverage the new law, and keeping clients informed of complementary legal developments (like HJR 4’s potential constitutional change). For sophisticated business and legal audiences, the takeaway is clear: Texas has set the stage for a new era in which it could host major stock exchanges and trading operations – and SB 1058 removes a key tax obstacle from that stage.

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[1] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[2] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[3] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[4] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[5] Office of the Tex. Governor, Governor Abbott Signs Pro-Growth Business Legislation Into Law (May 14, 2025), https://gov.texas.gov/news/post/governor-abbott-signs-pro-growth-business-legislation-into-law.

[6] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[7] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[8] Victoria Antram, Texas Voters Will Decide on an Amendment to Ban Taxes on Securities Transfers and Certain Financial Transactions in November, Ballotpedia News (Apr. 30, 2025), https://news.ballotpedia.org/2025/04/30/texas-voters-will-decide-on-an-amendment-to-ban-taxes-on-securities-transfers-and-certain-financial-transactions-in-november/.

[9] Victoria Antram, Texas Voters Will Decide on an Amendment to Ban Taxes on Securities Transfers and Certain Financial Transactions in November, Ballotpedia News (Apr. 30, 2025), https://news.ballotpedia.org/2025/04/30/texas-voters-will-decide-on-an-amendment-to-ban-taxes-on-securities-transfers-and-certain-financial-transactions-in-november/.

[10] Intercontinental Exchange, Inc., NYSE Texas Opens for Business, Business Wire (Mar. 31, 2025), https://www.businesswire.com/news/home/20250331173085/en/NYSE-Texas-Opens-for-Business.

[11] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[12] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[13] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[14] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[15] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[16] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[17] Texans for Lawsuit Reform, TLR Weekly News Roundup: May 21, 2025, Texans for Lawsuit Reform (May 21, 2025), https://www.tortreform.com/newsletters/tlr-weekly-news-roundup-may-21-2025/.

[18] Office of the Tex. Governor, Governor Abbott Signs Pro-Growth Business Legislation Into Law (May 14, 2025), https://gov.texas.gov/news/post/governor-abbott-signs-pro-growth-business-legislation-into-law; Texans for Lawsuit Reform, TLR Weekly News Roundup: May 21, 2025 (May 21, 2025), https://www.tortreform.com/newsletters/tlr-weekly-news-roundup-may-21-2025/.

[19] Office of the Tex. Governor, Governor Abbott Signs Pro-Growth Business Legislation Into Law (May 14, 2025), https://gov.texas.gov/news/post/governor-abbott-signs-pro-growth-business-legislation-into-law.

[20] Office of the Tex. Governor, Governor Abbott Signs Pro-Growth Business Legislation Into Law (May 14, 2025), https://gov.texas.gov/news/post/governor-abbott-signs-pro-growth-business-legislation-into-law.

[21] Tex. S.B. 1058, 89th Leg., Reg. Sess. (2025) (enacted), https://capitol.texas.gov/tlodocs/89R/billtext/html/SB01058F.htm.

[22] Tex. S.B. 1058, 89th Leg., Reg. Sess. (2025) (enacted), https://capitol.texas.gov/tlodocs/89R/billtext/html/SB01058F.htm.

[23] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[24] Tex. S.B. 1058, 89th Leg., Reg. Sess. (Tex. 2025) (analysis of introduced bill), https://legiscan.com/TX/supplement/SB1058/id/545918.

[25] Office of the Tex. Governor, Governor Abbott Signs Pro-Growth Business Legislation Into Law (May 14, 2025), https://gov.texas.gov/news/post/governor-abbott-signs-pro-growth-business-legislation-into-law.