Discover how sales tax in Texas impacts your business

What is sales tax?

TL;DR

• ​​​​​​Sales tax is levied on the sale of taxable goods and services. In Texas, sales tax is administered by the Texas Comptroller of Public Accounts.
• The seller is responsible to collect this tax from the buyer at the point of sale and pay it to the tax authorities in order to stay sales tax compliant.
• Failure in any of the steps to be sales tax compliant—registering for a permit, collecting sales tax, filing returns and paying the collected tax by the due date—will result in penalties, fines, and interest charges.
• The base sales tax rate in Texas is 6.25%, and city or county rates can go up to an additional 2%. So, the overall sales tax rate can reach up to 8.25%.
• Texas is an origin-based state, which means that rates are calculated based on the seller's location.
• Remote sellers selling into Texas can charge a uniform local tax rate of 1.75% so the total rate would be 8% for them (state-wide rate of 6.25% plus 1.75%). If not, rates are determined based on the buyer's location.
• Sales tax will be levied based on whether you have nexus (a physical/economic presence) in Texas, whether your buyer has to pay taxes, and whether what you are selling is taxable.
• If your buyer is a government or non-profit organization, they are exempt from paying sales tax. Furthermore, buyers with a resale certificate and a Direct Pay Permit need not pay taxes to you.
• Tangible personal property and digital goods are taxable in Texas. There are several taxable services including telecommunication services and labor services that are part of the manufacturing process and/or final sale of a product.
• Some goods are non-taxable such as newspapers and OTC medicines.

US sales tax is a tax that is levied on the sale of certain goods and services. This tax is collected from the buyer at the point of sale, and will have to be remitted to the state by the seller. Like other US states with sales tax obligations, Texas also requires sellers to collect and pay sales taxes to the tax authority. As a seller with an established presence in Texas, it is advised that you know the basics of sales tax to ensure that your business is compliant with the many rules surrounding it.

This guide will help you understand the fundamentals of Texas sales tax—its importance, the sales tax rate in Texas, when sales tax is levied, what is taxable and non-taxable.

Why is it important?

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• Knowing about Texas sales tax is essential for those doing business in this state. To stay tax compliant, it is your responsibility to know the sales tax rates, and to collect and pay the right amount of sales tax to the state. Considering that Texas does not have a state income tax, revenue from sales tax is all the more important for the state to function. The state is dependent on this amount for funds used for public service and infrastructure, maintenance, health care, transportation, and other such purposes.   
• Failure or delay in sales tax registration, collection, or payment of sales tax can result in several consequences. Penalties, fines, and interests will be levied, and if you have been unaware of your sales tax liability and have failed to collect sales tax from your customers, you will have to pay the due amount out of your own pocket. Continued failure to do any of this will lead to your business being forced to shut down. To avoid any of this, you need to know what products and services are taxable and non-taxable, and be consistent and punctual in keeping up with your duties as a seller who is engaged in business in Texas.
• Whether the sale is done in a physical space, online, or out-of-state, sales tax can be levied on any taxable sale. However, the rules surrounding your sales tax obligation can vary based on where you are located and how the sale has been made. So, you need to know how sales tax is applied in different situations, and keep up with the state-specific rates and obligations in each state you have a business presence in.
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Sales tax in Texas

The base sales tax rate in Texas is set at 6.25%, and when added with the city or county rates (which can go up to an additional 2%), the overall sales tax rate can reach up to 8.25%. Sales tax in Texas is administered by the Texas Comptroller of Public Accounts.

Since remote sellers selling into Texas may be unable to manage all the different local jurisdiction rates here (with multiple cities, counties, and special taxing jurisdictions), they can choose to charge a single local tax rate of 1.75% that will stay uniform on purchases made within taxing jurisdictions. So, the sales tax rate for remote sellers will be the state-wide rate (6.25%) added with the local rate for remote sellers (1.75%), which is 8%. If remote sellers don't want to collect at this rate, the tax rate will be based on the destination/buyer's location.

If you are engaged in business here, you have to register with the Comptroller's office for a permit or a 'Texas Business Tax License'. This permit is what will allow you to continue your business, begin collecting taxes at the point of sale, and remit the amount to the tax authority. It's also important to collect the right amount of taxes. While you proceed to calculate sales tax rates, you need to note the location. Texas is an origin-based state, which means that rates are calculated based on the seller's origin/location. For example, if you are operating your business in Winona, Texas, you would charge all your Texas customers a sales tax of 8.25% (the rate in Winona, TX). In some cases, use tax will have to be collected:

• When sales tax is not collected i.e. when goods are bought for resale, when goods are bought by tax-exempt organizations, or when they are bought from other states but used in Texas.
• If you are a seller located outside Texas, but selling to a customer in Texas. This amount will be determined based on the buyer's location.

When is it levied?

Sales tax will be levied based on these criteria:

1. Whether you have nexus in Texas
2. Whether your buyer has to pay taxes
3. Whether the product or service is taxable

1. Whether you have nexus in Texas

When you have an established presence in a state — physically or economically — you have nexus there. This commercial link that your business has with a state by selling taxable goods and/or services is called 'Nexus'. There are different kinds of nexus in Texas — you can have nexus by having a physical space for sale, storage, or distribution, or even through the presence of employees, salesmen, agents, affiliates, and contractors. Online and remote sellers will have nexus in Texas if they exceed an annual threshold of $500,000 in sales revenue. If you have nexus in a state, you should register for a permit and collect sales taxes.

2. Whether your buyer has to pay taxes

Your buyer may be exempted from having to pay taxes. This may happen if they are a non-profit organization, a government body, or even a religious or educational organization. You have to collect an exemption certificate from them, and keep it as a copy for business records. Similarly, if your buyer is purchasing for resale, they will have to provide a resale certificate to prove that they do not need to pay taxes. This is because they will collect taxes from the end consumer and remit that amount to the state. Companies with a Direct Pay Permit can also make purchases without paying sales tax to the seller, and pay taxes directly to the state.

What is taxable in Texas?

Tangible personal property — goods that can be grasped by your senses — are taxable. These include gadgets, toys, furniture, etc. Shipping and delivery charges for any taxable product are taxable.  Digital goods are also taxable.

Unlike several states, a number of services are taxable in Texas. Taxable services include cable television services, data processing services, telecommunication services, labor services that are part of the manufacturing process and/or final sale of a tangible personal product, etc. To know the complete updated list of taxable services, we recommend that you visit the Texas Comptroller's website and check if your service is listed.

What is non-taxable in Texas?

Some goods are non-taxable in Texas, such as unprepared food (like grocery items), newspapers, and even OTC drugs and medicines.

However, as there are certain exceptions and rules for what is taxable, based on the nature of the sale and whether it is combined with something else, it is recommended that you contact the Texas Comptroller and identify whether what you sell is taxable or not. To know the full list of what is taxable and non-taxable, visit the Texas Comptroller's website.

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