Texas Sales Tax Guide for Businesses
Sales Tax Rate: 6.25%
Local Taxes: Yes
Last Updated: April 16, 2021.
Texas has developed a reputation as one of the more difficult states for sales and use tax compliance. And, from complex regulations to aggressive auditing, it’s easy to see why. In this guide, we break down everything you need to know about getting compliant in the Lone Star State.
This research is meant to be informational and not a substitute for accounting advice.
State and Local Tax Rates
Like a lot of states, Texas imposes a flat tax rate on the sale of taxable products and services. Local municipalities can also collect sales tax on top of the state’s tax rate.
The Texas Comptroller defines the tax rate as the following:
6.25 percent state sales and use tax on all retail sales, leases and rentals of most goods, as well as taxable services. Local taxing jurisdictions (cities, counties, special purpose districts and transit authorities) can also impose up to 2 percent sales and use tax for a maximum combined rate of 8.25 percent.
Texas taxes businesses that have a sufficient presence (“Nexus”) in the state. There are two ways of meeting this definition:
- Having a physical presence in the state, known as physical nexus.
- Having an economic presence in the state, known as economic nexus. Out-of-state sellers meet this criteria if they exceed the economic threshold of $500k in annual taxable revenue.
If you meet either of these definitions, you could have a sales tax responsibility in Texas. However, there are some laws and exemptions that could alleviate this responsibility.
Marketplace Provider Legislation
Since 2019, Texas has required marketplace providers engaged in business in Texas to “collect, report and remit state and local sales and use tax on all sales made through a marketplace.”
This means that marketplace sellers with the proper documentation are not responsible for collecting sales tax on any of their marketplace sales in Texas.
Texas defines these marketplace roles in the following way:
- Marketplace: a physical or electronic store, internet website, software application, or catalog that marketplace sellers use to make sales.
- Marketplace provider: an entity that owns or operates a marketplace and processes sales or payments for marketplace sellers. Examples include Amazon, eBay, Walmart Marketplace, and Etsy.
- Marketplace seller: an individual who sells through a marketplace provider.
What Products and Services Does Texas Tax?
Texas taxes the sale of most products (tangible personal property). There are a number of non-taxable of products, including, but not limited to, non-prescription drugs, prescription drugs and groceries.
In contrast, Texas only defines a select list of taxable services. These include:
- Cable Television
- Credit Reporting
- Data Processing
- Debt Collection
- Information Services
- Internet Access
- Laundry & Cleaning
- Motor Vehicle Parking and Storage
- Nonresidential Real Property Repair, Restoration or Remodeling
- Personal Property Maintenance, Remodeling or Repair
- Personal Services
- Real Property Services
- Telephone Answering
- Utility Transmission and Distribution
- Taxable Labor
Sales Tax Exemptions
Texas offers sales and use tax exemptions on purchases by individuals and organizations that meet certain criteria. That means you’re not responsible for collecting and remitting tax for sales to exempt entities. There are over three dozen different exemption categories in Texas.
The Comptroller’s office maintains a publicly available list of exempt organizations.
The Texas Comptroller defines the Texas franchise tax as:
“a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.”
Legally, the franchise tax is technically different than sales tax. But because Texas presumes that anyone with a sales tax permit has franchise tax nexus, it’s important to be aware of this responsibility as you get compliant.
The tax rate varies depending on the annual revenue of your business:
- Businesses with receipts less than $1.18 million pay no franchise tax.
- Businesses with $1.18 million to $10 million in annual receipts are taxed at a rate of 0.575%.
- Businesses with more than $10 million in revenue pay a franchise tax of 1%.
- A foreign taxable entity with no physical presence in Texas now has nexus if, during any federal accounting period ending in 2019 or later, it has gross receipts from business done in Texas of $500,000 or more.
Franchise taxes are due on May 15th every year.
Exceptional factors like COVID-19 and extreme weather resulted in extensions in both the 2020 and 2021 filing seasons. The 2021 filing date is June 15.
Texas Sales Tax Audits
Texas conducts thousands of sales tax audits every year, and their audits have a reputation for being among the toughest. To survive a Texas sales tax audit, you’ll need to be at the top of your game. Because of this, you should prepare your Texas audit defense plan in conjunction with working on your compliance.
Texas doesn’t just audit in-state businesses. Data from the Texas Comptroller indicates that one-third of their 4,252 audits in progress are being conducted out of state. Research also shows that Texas has a total of 595 auditors, and 78 of them are permanently based out of state.
The Statute of Limitations in Texas is four years, which is above the nationwide average of three years. That means that your audit period and potential exposure is 33% higher than in most other states.
How to Register for a Sales Tax Permit in Texas
Sellers with sales tax nexus in Texas must apply for a Texas sales tax permit.
Failure to complete registration and collect sales tax could result in audits and significant financial repercussions. Texas also considers collecting sales tax without a permit to be fraud.
If you have nexus in Texas, the best way to protect your business is to get compliant and register for a sales tax permit in Texas.
Texas Sales Tax Compliance Help
Getting sales tax compliant in Texas is a tough process. The regulations are complex, the stakes are high, and their aggressive audits mean any mistakes are sure to catch up with you. If you’re not sure what to do next about Texas, we’re here to help.
Fill out our short What’s Next questionnaire to get in touch for a free 45-minute consultation.