Serving as a cornerstone of industry and travel in the Southwest, the Lone Star State stands out for its sprawling landscapes, rich cultural heritage, and vibrant economic scene. Yet, mastering the nuances of sales tax in Texas demands a comprehensive grasp of its statutes and guidelines.
This guide breaks down everything you need to know about Texas’ sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle Texas’s sales tax with confidence and ease.
Sales Tax Nexus in Texas
When a business creates either a physical or economic nexus, it is required to collect sales tax in Texas.
Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require the collection and payment of sales tax. The factors that determine a physical nexus in Texas include:
- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products (i.e., sample room), a warehouse or storage facility, or any other place where you conduct business. This includes ownership, usage, leases, or rents of tangible personal property in Texas.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Employees, independent contractors, agents, or other representatives operating on your behalf.
- Affiliate Nexus: An out-of-state seller may establish a taxable presence in Texas—if there is a significant ownership link with any entity in Texas that fulfills orders, shares a brand or product line, or conducts business activities that bolster the seller’s market within the state. This includes affiliates that manage distribution centers, conduct business under a similar name, or engage in activities on the seller’s behalf, such as handling returns.
- Presence at Trade Show: Out-of-state sellers attending trade shows in Texas for product promotion and order solicitation are considered to be conducting business in the state, thereby requiring them to collect Texas use tax on sales, regardless of where the orders are processed or fulfilled. This applies even if a single order is taken at a trade show, whether from Texas residents or non-residents.
To stay informed about the current criteria for establishing a physical sales tax nexus in Texas, take a look at the official regulations available right here!
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as economic nexus.
Beginning October 1, 2019, the threshold for economic nexus in Texas is $500,000 in gross revenue in the prior 12 months.
While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing economic sales tax nexus. To access a comprehensive list of these rules, please refer to the governing laws for economic sales tax nexus requirements in Texas.
Texas Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in Texas.
Tangible Products
Almost all goods are taxable in Texas, including:
- Cosmetics
- Electronics
- Clothing
- Jewelry
- Home Goods
The goods that are exempt from sales tax are:
- Groceries – In Texas, most foods meant for human consumption are not subject to sales tax. However, certain types of food and drinks, including prepared meals, candy, soft drinks, and alcoholic beverages, do not qualify for this tax exemption and are therefore taxable.
- Baby Products (i.e., Diapers, Baby Food, Baby Bottles, Baby Wipes, Milk, Formula, Medicated products) – S.B.79 was passed on September 1, 2023 to eliminate sales tax on these items.
- Feminine Hygiene Products (i.e. pads, tampons, and menstrual cups) – Effective September 1, 2023
- Prescription Medications
- Nutritional Supplements (i.e. herbal products, mineral products, vitamins)
- Over-the-Counter Drugs and Medicines (when required by the FDA to be labeled with a Drug Facts panel)
- Textbooks
- Medical Devices
- Energy-efficient Appliances – Texas provides tax exemptions for products that promote energy efficiency.
Services
In Texas, the majority of service-based transactions, such as professional services, advertising, and cleaning services, are subject to sales tax.
However, there are specific situations where certain services are tax-exempt. For instance, non-taxable services are:
- Medical Services
- Project Management – purchases of tools, machinery, equipment, supplies, and consumable items and its charges for labor and materials for nonresidential (commercial) real property repair, remodeling, or restoration are taxable.
- Employment Services
Software-As-A-Service (SaaS)/Digital Products
SaaS is taxable as they are considered part of a data processing service.
Digital products (i.e., ebooks, downloadable video content, mobile apps) are also taxable.
Shipping/Handling
Shipping and handling charges in the state of Texas are taxable.
Sales tax is exempt if:
- the buyer/customer paid the shipping charge separately from the sale of the product to the shipping carrier or delivery/freight company or
- item is exempt.
Sales Tax Permits and Licenses in Texas
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in Texas, the next important step is getting your Texas Seller’s Permit, also known as a sales tax permit.
Seller’s Permit
You can register for a Texas sales tax permit online at the Texas Comptroller of Public Accounts.
Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:
- Business Identification Information (name, address, phone number, email address)
- Business Entity Structure (sole proprietorship, partnership, corporation, LLC, etc.)
- Federal Employer Identification Number (EIN or FEIN)
- Owner/Partner/Officer Information
- Business Activity Details (description of products or services sold, sales volume, date of the first sale or the expected date to start dates)
- North American Industrial Classification System (NAICS) code
Registration fee
There is no fee to register for a sales tax permit.
Renewal
In Texas, you don’t have to renew your sales tax permit. Texas sales tax permits renew automatically every year, so business owners don’t need to do it themselves. But, the permit only stays valid if you’re actively selling as a business.
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale.
In Texas, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items.
You can fill out the 01-339 Texas Sales and Use Tax Resale Certificate provided by Texas after you receive your sales tax permit. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.
Streamlined Sales Tax (SST)
The Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. However, Texas is not a party to this program, meaning it does not follow the uniform rules and definitions established by SST but has its own sales tax regulations.
Calculating and Collecting Sales Tax in Texas
Sales Tax Computation
In Texas, sales tax isn’t just one simple rate; it’s a combination of state and local taxes. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs. Use TaxHero’s Texas Sales Tax Calculator to compute for sales tax.
Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in Texas and sells to a customer in Houston, TX, with a ZIP code of 77002. In that case, the seller has to charge the customer a total sales tax, which can be broken down as follows:
 |
SALES TAX FORMULA |
RATE |
| State: |
Texas |
6.25% |
| County: |
Harris |
0.00% |
| District: |
Downtown |
1.00% |
| City: |
Houston |
1.00% |
| Combined Sales Tax Rate = |
8.25% |
|
Origin-based vs. Destination-based
When making in-state sales, it is important to determine if you are located in an origin-based or destination-based state to figure out what rate to charge for sales tax.
Texas is an origin-based state, meaning sales tax is determined based on the seller’s location. That means for a Texas-based seller, sales tax is generally based on the location of the seller when selling within the state.
For out-of-state or remote sellers, the sales tax rate is always determined by the buyer’s location. For instance, if you’re selling a product from Illinois to a customer in Houston, Texas, where you have nexus, you’d apply Houston’s sales tax rate to that sale.
To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.
Filing and Remitting Sales Tax Returns in Texas
The next step after collection is filing and remitting your Texas sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, or annually.
It’s crucial to keep accurate records of your sales and tax collections and adhere to the filing schedule set by the state to remain compliant with Texas’ sales tax regulations.
Due Dates
In Texas, the due date falls on the 20th day of the following month. For instance, sales tax collected in January is due by February 20th for monthly filers.
However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day. For instance, if you’re a monthly filer and filing sales tax for the month of April, and the May 20th deadline falls on a holiday or weekend, you’ll have until May 21st, the following business day, to submit.
Quarterly/Monthly Prepayments
Businesses with a notable sales tax liability may need to make monthly/quarterly prepayments ahead of their monthly/quarterly return filings. The specifics of these prepayments depend on the business’s prior year’s tax liabilities.
If you pay your taxes monthly or quarterly, you can get a 1.25% discount for paying early. This is on top of the 0.5% discount you get for filing your taxes and payments on time.
Filing Sales Tax Returns
To file your sales tax return for Texas, a few options are available:
- File online through the Texas Comptroller of Public Accounts.
- File by mail – Download a Texas Sales and Use Tax Return here.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
Some states offer a discount to businesses for collecting, filing, and remitting sales tax on time as an incentive to process sales taxes promptly.
In Texas, permitted sales taxpayers are eligible for a 0.5% discount on the tax amount they report and pay on time.
Sales Tax Holiday
Currently, for 2023 – 2024, the planned sales tax holidays in Texas are:
| DATE |
TYPE |
ELIGIBLE MERCHANDISE |
| August 9, 2024 – August 11, 2024 |
Back-to-School Sales Tax Holiday |
- Most clothing, footwear, school supplies, and backpacks under $100 without paying tax.
- Shop tax-free at Texas stores, online, or through catalogs.
|
| May 25, 2024 – May 27, 2024 |
Energy Efficient Products Sales Tax Holiday |
- Soaker or drip-irrigation hoses.
- Moisture controls for sprinklers or irrigation systems.
- Mulch.
- Rain barrels or alternative rain/moisture collection systems.
- Permeable ground covers for water penetration.
- Plants, trees, and grasses.
- Water-saving surfactants.
|
| April 27, 2024 – April 29, 2024 |
Emergency Preparation Supply Sales Tax Holiday |
- Portable generators under $3,000 for power outages (light, communication, food preservation).
- Storm protection devices or emergency ladders under $300 (for windows and openings).
|
|
Texas Sales Tax Penalties
Like in most states, sales tax is a big part of how Texas generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state.
Here are the specific penalties for non-compliance with sales tax regulations in Texas:
- $50 penalty for each late report.
- 5% penalty if tax is paid 1-30 days late.
- 10% penalty if tax is paid more than 30 days late.
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