Texas Sales and Use Tax

How Texas Sales Tax Is Built

Texas charges a 6.25 percent state sales and use tax. Cities, counties, transit authorities and special purpose districts can each add local tax, but the combined local rate cannot exceed 2 percent, so the highest total rate anywhere in the state is 8.25 percent. Many cities in the large metro areas are at that cap. The Comptroller of Public Accounts administers the state and local taxes together on one return, so a business files once for all of its local jurisdictions.

Getting a Permit

Any business that sells, leases or rents taxable goods or performs taxable services in Texas needs a sales and use tax permit before it starts. The permit is free, but the Comptroller may require a security deposit. A business with several locations lists each one, because local tax for most in-state sales is sourced to the seller's place of business.

Where a Sale Is Sourced

For a seller with a place of business in Texas, local sales tax is generally due where the order is received or fulfilled, not where the customer lives. Local use tax can then apply at the delivery address if the 2 percent cap has not been reached. These rules matter for businesses that take orders at one site and ship from another. Remote sellers, by contrast, collect based on the customer's location.

Taxable Services

Texas taxes a longer list of services than many states. Among them:

Data processing services, including software as a service, where 20 percent of the charge is exempt and tax applies to the other 80 percent.
Information services, with a similar 20 percent exemption.
Repair, remodeling and restoration of nonresidential real property, and building cleaning and maintenance.
Security services, telecommunications, cable and satellite services.
Landscaping and lawn care, pest control, and personal services such as massage parlours and tanning salons.
Repair of most tangible personal property, from vehicles to equipment.

Professional work such as accounting, legal, engineering and medical services is not taxable, even when it is performed on a computer.

Contractors

Texas treats residential and nonresidential construction differently. Labor to repair or remodel a residence is not taxable; on a lump-sum contract the contractor pays tax on materials when buying them, while on a separated contract the contractor collects tax from the customer on the separately stated materials. Repair, remodeling and restoration of nonresidential property is taxable on the full charge, including labor, whatever form the contract takes. New construction is generally not a taxable service, but materials are taxed. Getting the contract type right before the job starts avoids an audit assessment later.

Remote Sellers and Marketplaces

A seller with no physical presence in Texas must register once its total Texas revenue reaches $500,000 in the preceding 12 calendar months. That figure includes taxable and nontaxable sales and sales for resale. Remote sellers can elect the single local use tax rate, currently 1.75 percent, instead of tracking each local rate. Marketplace providers collect on behalf of their third-party sellers, and those sales are reported by the marketplace.

Filing Frequency and Discounts

The Comptroller assigns monthly filing to businesses owing $1,500 or more a quarter, quarterly filing below that, and yearly filing when tax owed is less than $1,000 a year. Returns are due on the 20th of the month after the period ends. Businesses that file and pay on time keep a 0.5 percent discount on the tax collected, and monthly and quarterly filers can earn an additional prepayment discount by paying a reasonable estimate early. A return is required even for a period with no sales.

Use Tax and Exemptions

When a business buys taxable items or services without paying Texas tax, such as equipment from an out-of-state vendor or software from a provider that did not collect, it owes use tax and reports it on its own return. Purchases for resale are exempt with a properly completed resale certificate, and manufacturers, farmers and ranchers with an agricultural and timber registration number, and qualifying nonprofits can buy certain items exempt. Each exempt sale should be backed by the certificate in your files.

What We Handle

Taxability reviews of your products and services.
Permit applications and location setup.
Monthly, quarterly or yearly returns.
Reconciling tax collected in your point-of-sale or invoicing system to the ledger.
Use tax reviews of vendor invoices and certificate files.