Are Services Subject to Sales Tax in Texas?

In the United States, sales tax generally applies to the sale of tangible personal property. However, the application of sales tax to services varies by state. Texas has specific rules for taxing services, which differ from the general taxation of goods. Businesses and consumers must understand these rules to ensure compliance.

The General Rule for Services

In Texas, services are not subject to sales tax unless explicitly identified as taxable by state law. This contrasts with tangible personal property, which is generally taxable unless specifically exempt. The Texas Tax Code outlines a list of services subject to sales tax; any service not on this list is considered non-taxable. This requires careful attention to specific legal definitions and categories, rather than assuming a service is exempt simply because it is not a physical product.

Services Subject to Sales Tax

Texas law specifies categories of services subject to sales tax. These taxable services cover various industries and activities, often with detailed definitions and exceptions. The state sales tax rate is 6.25%, with local jurisdictions potentially adding up to 2%, for a combined maximum rate of 8.25%.

Repair, remodeling, maintenance, and restoration services for tangible personal property are taxable. This includes services like shoe shining, appliance repair, furniture refurbishing, jewelry repair, and dog grooming. Labor that creates or modifies a taxable item, such as photography, producing artwork, or custom sewing, is also subject to sales tax.

Amusement services are taxable in Texas, covering activities for entertainment or recreation. Examples include sightseeing tours, online games, and fortune-telling services.

Cable television and bundled cable services are taxable. This includes video programming distribution, such as direct broadcast satellite service (DBS) and subscription television service (STV). However, satellite television service provided directly to a customer’s premises is exempt from local sales and use tax.

Data processing services, involving computer use for word processing, data entry, compilation, storage, or manipulation, are taxable. Twenty percent of the charge for these services is exempt from tax. This category can also include some software as a service (SaaS) offerings.

Information services are taxable, with 20% of the charge exempt from tax. This includes subscriptions to databases, newsletters, financial market reports, and news clipping services. Services like data retrieval, research, and global positioning system (GPS) information also fall under this category.

Laundry, cleaning, and garment services are taxable, including dry cleaning, washing, and pressing apparel and other textiles. These services apply to both personal and commercial items.

Motor vehicle parking and storage services are taxable, including charges for parking meters, decals, permits, valet parking, and impound fees. This applies to both short-term and long-term parking facilities.

Nonresidential real property repair, remodeling, and restoration services are taxable. This applies to labor and materials used to rebuild, replace, alter, modify, or upgrade existing nonresidential real property. However, it does not include adding new usable square footage or scheduled periodic maintenance. Residential real property contractor services are not taxable.

Personal care services, including those provided by a massage parlor, Turkish bath, or escort service, are taxable. This category covers services focused on personal well-being or appearance.

Security services are taxable, covering charges for protecting people or property. If any portion of the service is located in Texas, sales tax applies.

Telecommunication services are taxable, including voice, data, and video transmission. Telephone answering services are also taxable.

Utility transmission and distribution services are taxable if the transmission or delivery is directly to an end-use customer whose electricity consumption is subject to sales tax. This ensures that the final delivery of taxable utilities is also taxed.

Other specific taxable services include credit reporting services, where tax applies if the credit applicant’s address is in Texas and the requester is in or doing business in Texas. Debt collection services are taxable. Pest control and extermination, garbage and waste collection or removal, janitorial and custodial services, landscaping, and surveying services are also taxable.

Applying Sales Tax to Services

Determining the taxability of services becomes more intricate when transactions combine taxable and non-taxable components. When a transaction includes both taxable and non-taxable services or tangible personal property for a single, non-itemized price, it is a bundled transaction. If the taxable portion exceeds 5% of the total charge, the entire transaction is presumed taxable unless items are clearly separated on the invoice. The “true object” test determines the transaction’s primary purpose; if the intent was to purchase non-taxable services with incidental tangible personal property, the transaction might not be taxable. Businesses should itemize charges on invoices and maintain documentation to prevent the entire charge from being taxed.

Sourcing rules determine the jurisdiction where sales tax applies, especially for services involving multiple locations. For sales tax purposes, a service is performed where the provider’s personnel or property are doing the work. Activities not directly used to provide the service are not considered when determining the location of performance. If services are performed both inside and outside Texas for a single charge, receipts are attributed to Texas based on the fair value of services performed within the state. This fair value can be determined by considering the relative value of each service or units of service, such as hours worked.

A common misconception is that all services are exempt from sales tax. While many services are non-taxable, Texas specifically lists categories of services subject to sales tax. Businesses providing services must review the state’s tax code and guidance from the Texas Comptroller of Public Accounts to determine their sales tax obligations. Another misconception involves labor taxability; while some labor is non-taxable, labor associated with the repair, remodeling, or restoration of tangible personal property or nonresidential real property, or the creation of new taxable items, is taxable.