Do I Charge Sales Tax on Services in Texas?

Sales tax in Texas generally applies to the sale of tangible personal property. However, many services are also subject to sales tax if they are specifically listed as taxable by law. Businesses operating in Texas must understand if their services are taxable. This article identifies taxable services and outlines compliance steps, including obtaining a sales tax permit and managing tax collection and remittance.

Determining Taxability of Services

In Texas, the rule is that services are not taxable unless explicitly defined as such by statute. The Texas Tax Code specifies certain categories of services that are subject to sales tax. Service providers must review their offerings against these definitions.

Amusement services are taxable and encompass activities like sightseeing tours, online games, and fortune-telling. Cable television services and bundled cable services are also subject to sales tax. Data processing services are taxable, covering activities such as word processing, data entry, compilation, manipulation, or storage of data. This can include web hosting, website creation, maintenance, and data storage, though 20% of the charge for these services is exempt from tax.

Debt collection services are taxable, but this does not include the collection of court-ordered child support or current credit and real estate accounts. Information services, which involve gathering and furnishing news or other information, including electronic data research and access to databases, are also taxable, with a 20% exemption similar to data processing. Insurance services are taxable, as are laundry, cleaning, and garment services, which include dry cleaning, carpet cleaning, and alterations. Motor vehicle parking and storage services, including valet parking and parking permits, are also taxable.

Nonresidential real property repair, remodeling, and restoration services are taxable on the total charge, including both labor and materials. However, labor for new construction and residential real property repair or remodeling is not taxable. Personal services provided by establishments like massage parlors and tanning salons are taxable. Real property services, such as pest control, garbage collection, janitorial services, landscaping, and surveying, are taxable.

Security services are taxable, including those provided by investigations companies or guard companies. However, certain services, like medical alert services or those provided by full-time, privately employed peace officers, are not taxable. Telecommunication services, including mobile telecommunications, are subject to state sales tax and potentially local sales tax depending on the service and location. Telephone answering services, specifically the receiving and relaying of messages by a human operator, are also taxable. This list provides common examples, but it is not exhaustive, and the specific nature of the service determines its taxability.

Sales Tax Permits

Businesses that provide taxable services in Texas must obtain a Texas Sales and Use Tax Permit. This permit authorizes a business to collect sales tax from customers and then remit it to the state. Preparation of necessary information precedes application submission.

Before applying, businesses should gather the following information:
Legal entity type (e.g., sole proprietorship, partnership, corporation).
Identification numbers, including a federal Employer Identification Number (EIN) or Social Security Number for sole proprietors.
Business contact information, including physical and mailing addresses.
Details of business activities and specific taxable services offered.

The application form for the Texas Sales and Use Tax Permit is available on the Texas Comptroller of Public Accounts website. Having all required business details ready can expedite approval. Once registered, a permit number is issued and must be displayed at the business location.

Collecting and Paying Sales Tax

Once a Texas Sales and Use Tax Permit is obtained, businesses must accurately calculate, collect, and remit sales tax. The state sales tax rate in Texas is 6.25%. Local jurisdictions can impose an additional sales tax of up to 2%, leading to a combined rate of up to 8.25%. Businesses must collect the correct combined rate based on the point of origin for the sale if they are based in Texas, or based on the customer’s location for remote sales.

Sales tax is calculated by multiplying the item price by the applicable tax rate. For instance, a service costing $100 with an 8.25% combined tax rate would incur $8.25 in sales tax. The collected tax must then be remitted to the Texas Comptroller of Public Accounts.

Filing frequencies for sales tax returns are assigned by the Comptroller and depend on the amount of tax collected. Businesses collecting less than $500 per month in sales tax file quarterly. Those collecting between $500 and $20,000 per month file monthly. For businesses collecting more than $20,000 per month, semi-monthly filing is required.

Sales tax returns are due on the 20th of the month following the reporting period, or the next business day if the 20th falls on a weekend or holiday. Filing is done online through the Comptroller’s Webfile eSystems, mandatory for businesses with sales tax liabilities exceeding $50,000. Even if no tax is due for a period, a return must still be filed.

Exemptions for Services

While many services are taxable in Texas, certain transactions involving otherwise taxable services may qualify for exemptions. Exemptions depend on the transaction’s nature or the purchaser’s status. Understanding these helps businesses and customers avoid unnecessary tax liabilities.

One common exemption applies when a taxable service is purchased for resale. If a business purchases a taxable service and resells it as part of another taxable service, they can provide a resale certificate to the original service provider instead of paying sales tax. The business then collects sales tax on the total amount charged to their customer. This prevents double taxation on the same service.

Services provided to certain governmental entities are exempt from sales tax. If a taxable service is rendered directly to a government agency, sales tax is not applied. Similarly, qualifying non-profit organizations are also exempt from paying sales tax on taxable services. To claim this exemption, the non-profit must provide an exemption certificate to the service provider.

Specific statutory exemptions may apply to certain services under particular conditions; businesses should consult the Texas Comptroller’s guidance for detailed information.