Do I Have to Charge Sales Tax in Texas?

Sales tax in Texas is a consumption tax imposed on the retail sale, lease, or rental of most goods and certain services within the state. Businesses operating in Texas, or those with a connection to the state, are responsible for collecting this tax from customers and remitting it to the Texas Comptroller of Public Accounts. The state sales tax rate is 6.25%, with local taxing jurisdictions potentially adding up to 2%, for a maximum combined rate of 8.25%.

Determining Your Obligation to Collect Texas Sales Tax

A business must collect Texas sales tax if it has “nexus” in the state and sells taxable goods or services. Nexus refers to a sufficient connection between a business and Texas that creates a sales tax collection obligation. Physical presence nexus is established if a business maintains an office, distribution center, warehouse, or any physical location where business is conducted in Texas. This also includes having employees, sales representatives, or agents conducting business, or owning/leasing property or inventory within Texas.

Beyond physical presence, Texas has economic nexus provisions for out-of-state sellers. Remote sellers must register and collect Texas sales tax if their total sales revenue in the state exceeds $500,000 in the preceding twelve calendar months. This threshold includes both taxable and nontaxable sales of tangible personal property and services.

A “seller” or “retailer” for sales tax purposes is any individual, partnership, corporation, or organization engaged in business in Texas that sells tangible personal property or provides taxable services. Businesses making regular sales are subject to these rules, distinguishing them from occasional, isolated sales like a private garage sale. The obligation to collect sales tax applies to both in-state and qualifying out-of-state retailers.

What is Subject to Texas Sales Tax

Texas sales tax applies to the sale, lease, or rental of most tangible personal property. Common examples include clothing, electronics, furniture, vehicles, and general merchandise. This broad category covers any item that can be seen, touched, or measured.

While many services are exempt, Texas specifically taxes a variety of services.

• Amusement services
• Cable television services
• Data processing services
• Debt collection services
• Security services
• Information services
• Laundry, cleaning, and garment services
• Motor vehicle parking and storage services
• Nonresidential real property repair, restoration, or remodeling services

Labor charges for fabricating or processing tangible personal property, even when the customer provides materials, can also be taxable.

Digital products, including Software as a Service (SaaS), are taxable in Texas. SaaS is categorized as a data processing service and is subject to sales tax. However, only 80% of the total charge for data processing services, including SaaS, is subject to the state’s sales tax. The lease or rental of tangible personal property is also subject to sales tax in Texas.

Common Exemptions from Texas Sales Tax

Texas law provides several exemptions from sales tax. One exemption is for sales for resale, where a purchaser buys goods with the intent to resell them. To claim this exemption, the buyer must provide the seller with a valid resale certificate.

Manufacturing exemptions apply to tangible personal property that becomes an ingredient or component of an item manufactured for sale. This also covers machinery, equipment, and certain materials used directly in the manufacturing process that cause a physical or chemical change in the product. Qualified non-profit organizations may also be exempt from sales tax on certain purchases.

Agricultural exemptions are available for items used directly in agricultural production, such as seeds, fertilizers, livestock feed, and farm machinery. Some specific services are exempt, including professional services like legal or medical services. Most food products for home consumption, such as unprepared groceries, are exempt from sales tax. Prescription medications and certain over-the-counter medicines labeled with a “Drug Facts” panel are also exempt from sales tax.

Registering and Reporting Texas Sales Tax

Once a business determines it has a sales tax collection obligation, it must obtain a sales tax permit from the Texas Comptroller of Public Accounts. The application process can be completed online or by mail. Required information for registration includes the business’s legal name, structure, address, Employer Identification Number (EIN) or Social Security Number, and details about the business activity. There is no fee to apply for a Texas sales tax permit.

The Texas Comptroller assigns a filing frequency (monthly, quarterly, or annually) based on the business’s sales volume. For instance, businesses collecting $1,500 or more in state sales tax per quarter file monthly, while those collecting less may file quarterly or annually. Sales tax returns are due on the 20th of the month following the reporting period. If the due date falls on a weekend or holiday, the deadline shifts to the next business day.

Businesses are responsible for collecting the sales tax from customers at the time of sale and then remitting these funds to the state. Sales tax returns can be filed online, which requires inputting total sales, taxable sales, and taxable purchases for the period. Businesses must retain sales and use tax records for at least four years, including records of gross receipts, purchases of taxable items, and exemption certificates. These records are necessary to verify the accuracy of sales and use tax returns and to substantiate any claimed deductions or exclusions.