How to Correctly Charge Sales Tax in Texas

Sales tax in Texas impacts both consumers and businesses. It serves as a significant revenue stream for state and local governments, funding public services like education and infrastructure. Businesses selling taxable goods or services in Texas must collect this tax from customers and remit it to the state. Understanding sales tax regulations is essential for businesses to ensure compliance and avoid potential penalties.

Obtaining a Texas Sales Tax Permit

Before collecting sales tax, a business must obtain a Texas Sales and Use Tax Permit. This permit is required for any business selling, leasing, or renting taxable goods, providing taxable services, or acquiring taxable items from out-of-state suppliers who do not hold a Texas permit.

Businesses can apply online through the Texas Comptroller of Public Accounts website, which is the faster method. Alternatively, a paper application (Form AP-201) can be downloaded, completed, and submitted by mail.

The application requires the business’s legal name, address, contact information, and Federal Employer Identification Number (EIN) or Social Security Number for sole proprietors. Additional details like the business entity type, North American Industrial Classification System (NAICS) code for the primary business activity, and estimated monthly taxable sales are also requested.

If the business has multiple physical locations in Texas, these can be registered under a single permit during the initial application. Online processing typically takes a few weeks, while mailed applications may require a longer processing time. Upon approval, the business receives its permit number and Webfile ID, which are necessary for filing and payment.

Identifying Taxable Sales and Services

Identifying taxable sales and services is crucial for accurate collection. Sales tax applies to all retail sales, leases, and rentals of most tangible personal property. Tangible personal property refers to items that can be seen, touched, or measured, such as electronics, clothing, and vehicles.

While most services are not subject to sales tax in Texas, the state specifically lists certain services as taxable. These include:
Amusement services
Cable television services
Data processing services
Debt collection services
Information services
Repair, remodeling, or restoration services for nonresidential real property
Personal services like laundry, cleaning, and garment services
Motor vehicle parking and storage services

Common exemptions exist that businesses should be aware of. Food products for home consumption, such as most unprepared grocery items, are exempt from sales tax. Prescription drugs and certain medical supplies are also exempt. Sales made for resale, where the purchaser intends to resell the item, are exempt when the seller obtains a valid resale certificate from the buyer. Certain agricultural items and sales to specific tax-exempt entities, such as government agencies and some nonprofit organizations, may also qualify for exemption.

Calculating Sales Tax

Determining the correct sales tax amount involves applying the proper tax rate to taxable sales. Texas imposes a statewide sales and use tax rate of 6.25 percent on retail sales. Local taxing jurisdictions also impose their own sales taxes.

These local components include city, county, and special purpose district (SPD) taxes. The combined local sales tax rate can be up to 2 percent, bringing the maximum total sales tax rate in some areas to 8.25 percent. The total sales tax rate varies depending on the specific location where the sale occurs.

For businesses operating within Texas, the sales tax rate is determined by the seller’s location, following an origin-based sourcing rule. However, if the local tax rate at the origin address is less than 2 percent, the destination address may be used to apply additional local tax up to the 2 percent limit. For sales made remotely into Texas, the rate is based on the buyer’s location.

Businesses can use the Texas Comptroller’s online Sales Tax Rate Locator tool to determine the combined state and local sales tax rate for a specific address. This tool ensures the correct rate is applied to each transaction. For example, an item costing $100 in an area with an 8.25 percent combined sales tax rate would have $8.25 in sales tax, making the total cost $108.25.

Filing and Paying Sales Tax

Businesses must file returns and remit collected sales tax to the Texas Comptroller of Public Accounts. The Comptroller determines filing frequency (monthly, quarterly, or annually) based on the amount of sales tax collected. Businesses collecting larger amounts of sales tax have more frequent filing obligations.

Sales tax returns are due on the 20th day of the month following the reporting period. If the 20th falls on a weekend or legal holiday, the due date extends to the next business day. For instance, monthly filers report sales for April by May 20th, quarterly filers report sales for January through March by April 20th, and annual filers submit reports for the previous year by January 20th.

The primary method for filing sales tax returns is electronically through the Texas Comptroller’s Webfile system. Businesses log into their Webfile account to file an original return. The system guides users through entering information such as total sales, taxable sales, and taxable purchases for the filing period. Any applicable deductions or credits are also accounted for.

Payment of collected sales tax can also be made electronically through Webfile using methods like electronic bank checks (EFT) or credit cards. While electronic filing is encouraged, paper returns can also be mailed to the Comptroller’s office.

Accurate record-keeping is essential for sales tax compliance. Businesses must maintain records of gross receipts from all sales, taxable services, and total purchases of taxable items. These records, including sales receipts and invoices, must be kept for a minimum of four years, or longer if an audit or legal proceeding is pending.