If you sell products, or certain services, in Texas, you are responsible for collecting sales tax from your customers and sending it to the state. The money isn't yours; you're holding it for the Comptroller. So if you under-collect, the difference comes out of your own pocket.
Do you need a sales tax permit?
You need a Texas sales and use tax permit if you:
- Sell tangible goods in Texas (from a store, online, at markets or events)
- Lease or rent out goods
- Sell taxable services
The permit is free, and you apply online through the Texas Comptroller. Get it before you make your first taxable sale.
Online sellers based outside Texas must also register once their sales into Texas pass $500,000 in the previous twelve months.
Which services are taxable in Texas?
Most professional services, like accounting, legal work or consulting, are not taxed. But Texas does tax more services than many states. Examples include:
- Data processing and information services (taxed on 80% of the charge)
- Security services
- Real property services, such as landscaping, lawn care and janitorial work
- Repair, remodeling and maintenance of personal property
If you're a service business and you're not sure where you stand, check before you start invoicing. Fixing it after an audit is far more expensive.
How the rate works
The state rate is 6.25%. Cities, counties, transit authorities and special purpose districts can add up to 2% more, so the maximum combined rate is 8.25%.
Which local rate applies depends on where the sale happens:
- In-state sellers generally collect local tax based on the location of their business.
- Delivered goods can be sourced to the delivery address in some cases.
The Comptroller has a free rate lookup by address. Set up your invoicing or point-of-sale system with the correct rate once, and check it each January, since local rates can change.
How often you file
When you get your permit, the Comptroller assigns you a filing frequency based on how much tax you collect:
- Monthly for larger amounts
- Quarterly for most small businesses
- Annually for very small amounts
Returns are due on the 20th day of the month after the reporting period. A quarterly filer, for example, reports July through September by October 20.
You must file even if you had no sales. Skipping a "zero" return triggers the same late penalty as skipping any other return.
Discounts for paying on time
Texas rewards you for paying on time:
- Timely filing discount: you keep 0.5% of the tax due when you file and pay on time.
- Prepayment discount: if you prepay a reasonable estimate before the due date, you get an additional 1.25%.
On a few thousand dollars a quarter the discount is small, but you lose it the moment you're late.
Penalties for filing late
- $50 late filing fee for each return
- 5% penalty on tax paid 1 to 30 days late
- 10% penalty on tax paid more than 30 days late
- Interest after 60 days
Repeated late returns can also lead to the Comptroller requiring a security bond from your business.
The bookkeeping that keeps you safe
Most sales tax problems come from messy records rather than from not knowing the rules. The basics that prevent them:
- Record sales tax separately from your revenue. Collected tax is a liability, not income.
- Reconcile the sales tax collected in your books against your sales reports every month.
- Keep exemption and resale certificates for every customer you didn't charge tax.
- File every period, including zero periods, and save the confirmations.
- Track your due dates with a reminder a week before the 20th.
QuickBooks can track sales tax automatically, but only if it's set up with the right rates and the right taxable and non-taxable items. That setup is one of the first things I check when I take over a client's books.
If you'd like someone to handle your sales tax filings and keep the books clean behind them, book a short intro call.
This article is general information, not tax advice for your specific situation. Rules and rates are set by the Texas Comptroller and can change.