Understanding Texas Sales and Use Taxes
Understanding and complying with the sales tax requirements in the states in which you do business is absolutely essential. More states are taxing services, as well as retail sales, so no business owner can afford to be in the dark. In addition, you may find that you are liable for use taxes for products purchased out of state. This article answers some of the basic questions regarding sales tax in Texas.
In Texas, a tax is imposed on the sale at retail of taxable items and upon the storage, use or other consumption in the state of taxable items purchased, leased or rented from any retailer for storage, use or other consumption in Texas.
Taxable items are tangible personal property (including computer programs) and taxable services including the following:
- amusement services
- cable television services
- personal services
- motor vehicle parking and storage services
- repair, remodeling, maintenance and restoration of tangible personal property
- telecommunications services
- credit reporting services
- debt collection services
- insurance services
- information services
- real property services
- security services
- data processing services
- real property repair and remodeling services
- telephone answering services
Leases. Tax is due on the total amount of financing leases regardless of where the property that was received in Texas is used during the lease. Tax is imposed on the total of an operating lease amount for the entire term of the lease regardless of where the property is used if the lessee takes delivery of the property in the state.
Sales and use tax rate. The sales and use tax rate is 6.25 percent on the state level. If you are the taxpayer collecting the tax, you may deduct 0.5 percent of the tax as reimbursement for collecting the tax. An additional 1.25 percent discount is allowed if you make prepayments of the tax based upon a reasonable estimate of the liability for the quarter or month in which prepayment is made. Be sure to check with your local government in Texas because they are allowed to assess a local sales and use tax.
Sellers and Buyers Both Bear Responsibility for Paying Sales Tax
In Texas, the responsibility is on both the purchaser and seller. Texas may proceed against either the purchaser or the seller for unpaid sales tax. If you are a seller you are responsible for collecting and remitting the tax to the state. The tax is intended to fall on the purchaser and a seller's failure to collect the tax from the purchaser does not relieve the purchaser of tax liability. The required sales tax is added to the sales price and becomes a debt from the purchaser to the seller recoverable at law in the same manner as the sales price.
Absorbing the tax is not permitted. A retailer commits an offense if the retailer advertises, holds out, or states to a customer or to the public that the retailer:
- will assume, absorb, or refund a part of the tax; or
- will not add the tax to the sales price of a taxable item sold, leased, or rented
Obtaining Tax Permits in Texas
If you desire to engage in business as a seller in Texas, a state tax report is required. As a seller you must obtain from the Comptroller of Public Accounts a permit for each place of business. Every retailer selling, leasing or renting tangible personal property for storage, use or other consumption in the state must register with the Comptroller. The permit is valid indefinitely and no fee is necessary.
Many Items May Be Exempt from Tax
Texas includes many specific items that are exempt from sales and use tax. As an example: water, and food for human consumption (with several exceptions), are not subject to sales tax in Texas. You'll want to check and see if you are exempt from the tax. An exemption certificate may be issued by a purchaser of a nontaxable item, or by an organization that has qualified for exemption.
No Tax Is Due When Item Is Purchased for Resale
A resale certificate must be issued for items purchased for resale. A sale is exempt if the seller receives in good faith from a purchaser either an exemption certificate or a resale certificate from a purchaser in the business of selling, leasing, or renting taxable items. The certificate must state that the item purchased is to be sold or transferred as an integral part of a taxable service, in the regular course of the purchaser's business.
Requirements for resale certificates. The exemption certificate must show the following information:
- name and address of the purchaser
- a description of the item to be purchased
- the reason the purchase is exempt from tax
- the purchaser's signature
- the date
- the name and address of the seller
The certificate does not require a tax-exempt number to be valid.
Blanket Resale Certificate Are Permitted
A "blanket" resale certificate may be issued to a supplier or seller by a retailer. A blanket certificate will relieve the burden of executing a separate certificate for each individual tax-exempt purchase as long as there is no significant change in the operations. A blanket certificate describes the general nature of the property purchased for resale and remains in force until revoked in writing.
Physical Presence Triggers Sales Tax Liability
Texas has a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if you have physical presence within State. To determine if you have physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse or any office space in Texas? Maintaining retail or warehouse facilities will give you physical presence. Also, having an office for employees, even for business activities unrelated to mail order sales, will give you physical presence.
- Do my employees or I enter Texas for purposes of taking and transmitting orders from Texas? If your employee or independent contractor goes into Texas to take or transmit orders your business may have physical presence in Texas. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence
- Do my delivery vehicles frequently enter Texas for purposes of delivering property? Frequent deliveries in Texas by your trucks will give you physical presence in Texas.
Texas Allows Use of Sales Tax "Bracket System."
The following bracket system has been issued for purposes of collecting the 6.25 percent state sales and use tax:
|Amount of Sale ||Amount of Tax |
|$0.01 to $0.07 ||No tax |
|.08 to .23 ||1¢ |
|24 to .39 ||2¢ |
|.40 to .55 ||3¢ |
|.56 to .71 ||4¢ |
|.72 to .87 ||5¢ |
|.88 to 1.03 ||6¢ |
|and so forth || |
Texas Imposes Use Tax on Out-of-State Purchases
Use tax is defined as a tax on the person consuming, using, or storing the taxable item in the state. The consumer's liability continues until the tax is paid to the state unless the consumer pays the tax to the retailer or other the person authorized to collect the tax. Retailers engaged in business in the state are responsible for collecting and remitting use taxes and are generally liable for such tax if they fail to do so.
Use tax is also due on taxable items that are purchased outside Texas by a person engaged in business in Texas for delivery, at the direction of the purchaser, to recipients in Texas who are designated by the purchaser. The tax is based on the purchase price of the items delivered to Texas. Local use taxes may also be applicable.
Responsibility for paying use tax. In Texas the responsibility for paying use tax is on the person consuming, using, or storing the taxable item in the state. The consumer's liability continues until the tax is paid to the state unless the consumer pays the tax to, and obtains a receipt from, the retailer or other person authorized to collect the tax. Retailers engaged in business in the state are responsible for collecting and remitting use taxes and are generally liable for such tax if they fail to do so. Upon the purchase of goods, the use tax becomes part of the sales price and is a debt owed by the purchaser to the retailer. If the tax is unpaid, the retailer may file a lawsuit to recover it.
Claiming refund For Excess Tax Payments
If you, as a seller, have returned the sales tax to your customer, credit may be taken on the your current sales tax return or a refund may be requested. A refund may also be requested by a customer who has received from the seller an assignment of the right to the refund. A canceled check or a credit memo signed by the customer is sufficient to document the return of tax to the customer. As an alternative, the seller can file an amended return for the period in which the tax was paid.