Texas sales tax: common and unusual exemptions
Everything’s bigger in Texas, from cowboy hats and belt buckles to food and business. Behind New York, the Lone Star State has the most Fortune 500 companies in the US, including ExxonMobil, Texas Instruments, and Kimberly-Clark.
In addition, Texas was recently named one of the 10 most favorable states to do business, due to relatively low tax rates and business-friendly policies, such as no individual or corporate income taxes. However, no matter how friendly the tax policies, businesses can still take advantage of exemptions this tax season to reduce their tax burden.
Common sales tax exemptions
Common Texas sales tax exemptions include those for necessities of life, including most food and health-related items. In addition, goods for resale, such as wholesale items, are exempt from sales tax, as well as newspapers, containers, previously taxed items, and certain goods used for manufacturing. Certain groups, such as government entities, as well as religious, educational, charitable, and public service organizations, also benefit from sales tax exemptions when purchasing or selling certain items.
If you’re an ecommerce business that doesn’t maintain a presence, or nexus, in Texas, such as operating a physical office or warehouse, maintaining a sales representative, or marketing your products, you don’t need to collect sales tax from Texas customers. Rather, Texas residents are to report these purchases to the state via the Texas Use Tax Return form.
However, Texas is known to interpret nexus in very strict terms. For example, if you attend a one-day trade show to market your goods in Texas, you automatically have nexus for the entire year. If you do have nexus in Texas, you are required to obtain a sales tax permit and collect sales tax on taxable items. The current state sales tax rate in Texas is 6.25 percent, with local cities or counties imposing up to an additional 2 percent.
Unusual sales tax exemptions
Businesses that operate in Texas have to wrangle with more than just a few odd sales tax exemptions. For example, soft drinks and candy are taxable if sold through a retail store; however, these items are exempt if sold by certain organizations, such as schools, churches, and hospitals. In addition, while water is exempt from the sales tax, ice is not.
Check out the following list to see if your business can take advantage of some odd, but legitimate, exemptions:
- School supplies: Although normally considered taxable items, clothing, shoes, backpacks, and other school supplies under $100 are exempt from sales tax during a three-day weekend each August before the start of school.
- Sales by or to Native American Tribes: All items sold to the Alabama-Coushatta, Tigua, or Texas Kickapoo Native American tribal councils or council-owned businesses are exempt from sales tax. In addition, any cultural items made by a tribal member and sold within the reservation boundaries are exempt from sales tax.
- Gold and silver coins and bullion: The sale of gold and silver bullion and coins, as well as the sale of the official state coin, is exempt from sales tax.
- Sales via coin-operated machines: Food, candy, chewing gum, and children’s toys that are sold through a coin-operated machine (such as gumball machines) for $0.50 or less are exempt from sales tax.
- Bingo equipment: Bingo equipment is exempt from sales tax if purchased by certain charitable organizations for use in fundraisers.
Automating sales tax compliance can take the sting out of compliance. Learn how.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.