Texas sales tax guide

Sales tax is a tax paid to state and local tax authorities in Texas for the sale of certain goods and services. First adopted in 1961 and known as the "Limited Sales and Use Tax", sales tax is most commonly collected from the buyer at the point of sale. Municiple sales tax was enacted in 1967.

As a business owner selling taxable goods or services, you act as an agent of the state of Texas by collecting tax from purchasers and passing it along to the appropriate state or local tax authority. As of March 2019, sales and use tax in Texas is administered by the Texas Comptroller of Public Accounts.

Any sales tax collected from customers belongs to the state of Texas, not you.  It’s your responsibility to manage the taxes you collect to remain in compliance with state and local tax laws. Failure to do so can lead to penalties and interest charges.

Use tax is similar to sales tax, but applied where goods are consumed rather then where purchased.

In most cases, sales tax is collected at the point of purchase. However, there are a number of cases when this may not be the case:

• Resellers: Goods purchased for resale may be purchased tax free. The reseller will collect sales tax on the final sale to the consumer.
• Tax-exempt Organizations: Goods purchased by tax-exempt organization such as government agencies, nonprofits, or schools may qualify as a tax-exempt purchase.
• Remote Purchases: In some cases, goods purchased remotely via phone, online, or mail-order may not require the seller to collect sales tax.

In each of the above cases, a use tax may now be required to collect sales tax. In such instances, the tax burdon shifts to the consumer who is required to 

Use tax laws in Texas apply to goods purchased out of the country but consumed in Texas.

To summarize, use tax is due when goods are purchased tax free by a merchant and then converted for use, consumption, or enjoyment by that same merchant.

When you need to collect Texas sales tax

In Texas, sales tax is collected on the sale, lease, or rental of tangible goods and some services. The tax is collected by the seller and remitted to state and local tax authorities. The seller acts as a de facto tax collector. However, how does a seller know when they are required to collect sales tax in Texas?

The 1992 Quill Corp. v. North Dakota ruling held that a state could only require a company to collect, file, and remit sales tax if the seller had a substantial physical presence in the state. For many online sellers, this meant they did not have to collect tax on sales to consumers located in Texas. This, however, was overturned in 2018 with the South Dakota v. Wayfair, Inc. ruling by the Supreme Court.

A lot has changed with regards to sales tax lawsTo help you determine whether you need to collect sales tax in Texas, start by answering these three questions:

1. Do you have nexus in Texas?
2. Are you selling taxable goods or services to Texas residents?
3. Are your buyers required to pay sales tax?

If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.

Failure to collect Texas sales tax

If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.

It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete. 

The need to collect sales tax in Texas is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax. 

Nexus triggers

Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.

In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.


While physical presence still triggers a sales tax collection obligation in Texas, it’s now possible for out-of-state sellers to have sales tax nexus with Texas.

Out-of-state sellers

Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:


Affiliate nexus: Having ties to businesses or affiliates in Texas. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.

Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise. At this time, Texas has not enacted a click-through nexus law.

Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after April 1, 2019, a remote seller must register then collect and remit Texas sales tax if the remote seller meets the following criteria (the economic threshold):

• The remote seller's Texas revenues from sales of tangible personal property and services during the preceding 12 calendar months are below $500,000. The initial 12 calendar months for calculating a remote seller’s Texas revenues is July 1, 2018, through June 30, 2019.

Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Texas in a warehouse owned or operated by Amazon.

Trade shows: Attending conventions or trade shows in Texas. You may be liable for collecting and remitting Texas sales and use tax on orders taken or sales made during Texas conventions or trade shows, even if you only attend one trade show in the state in a year, for one day.

If you have nexus with Texas, you’re required to register with the Texas Comptroller and to charge, collect, and remit the appropriate tax to the state.

Trailing nexus

Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. Texas used to enforce trailing nexus for 12 months after a retailer last engaged in business in the state. In 2015, however, trailing nexus was eliminated. Now, nexus with Texas generally lasts until the seller no longer has, and no longer intends to engage in activities in the state that would create nexus with the state. To verify that nexus no longer exists, out-of-state sellers are required to maintain records for at least four years after ceasing to have nexus with the state.

Fulfillment by Amazon (FBA)

If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Texas.

If you sell taxable goods to Texas residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.

Sourcing sales tax in Texas: which rate to collect

In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing). Texas does a little of each.

The origin address is used first. However, if the local tax rate from the origin address is less than 2 percent, the destination address is used to apply additional local tax up to the state-mandated 2-percent limit.

For example:

• If an order is placed in person at a place of business in Texas, the rate is based on where the order is placed
• If an order is fulfilled at a seller’s place of business in Texas, the rate is based on where the order is fulfilled 
• If an order isn’t fulfilled at a seller’s place of business in Texas, but is received at a seller’s place of business in Texas, the rate is based on where the order is received
• If an order isn’t received or fulfilled at a seller’s place of business in Texas, but is fulfilled at a Texas location, the rate is based on where the order is shipped or delivered
• If the order is received, fulfilled, and delivered from a location outside of Texas, and the seller doesn’t have nexus with Texas, no tax is due

For additional information, see Local Sales and Use Tax Collection – A Guide for Sellers.

After determining you have sales tax nexus in Texas, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Texas business license and sales tax registration.

How to register for a Texas seller’s permit

You can register for a Texas Business Tax License online through the Texas Comptroller of Public Accounts. To apply, you’ll need to provide the Texas Comptroller with certain information about your business, including but not limited to:

• Business name, address, and contact information
• Federal EIN number
• Date business activities began or will begin
• Projected monthly sales
• Projected monthly taxable sales
• Products to be sold 

Cost of registering for a Texas seller’s permit

There is currently no cost to register for a seller's permit in Texas.

Acquiring a registered business

You must register with the Texas Comptroller of Public Accounts if you acquire an existing business in Texas. The state requires all registered businesses to have the current business owner’s name and contact information on file.

Streamlined Sales Tax (SST)

The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).

As of November 2018, Texas is not an SST member state.

Once you've successfully registered to collect Texas sales tax, you'll need to apply the correct rate to all taxable sales, file timely returns with the Texas Comptroller of Public Accounts, and keep excellent records. Here’s what you need to know to keep everything organized and in check.
 

How you collect Texas sales tax is influenced by how you sell your goods.

Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.

Hosted store: Hosted store solutions like Shopify or Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Texas sales tax collection can be managed.

Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.

Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.

Texas sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.

Tax-exempt goods

Some goods are exempt from sales tax under Texas law. Examples include most non-prepared food items, food stamps, and medical supplies.

We recommend businesses review the laws and rules put forth by the Texas Comptroller of Public Accounts to understand which goods require sales tax to be collected, and under what conditions.

Tax-exempt customers

Some customers are exempt from paying sales tax under Texas law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.

Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.

Misplacing a sales tax exemption/resale certificate

Texas sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the Texas Comptroller of Public Accounts may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.

Sales tax holidays

Sales tax holidays exempt specific products from sales and use tax for a limited period of time, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.

As of March 2019, Texas has the following annual sales tax holidays scheduled:

• Emergency preparedness supplies: April
• Texas EnergyStar®: Memorial Day Weekend
• Water-efficient products: Memorial Day Weekend
• Sales tax holiday (back-to-school items): August 

You're registered with the Texas Comptroller of Public Accounts and you've begun collecting sales tax. Remember, those tax dollars don't belong to you. As an agent of the state of Texas, your role is that of intermediary to transfer tax dollars from consumers to the tax authorities. 

How to file

Once you’ve collected sales tax, you’re required to remit it to the Texas Comptroller of Public Accounts by a certain date. The Texas Comptroller of Public Accounts will then distribute it appropriately.

Filing a Texas sales tax return is a two-step process comprised of submitting the required sales data (filing the return) and remitting the collected tax dollars (if any) to the Texas Comptroller. The filing process forces you to detail your total sales in the state, the amount of sales tax collected, and the location of each sale.

Online filing is generally recommended, but form 01-114 is still available for download.

Filing frequency

The Texas Comptroller of Public Accounts will assign you a filing frequency. Typically, this is determined by the size of your business. State governments generally ask larger businesses to file more frequently. See the filing due dates section for more information.

Texas sales tax returns and payments must be remitted at the same time; both have the same due date.

Online filing

You may file directly with the Texas Comptroller of Public Accounts by visiting their site and entering your transaction data manually. This is a free service, but preparing Texas sales tax returns can be time-consuming — especially for larger sellers.

Using a third party to file returns

To save time and avoid costly errors, many businesses outsource their sales and use tax filing to an accountant, bookkeeper, or sales tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about Missouri sales tax code.

Filing when there are no sales

Once you have a Texas seller's permit, you’re required to file returns at the completion of each assigned collection period regardless of whether any sales tax was collected. When no sales tax was collected, you must file a "zero return.”

Failure to submit a zero return can result in penalties and interest charges.

Closing a business

The Texas Comptroller of Public Accounts requires all businesses to "close their books" by filing a final sales tax return. This also holds true for business owners selling or otherwise transferring ownership of their business.

Timely filing discount

Many states encourage the timely or early filing of sales and use tax returns with a timely filing discount. As of March 2019, the Texas Comptroller of Public Accounts offers a timely filing discount of 0.5 percent plus an early payment discount of 1.25 percent, for a total possible discount of 1.75 percent.

It's important to know the due dates associated with the filing frequency assigned to your business by the Texas Comptroller of Public Accounts. This way you'll be prepared and can plan accordingly. Failure to complete filing by the assigned date can lead to fines and interest charges.

The Texas Comptroller of Public Accounts requires all sales tax filing to be completed by the 20th of the month following the assigned filing period. Below, we've grouped Texas sales tax due dates by filing frequency for your convenience. Due dates falling on a weekend or holiday are adjusted to the following business day.

Filing a Texas sales tax return late may result in a late filing penalty as well as interest on any outstanding tax due. For more information, refer to our section on penalties and interest.

In the event a Texas sales tax filing deadline was missed due to circumstances beyond your control (e.g., weather, accident), the Texas Comptroller of Public Accounts may grant you an extension. However, you may be asked to provide evidence supporting your claim.

Hopefully you don't need to worry about this chapter because you're filing and remitting Texas sales tax on time and without incident. However, in the real world, mistakes happen. 

If you miss a sales tax filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit collected tax on time may result in penalties and interest, and the longer you wait to file, the greater the penalty and the greater the interest.

If you’re in the process of acquiring a business, it’s strongly recommended that you contact the Texas Comptroller of Public Accounts and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding Texas sales and use tax liability.

Because Texas is one of the largest states in the Union, behind only California in population, most businesses have customers in the Lone Star State. If you’re collecting sales tax from Texas residents, you’ll need to consider how to handle taxes on shipping and handling charges.

Taxable and exempt shipping charges

Texas sales tax may apply to charges for shipping, delivery, freight, and postage. Charges for handling are generally taxable. 

The general rule of thumb in Texas is that if the sale is taxable, transportation and related delivery charges incurred both before and after the sale are taxable, even if stated separately from the sales price. If the sale is exempt, related delivery charges are generally exempt.

If a shipment contains both taxable and exempt items, related delivery charges may be either taxable or exempt, depending on the ratio of exempt and taxable goods.

Tax may also apply to drop shipping scenarios. If you use drop shipping to deliver items to customers in Texas, you may be responsible for collecting and reporting tax. However, if you pay a third party to deliver or ship items at the customer’s request, separately stated charges are generally not taxable.

The Texas Comptroller of Public Accounts recommends keeping clear invoices and records for all transactions. Records must reflect the total gross receipts from all sales, rentals, leases, taxable services, and taxable labor, as well as the total purchases of taxable items. Additional records must be kept to validate deductions, exclusions, or exemptions.

There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in Texas and sales tax should be taken directly to a tax professional familiar with Texas tax laws.