When conducting sales of taxable goods or services in Texas, or selling to customers within the state, understanding the sales tax regulations is crucial. This guide provides a detailed overview of “What Is The Sales Tax In Texas,” covering state and local taxes, how to determine which taxes to collect, and special situations that may apply to your business.
The state sales or use tax in Texas is 6.25 percent. In addition to the state tax, you must collect any applicable local sales or use tax. The local tax cannot exceed 2 percent, resulting in a maximum combined tax rate of 8.25 percent. Both state and local sales and use taxes are reported on the Texas Sales and Use Tax Return. The Comptroller’s online Sales Tax Rate Locator can be used to find specific sales tax rates by address.
Understanding Local Sales and Use Taxes in Texas
Navigating local sales and use taxes can be intricate. Here’s a breakdown of the key aspects:
Place of Business and Tax Collection
Generally, local sales tax is determined by the seller’s place of business. Local use tax, however, is based on the location where the customer first stores, uses, or consumes the item. If you ship or deliver goods, you may be responsible for collecting either local sales tax, local use tax, or both.
Defining “Place of Business” in Texas
A “place of business” is defined as a store, office, or other location operated by the seller for selling taxable items, where sales personnel receive three or more orders during the calendar year. These orders must come from individuals outside the seller’s employees, independent contractors, and affiliates. Importantly, computer servers, internet protocol addresses, websites, domain names, or software applications are not considered places of business.
Call centers, showrooms, and clearance centers can qualify as places of business if they meet the aforementioned requirements. However, a warehouse fulfilling orders is not considered a place of business unless it independently meets the criteria.
A seller can have multiple places of business, a single place of business, or no place of business in Texas, depending on their operational structure. Temporary locations, such as booths at fairs or parking lot sales, are also considered places of business for local sales tax collection.
Determining Which Local Taxes Are Due: Scenarios and Examples
The location where a sale or use is “consummated” dictates the applicable local taxes. This depends on where the order is received, whether it’s placed in person, and where it’s fulfilled.
Order Received at a Place of Business of the Seller in Texas
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Orders Placed in Person: When an order is placed in person at the seller’s place of business, the sale is consummated there, regardless of the fulfillment location.
- Example: A customer buys furniture in-person at a store. Local sales tax is due at the store’s location.
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Orders Not Placed in Person:
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If the order is fulfilled at a place of business of the seller, the sale is consummated where the order is fulfilled.
- Example: Store A receives a phone order and Store B fulfills it. Local sales tax is due at Store B’s location.
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If the order is fulfilled at a location that isn’t a place of business of the seller, the sale is consummated where the order is received.
- Example: A sales office receives phone orders, but a third party fulfills them. Local sales tax is due at the sales office location.
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Order Not Received at a Place of Business of the Seller in Texas
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Order Fulfilled at a Place of Business of the Seller in Texas: The sale is consummated at the place of business where the order is fulfilled.
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Order Not Fulfilled at a Place of Business of the Seller in Texas: The sale is consummated at the location in Texas where the order is shipped, delivered, or where the purchaser takes possession.
- Example: A customer orders from a store in Arkansas, and the item is shipped from a Texas warehouse (not a place of business) to their Texas address. Local sales tax is due based on the customer’s address.
If an order is received and fulfilled outside of Texas, the sale is not consummated in Texas. However, local use tax is due at the location where the item is shipped, delivered, or where the purchaser takes possession.
Local Taxing Entities and Combined Areas
Texas has four types of local taxing entities: cities, counties, special purpose districts (SPDs), and transit authorities. These entities can cross or share boundaries, but the combined local sales tax rate cannot exceed 2 percent.
Some areas in Texas have overlapping boundaries, technically exceeding the 2 percent local tax rate. The Comptroller maintains a 2 percent rate in these areas and shares revenues between the jurisdictions. Sellers in these “combined areas” must use the designated combined area local code when reporting sales and use taxes. You can find these areas listed on the Comptroller’s website.
Understanding Local Use Tax
Local use tax is due on the storage, use, or consumption of a taxable item within a local taxing jurisdiction. Sellers are responsible for collecting it if they ship or deliver a taxable item into a jurisdiction with a higher local sales and use tax rate than the location where the sale is consummated. Use tax rates are the same as sales tax rates.
Local sales tax and local use tax might both be due on the same item if:
- The total amount of local sales tax is less than 2 percent.
- The local sales tax and local use tax are not the same type (e.g., if a city sales tax is due, there will be no city use tax).
When state use tax is due, local use tax is also due at the ship-to location, if that location is within a local taxing jurisdiction.
Special Situations for Sales Tax in Texas
Specific types of businesses and transactions have unique rules for sales tax collection:
- Amusement Services: Collect local taxes where the performance or event occurs.
- Cable and Satellite TV Services: Collect local taxes where the customer receives the service. Satellite service is exempt from local tax.
- Florists: Collect local taxes based on the location of the place of business that takes the order.
- Marketplace Sales: Marketplace providers (e.g., Amazon, eBay) must collect and remit tax on third-party sales based on the shipping destination.
- Motor Vehicle Parking and Storage: Collect local taxes based on where the parking service occurs.
- Natural Gas and Electricity: Collect local taxes based on where the customer receives the utility. Residential use has specific exemptions.
- Nonresidential Real Property Repair and Remodeling Services: Collect local taxes for labor and materials based on the job site location.
- Separated Contracts for New Construction or Residential Repair and Remodeling Projects: Collect local taxes on the separately stated charge for materials based on the job site location.
- Telecommunications Services: Subject to state sales tax but not automatically subject to local sales tax.
- Waste Collection and Waste Removal Services: Collect local taxes where the waste is collected.
- Itinerant Vendors: Collect sales tax for all local taxing jurisdictions in Texas where deliveries are made or where the customer takes possession.
- Vending Machine Sales: Collect local sales tax for the taxing jurisdictions where the vending machines are located.
- Kiosks: If items are shipped from a Texas place of business, local sales tax is due at that location. Otherwise, local sales or use tax is due based on the ship-to location.
- Remote Sellers: Remote sellers with significant Texas revenue must collect and remit use tax, with options for using the ship-to location or the single local use tax rate.
Stay Compliant with Texas Sales Tax Laws
Navigating Texas sales tax can be complex, but understanding the rules and regulations is essential for compliance. Utilize the Comptroller’s online Sales Tax Rate Locator and consult the Texas Tax Code and Comptroller Rules for detailed information.
Disclaimer: This information is for general guidance only and does not constitute legal or tax advice. Consult with a qualified professional for specific advice regarding your situation.
