Texas Sales and Use Tax Guide | Economic Nexus, Rates & Marketplace Rules

Sales and Use Tax Basics in Texas

Sales Tax

The US State of Texas imposes a sales tax on all retail sales, leases, and rentals of most goods and listed taxable services. In addition to the state-wide tax rate, State laws allow local governments to impose local sales tax on taxable transactions, with some limitations on the applicable tax rates.

Use Tax

Use tax is owed if the sales tax has not been collected and remitted. Usually, the responsibility to remit use tax falls on the consumer, who must pay directly to the tax authority. Situations where a use tax is imposed include the storage, use, or other consumption of tangible goods or a taxable service in Texas.

Texas State Sales and Use Tax Rates

A state-wide sales and use tax rate of 6.25% applies to all taxable transactions. In addition to the state-wide, local governments, including cities, counties, special purpose districts, and transit authorities, may impose local sales and use taxes of up to 2%. 

Texas sales and use tax rules limit the total percentage of taxes imposed on taxable transactions to 8.25% when state and local taxes are combined.

To properly apply sales tax rates, sellers must determine the correct address where the purchases are made. While this is easy when sales are made in brick-and-mortar stores, additional efforts are needed when selling online.

Tax-Exempt Transactions

Under the Texas Tax Code, sales and use tax exemption applies to purchases made by nonprofit and government entities necessary for their functionality. While federal and Texas government bodies are automatically exempt from sales and use tax, nonprofit organizations, such as charities and educational and religious organizations, must apply for exemption from the Comptroller’s office and receive exempt status before making tax-free purchases.

However, the exemption does not apply to sales made by these organizations. If they make taxable sales, sales and use tax rules and rates apply. The list of tax-exempt organizations includes development corporations, emergency medical service corporations, homeowners associations, Chamber of Commerce organizations, and many more.

In addition, many food products, such as flour, sugar, bread, milk, eggs, fruits, vegetables, and similar groceries, are not subject to sales and use tax.

Nexus Rules in Texas

Individuals and businesses selling tangible goods and providing taxable services to customers and consumers in Texas have a physical or economic presence in the state, subjecting them to physical or economic nexus rules. 

In addition, the Texas Tax Code provides provisions on marketplace nexus that are relevant for marketplace facilitators and sellers.

Physical Nexus

A physical nexus in Texas is established when businesses have a temporary or permanent location in Texas where they operate directly or through an agent, have employees or representatives in Texas to sell, deliver, or take orders for taxable items, and perform services using company employees, authorized service agents, or subcontractors in Texas.

Additionally, leasing equipment or other tangible personal property to others in Texas or owning or using tangible goods, including computer software, in Texas is sufficient to establish a physical nexus.

Delivering goods using a company vehicle, allowing the franchisee or licensee to operate under a franchisor or lessor trade name, or incorporating a business in Texas is considered as engaging in business activities in Texas, which establishes a physical nexus.

Economic Nexus

As a result of the South Dakota v Wayfair decision, Texas introduced the economic nexus, mandating that remote sellers, either out-of-state or foreign, must register for sales and use tax when their gross revenue exceeds USD 500,000 in the last 12 months. Gross revenue includes taxable, non-taxable, and tax-exempt sales of tangible goods and services in Texas.

Once the economic threshold is exceeded, taxable persons must collect and remit taxes and meet reporting obligations.

Marketplace Nexus

A marketplace can be a physical or online marketplace, online platform, application, or catalog that marketplace sellers use to make sales. If the marketplace facilitator or seller exceeds the USD 500,000 gross revenue threshold, they must register for sales and use tax purposes.

Taxable Goods and Services in Texas

Non-food products, such as paper, pet, beauty products, clothing, books, and certain edible items, are subject to sales and use tax, as are most other tangible goods.

The Tax Comptroller and Texas Tax Code lists various forms of entertainment, digital and communication services, financial and information-based services, and professional labor as taxable services. Some examples of taxable services are amusement services, cable television, credit reporting, data processing, debt collection, internet access services, and those provided by photographers and artists.

Furthermore, maintenance, repair, and real estate transactions, such as laundry, vehicle storage, property remodeling, and security services, are taxable.

E-Commerce Framework

Remote sellers from another US state or foreign country are liable for sales and use tax if their total Texas gross revenue from sales of tangible goods and taxable services is above USD 500,000 in the preceding 12 calendar months. Once the revenue threshold is exceeded, remote sellers must obtain a permit from the Texas Comptroller, the state governing body for tax matters, and collect and remit state and local taxes on sales to Texas consumers.

The application for a Texas Tax Permit can be filed online through the Texas Online Tax Registration Application or by mailing a Texas application AP-201 form.

Remote sellers may apply a single local tax rate of 1.75% instead of determining the rate based on the destination principle, which is the consumer's address. To apply a single rate, a remote seller must send an official notice to the tax office and file a required form.

However, if the remote seller sells goods or services through a marketplace facilitator or provider, then different rules apply.

Marketplace Rules

Marketplace sellers are generally not required to collect and remit sales and use tax on their sales through the marketplace facilitator if the facilitator provides a certificate stating that they are responsible. However, suppose the facilitator does not provide the needed certificate stating that it will collect and remit sales and use tax on behalf of the marketplace seller. In that case, the seller will be liable for tax purposes.

Nevertheless, marketplace sellers who only sell taxable items through the marketplace must keep records of all marketplace sales for a minimum of four years, even if the marketplace facilitator collects and remits taxes.

Additionally, when a remote seller sells goods on their websites and through a marketplace facilitator, all sales are relevant to determining if the threshold is exceeded. For example, if total sales through the own website are USD 200,000 and through the marketplace USD 350,000, the threshold is exceeded. However, in this situation, the seller must only collect and remit taxes made through its website. In contrast, the marketplace facilitator is responsible for collecting and remitting tax on sales made through the marketplace.

Digital Goods and Services

Under the Texas Tax Code, tangible personal property is also a computer program. Therefore, selling computer programs and software, including software-as-a-service (SaaS), is taxable in Texas. In addition, the systematic solicitation of sales of taxable items in the state through the distribution of computer databases is also regarded as taxable.

Online games are taxable as amusement services. Furthermore, transactions that include sale of digital goods, such as downloaded music, movies, books, apps, and similar items, are taxable.

Finally, data processing services such as data storage, formatting or manipulating clients' data, creating webpages, and providing server space or hosting services are all deemed taxable.

Digital Marketplace

What is in most US states known as marketplace facilitator rules, in Texas, it is referred to as marketplace providers. Regardless of the different terms, they refer to the regulations for digital marketplace owners or operators that process and facilitate sales or payments for marketplace sellers. Examples of such marketplace facilitators include Amazon, eBay, Walmart Marketplace, and Etsy.

Digital Platform Operator

Digital marketplace operators or marketplace providers must collect, report, and remit state and local sales and use tax on all sales made through a marketplace, either their own or those of marketplace sellers, once they exceed the USD 500,000 threshold or engage in other business activities in Texas that would establish a physical nexus.

Unlike remote sellers, marketplace providers cannot apply a single local tax and must determine the applicable rate based on the destination.

An additional obligation for marketplace providers is to provide a written certificate or notification to marketplace sellers that they are responsible for collecting, reporting, and remitting tax on all sales by marketplace sellers. The certificate can be part of the terms of use, any other agreement between the marketplace provider and seller, or a separate document issued to the seller.

Filing and Payment Requirements in Texas

Upon completing the registration process, those who make taxable sales and are registered for sales and use tax purposes in Texas are notified whether they will file tax returns monthly or quarterly. In some cases, yearly returns are required.

Filing and payment methods depend on the taxes paid by a taxable person in the preceding state fiscal year, which runs from September 1 to August 31. If the taxes to be paid are USD 50,000 or more, electronic filing and reporting are required. If the amount is below USD 50,000, paper forms and payment by check are allowed. However, if the amount of tax to be paid is USD 500,000 or more, payments must be made through the government portal TEXNET.

Penalties for Non-Compliance with Sales and Use Tax Requirements

Those who do not meet a deadline for filing a tax return or who do not make payments of due tax on time will face penalties and interests. A penalty of USD 50 is defined for each report filed after the due date. For late payments of up to 30 days, a 5% penalty will be calculated on the due amount. If the payment of due tax is more than 30 days late, a 10% penalty is calculated on the due amount.

For interest, a grace period of 60 days is defined. After that, interest starts accumulating at the annual rate of 8.5%, ultimately increasing the total amount owed.