Texas, a state known for its business-friendly environment, also has a sales tax system that businesses and consumers need to navigate. If you’re operating in Texas or purchasing from Texas businesses, understanding “What Sales Tax In Texas” entails is crucial for compliance and accurate financial planning. This guide breaks down the complexities of Texas sales tax, ensuring you have a clear picture of your obligations and rights.
Texas Sales and Use Tax Basics
In Texas, sales tax is levied on the sale of tangible personal property and certain services. The state sales tax rate is 6.25%. However, this is just the state portion. Local jurisdictions, such as cities, counties, and special purpose districts, can also impose their own sales taxes. The combined rate of state and local sales taxes cannot exceed 8.25%. This means local sales tax can add up to an additional 2%.
Both state and local sales taxes are managed and collected by the Texas Comptroller of Public Accounts. Businesses are responsible for collecting these taxes from their customers and remitting them to the state. This process is typically done through the Texas Sales and Use Tax Return.
To find the precise sales tax rate for a specific location in Texas, the Comptroller provides an online tool: the Sales Tax Rate Locator. This tool allows you to search by address, ensuring you collect the correct amount of tax.
Local Sales Tax: Navigating the Jurisdictions
Local sales taxes in Texas are governed by specific rules and regulations outlined in the Texas Tax Code Subtitle C (Local Sales and Use Taxes) and Comptroller Rule 3.334. Understanding these rules is vital for businesses, especially those operating in multiple locations or shipping goods across the state.
Place of Business: The Key Determinant for Local Sales Tax
Generally, local sales tax is based on the seller’s place of business. This is a crucial concept in Texas sales tax law. A “place of business” is defined as a physical location like a store or office where sales activities occur. Specifically, it’s a location where sales personnel receive three or more orders during a calendar year from non-employees, non-independent contractors, and non-affiliated individuals.
It’s important to note that the definition of “place of business” excludes digital entities such as:
- Computer servers
- Internet protocol addresses
- Websites
- Domain names
- Software applications
However, physical locations like call centers, showrooms, and clearance centers can be considered places of business if they meet the order-receiving criteria. A warehouse, on the other hand, is generally not considered a place of business unless it independently meets the definition.
A business can have:
- A single place of business in Texas
- Multiple places of business in Texas
- No place of business in Texas
- Temporary places of business (e.g., booths at fairs, temporary sales events)
Temporary places of business are treated the same as permanent places of business for local sales tax collection.
Determining the Place of Business for Order Reception
The location where an order is received plays a significant role in determining the applicable local sales tax. Here’s how it works:
- Orders Received by Salespersons: If a salesperson receives an order (via mail, email, or phone) while not at their normal work location, the order is considered received at their normal work location, if that location qualifies as a “place of business.”
- Orders Not Received by Sales Personnel: Orders not directly received by sales personnel are considered received at locations that are not places of business.
- Fulfilled by a Place of Business: If these orders are fulfilled from a place of business of the seller, the sale is “consummated” at that place of business.
- Not Fulfilled by a Place of Business: If these orders are not fulfilled by a place of business, the sale is consummated at the destination location (where the goods are shipped).
It’s worth noting that there have been legal challenges regarding the rules for orders not received by sales personnel. Consult with a tax professional or the Texas Comptroller for the most up-to-date guidance.
Consummation of Sale: Pinpointing Tax Location
The “consummation of sale” refers to the specific location where a sale is considered to have taken place for sales tax purposes. This location dictates which local sales taxes apply. The rules for determining the consummation location depend on where the order is received and fulfilled.
Orders Received at a Texas Place of Business
1. Orders Placed In Person:
When a customer places an order in person at a seller’s place of business in Texas, the sale is consummated at that place of business. This is regardless of where the order is actually fulfilled or shipped from.
Example: A customer buys shoes at a shoe store. The local sales tax is due based on the location of the shoe store.
2. Orders Not Placed In Person:
- Fulfilled at a Texas Place of Business: If an order is received at a Texas place of business and also fulfilled from another Texas place of business of the same seller, the sale is consummated where the order is fulfilled.
Example: Office Supply Store A receives a phone order, but Office Supply Store B (both owned by the same retailer) fulfills it. Local sales tax is due based on the location of Store B. If Store B ships to a location with a higher local tax rate, the retailer must collect the additional use tax.
- Fulfilled at a Non-Place of Business: If an order is received at a Texas place of business but fulfilled from a location that is not a place of business (e.g., a third-party warehouse), the sale is consummated where the order is received.
Example: Customers call a sales office (a place of business) to order discount merchandise. Orders are fulfilled by a third-party warehouse (not the seller’s place of business). Local sales tax is due based on the location of the sales office. Again, use tax may apply if shipping to a higher-tax location.
Orders Not Received at a Texas Place of Business
1. Fulfilled at a Texas Place of Business:
If an order is received at a location that is not a Texas place of business (or outside Texas altogether) but is fulfilled from a Texas place of business, the sale is consummated where the order is fulfilled.
2. Not Fulfilled from a Texas Place of Business:
When an order is received at a non-Texas place of business and fulfilled from a location in Texas that is also not a place of business, the sale is consummated at the location in Texas where the order is shipped, delivered, or where the customer takes possession. Use tax may also be due if shipping to a higher-tax jurisdiction.
Example: A customer at an Arkansas store orders an out-of-stock item. The item is shipped from a Texas warehouse (not a place of business) to the customer’s Texas address. Local sales tax is due based on the customer’s address.
3. Orders Received and Fulfilled Outside Texas:
If an order is received and fulfilled outside of Texas, the sale is not consummated in Texas. However, local use tax may still be due based on the Texas “ship-to” location.
Local Use Tax: Tax on Consumption
Local use tax is levied on the storage, use, or consumption of taxable items within a local taxing jurisdiction. It’s often triggered when goods are shipped or delivered into a local jurisdiction with a higher combined sales and use tax rate than where the sale was consummated.
Every local jurisdiction with a sales tax also has a use tax at the same rate. Use tax prevents avoidance of local sales tax by purchasing goods in a lower-tax area but using them in a higher-tax area.
When Local Use Tax Applies
Local use tax can apply even if local sales tax was already collected. This typically happens when:
- The total local sales tax collected is less than 2%.
- The local sales tax and local use tax are not the same type of tax (e.g., county sales tax and city use tax). If a city sales tax is already due, city use tax will not be due, even if the item is shipped to a different city.
When state use tax is due (e.g., for out-of-state purchases), local use tax is also generally due at the “ship-to” location if it’s within a local taxing jurisdiction.
Example: An item bought in Seattle (no Texas sales tax) and shipped to Austin, Texas. State use tax (6.25%) and local use tax (Austin rate) are due.
Example Scenario Illustrating Sales and Use Tax:
A furniture store outside Corsicana (Navarro County) receives an in-person order. The warehouse is attached to the store (both outside Corsicana city limits). Delivery is offered within 50 miles.
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Customer 1: Delivery to Ennis (1.5% city sales/use tax).
- No Corsicana city sales tax (store is outside city limits).
- Navarro County sales tax (0.5%) is due.
- Ennis city use tax (1.5%) is also due because the total local sales tax (0.5%) is under 2% and it’s a different tax type (city use tax vs. county sales tax).
- Total combined tax: 6.25% (state) + 0.5% (Navarro County) + 1.5% (Ennis City Use) = 8.25%
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Customer 2: Delivery to Waxahachie (2% city sales/use tax).
- No Corsicana city sales tax.
- Navarro County sales tax (0.5%) is due.
- Waxahachie city use tax is capped. While the rate is 2%, the total local tax cannot exceed 2%. Since 0.5% county sales tax is already collected, only 1.5% of Waxahachie use tax can be collected to reach the 2% local cap.
- Total combined tax: 6.25% (state) + 0.5% (Navarro County) + (capped) 0% Waxahachie City Use = 6.75% (Note: In this specific example, Waxahachie city use tax becomes 0% to stay within the 2% local cap after county tax). Correction: Waxahachie City Use tax would be 1.5% to reach the 2% cap, making total local tax 2%, and total combined 8.25%. Further Correction: The example states 6.75%. It appears the Waxahachie City use tax collection is limited to keep the total local tax at 0.5% (Navarro) + 1.5% (Waxahachie capped), for a total local of 2%. Therefore, the combined is 6.25% + 0.5% = 6.75%. The example provided seems to incorrectly cap the city use tax at 0%, when it should be capped to reach a total local tax of 2%. The intended calculation likely is: 2% (local cap) – 0.5% (county) = 1.5% (remaining for city use tax, but Waxahachie is 2%, so capped at 1.5%). Therefore, combined should be 6.25% + 0.5% + 1.5% = 8.25%. The example in the original text might be simplified or contain a minor error in explanation.
It’s always recommended to use the Sales Tax Rate Locator to determine the precise sales and use tax rates for any Texas address.
Rules for Local Use Tax Application
- 2% Cap: Total local sales and use tax cannot exceed 2%.
- Tax Type Order: Use taxes are applied in this order: 1) City, 2) County, 3) Special Purpose Districts (SPDs), 4) Transit Authorities.
- Different Tax Type: Use tax of a specific type is not collected if a sales tax of the same type is already due.
Special Situations: Variances in Tax Collection
Certain industries and transaction types have specific rules for local sales tax collection. These “special situations” require careful attention:
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Amusement Services: Tax is collected where the performance or event occurs.
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Cable and Satellite TV Services: Tax is collected where the customer receives the service (satellite TV is exempt from local tax).
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Florists: Tax is based on the location of the florist shop taking the order, regardless of fulfillment/delivery location.
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Marketplace Sales: Marketplace providers (Amazon, eBay, Etsy, etc.) collect and remit tax based on the shipping destination. Marketplace sellers are generally not responsible if the provider certifies they will collect.
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Motor Vehicle Parking and Storage: Tax is collected where the parking service occurs.
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Natural Gas and Electricity: Tax is collected where the customer receives the utility service. Residential use has exemptions in many areas.
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Nonresidential Real Property Repair and Remodeling: Tax (on labor and materials) is collected at the job site location.
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Separated Contracts (Construction/Remodeling): For new construction and residential projects with separated contracts, tax on materials is based on the job site location.
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Telecommunications Services: State sales tax applies, but local tax application varies. Interstate telecommunications are exempt.
- Landline Services: Tax is based on the call origination point. If unknown, billing address is used.
- Mobile Services: Tax is based on the “place of primary use” – customer’s residential or primary business address within the provider’s licensed area.
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Waste Collection and Removal: Tax is collected where the waste is picked up.
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Itinerant Vendors: Vendors without a fixed place of business collect sales tax for all jurisdictions where deliveries are made or possession is transferred.
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Vending Machine Sales: Operators collect local sales tax for the jurisdiction where the vending machine is located.
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Kiosks: Kiosks themselves are not places of business. Tax collection depends on where orders are fulfilled:
- Fulfilled from a Texas Place of Business: Local sales tax is due at that place of business. Use tax may also apply based on the customer’s location.
- Fulfilled from a Non-Texas Location: Local sales/use tax is based on the location where items are shipped or delivered.
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Remote Sellers: Remote sellers with significant Texas revenue ($500,000+ in the preceding 12 months) must collect and remit use tax. They can choose to collect:
- Local use tax based on the “ship-to” location.
- The “single local use tax rate” (currently 1.75%). To use this, they must notify the Texas Comptroller.
Additional Resources and Staying Compliant
Navigating Texas sales tax can be complex. Utilize the resources provided by the Texas Comptroller to ensure compliance:
- Sales Tax Rate Locator: https://gis.cpa.texas.gov/search/ – Find accurate rates by address.
- Texas Comptroller Website: https://www.comptroller.texas.gov/taxes/sales/ – For forms, rules, and detailed information.
- Texas Tax Code and Administrative Rules: (https://statutes.capitol.texas.gov/Docs/TX/htm/TX.321.htm, https://texas-sos.appianportalsgov.com/rules-and-meetings?%24locale=en_US&interface=VIEW_TAC_SUMMARY&recordId=219470) – For legal details.
- Form 01-799, Remote Seller’s Intent to Elect or Revoke Use of Single Local Use Tax Rate (PDF): (/forms/01-799.pdf) – For remote sellers electing the single local use tax rate.
Understanding “what sales tax in texas” requires attention to both state and local rules. By using the resources available and carefully applying the principles outlined in this guide, businesses can confidently manage their sales tax obligations in Texas.
