When Are Businesses Required to Collect Texas Sales Tax (and What if They Don’t)?

Businesses are required to collect Texas sales tax when they make taxable sales in the state and they have either physical or economic nexus. Failure to collect Texas sales tax can lead to steep penalties—including criminal penalties in some cases. If you have concerns about your company’s Texas sales tax liability, consult an experienced Texas tax attorney promptly.

Businesses that sell taxable goods and services in Texas are subject to the state’s taxing authority. Both in-state and out-of-state businesses can have filing and payment obligations—and both can face scrutiny from the Texas Comptroller’s Office if they fail to comply.

With this in mind, retailers and businesses that sell taxable services in Texas need a proactive approach to state sales tax compliance. For those not currently in compliance, becoming compliant before the Texas Comptroller’s Office opens an audit or investigation can be critical to avoiding unnecessary consequences.

What Goods and Services Are Subject to Sales Tax in Texas?

As a general rule, tangible personal property sold at retail is subject to Texas sales tax (and, in many jurisdictions, local sales tax as well). This includes, but is by no means limited to, items such as:

• Aircraft, boats and boat motors
• Clothing, electronics and other personal items
• Food and beverages (including alcoholic beverages)
• Furniture and appliances
• Vehicles and vehicle components

This is just a small sampling. While certain types of necessities (i.e., unprepared grocery items and baby supplies) are exempt from sales tax in Texas, all retailers should assess their Texas sales tax compliance obligations before doing business in the state.

Like most forms of tangible personal property, several types of services are also subject to sales tax in Texas. Some examples of taxable services include:

• Amusement services
• Data processing services and software as a service (Saas)
• Information services
• Pest control, garbage removal and other real estate services
• Telecommunications services

As the Texas Comptroller’s Office notes, certain other types of services are subject to state sales tax because they involve the “sale, processing or remodeling of tangible personal property.” These include photography and videography, woodworking, welding, and catering services, among others.

What Are Texas’s “Nexus” Rules for Sales Tax Compliance?

Businesses that sell taxable goods or services in Texas are required to collect and remit sales tax if they have “nexus” with the state. Under Texas law, businesses can have nexus based on either their physical contacts with the state or their volume of in-state sales:

• Physical Nexus – Businesses with a physical location in Texas must comply with state sales tax requirements based on their presence in the state. However, many out-of-state businesses can have sufficient contacts to establish physical nexus, even if they do not meet the revenue threshold for economic nexus.
• Economic Nexus – Even if an out-of-state business does not have any physical connection to Texas, it can still be subject to state sales tax compliance if it has $500,000 or more in annual “total Texas revenue.” This threshold includes both taxable and non-taxable sales.

Businesses that have physical nexus and those that have economic nexus are subject to identical sales tax compliance obligations under Texas law. They also face identical risks when they fail to do what is required.

What Are the Penalties for Failing to Collect and Remit Texas Sales Tax When Required?

Businesses that fail to collect and remit Texas sales tax when required can face substantial liability. This includes liability for:

• All Sales Tax Owed – Even if a business has not collected sales tax from its customers, it can still be held liable for all sales tax owed under state law.
• Interest – Unpaid sales tax begins to accrue interest once it is 61 days past due. The applicable interest rate is determined annually.
• Statutory Penalties – Unpaid sales tax begins to accrue penalties immediately. A five-percent penalty applies to amounts that are up to 30 days past due, and a 10-percent penalty applies after 30 days.

Along with liability for back taxes, interest, and statutory penalties, businesses can also face criminal penalties in some cases. If the Texas Comptroller’s Office has reason to believe that a business has intentionally attempted to evade its state sales tax liability, it can work with the Texas Attorney General’s Office to pursue criminal charges.

FAQs: What Business Owners Need to Know About Texas Sales Tax Compliance

How can I determine if my business is required to collect Texas sales tax?

If you are unsure whether your business is required to collect Texas sales tax, you should consult with an experienced Tax attorney. Texas’s tax laws are complex, and making uninformed decisions about your business’s state tax obligations could have serious consequences.

What is Texas’s sales tax rate?

Texas’s standard sales tax rate is 6.25 percent. Local jurisdictions can charge up to an additional 2.00 percent in sales tax—for a maximum potential combined tax rate of 8.25 percent.

What other state taxes do businesses need to pay in Texas?

Along with sales tax, companies doing business in Texas may need to collect and remit other state taxes. These include the state’s franchise tax as well as taxes that apply in the hospitality industry and energy industries, among others.

How Our Law Firm Can Help

If you have questions or concerns about your business’s Texas state tax liability, we can help assess your compliance obligations. If your business is facing scrutiny from the Texas Comptroller’s Office, we can help in that situation as well. To make informed, strategic decisions, contact us to arrange a confidential consultation today.

Request an Appointment with Texas Tax Attorney Lawrence Brown

If you need to speak with an attorney about your business’s Texas state tax obligations, please get in touch. To request an appointment with Texas tax attorney Lawrence Brown, please call 888-870-0025 or contact us confidentially online now.