Texas businesses must collect and pay sales taxes on most items they sell. The sales tax varies from county to county – the state has a base sales tax, plus the counties have discretionary taxes that they can add to the state sales tax rate. Texas also charges use taxes, transient rental taxes, and franchise taxes. This guide does not fully describe all of Texas’s laws and regulations regarding taxes. Businesses should contact a business attorney or visit the Comptroller’s Office to learn which rules and regulations are associated with their industries.
Types of taxes
In addition to regular sales tax, businesses must also pay – where applicable – use tax, discretionary sales surtax, transient rental taxes, and franchise taxes.
Sales tax
The state sales tax rate is 6.25 percent on all retail sales, rentals, leases, taxable services, and goods unless that item or service is exempt.
Use tax
The use tax is the sales tax’s partner. The state imposes this tax on the consumption and storage of tangible personal property or services that are taxable. Businesses must collect use taxes and submit them to the Comptroller’s Office if the business does not have tax-exempt status and purchases the goods from a seller, whether a wholesaler or retailer, who does not charge Texas sales tax.
The use tax rate is the same as the state sales tax rate of 6.25 percent. In most cases, the seller collects taxes at the buyer’s state’s tax rate. If so, the buyer does not have to pay the use tax. The seller must also figure out discretionary taxes.
Texas does allow a single local use tax rate to make it easier on sellers – they won’t have to keep updated on local taxes that might change more often than the state sales tax. If you elect to use one rate, it is 1.75 percent. Check for changes to this rate by checking the Texas Register by January 1 of every year.
Should a business choose to use the single local rate, the taxpayer must file Form 01-799 Remote Seller’s Intent to Elect or Revoke Use of Single Local Use Tax Rate via regular mail or email.
Discretionary sales surtax
Counties, cities, transit authorities, and special purpose districts can impose a discretionary sales surtax rate up to 2 percent over and above the state’s sales tax rate. Thus, if a county imposes a 2 percent tax rate, the total sales tax on taxable items and services is 8.25 percent.
Transient rental taxes
Hotels, motels, and Airbnbs must collect a state hotel occupancy tax of 6 percent if the room is more than $15 per day. The rate also applies to condominiums, bed and breakfasts, rental homes, and apartments. If an establishment has a sleeping room that costs more than $2 per day, the establishment must also collect the state hotel occupancy tax.
Often homeowners rent out rooms in their homes to people attending entertainment and sporting events. The homeowners must also collect and pay the hotel occupancy tax from their customers. If a business is a property management company, travel company, or another third-party rental company, those businesses might also be responsible for collecting and paying the tax.
Establishments must pay the hotel occupancy rate monthly or quarterly. If the establishment pays monthly, the tax is due on the 20th of the next month. For example, taxes on January sales are due February 20. If the establishment pays quarterly, the tax is due on the 20th of the first month after the end of the quarter. For example, an establishment that pays quarterly would pay taxes collected from January through March by April 20.
If the business pays the taxes on time, it can apply a discount of 1 percent to the total due on the quarterly or monthly return.
Out-of-state retailers
Remote sellers, or out-of-state retailers, do not have a physical presence in Texas. However, because of a 2018 case, South Dakota v. Wayfair, all states can impose their sales and use taxes on goods sold out of state but that are delivered into the state. Remote sellers include those who sell their goods via phone, internet, television, radio, flyers, catalogs, and other forms other than having a physical presence in the state.
However, if a remote seller had less than $500,000 of sales in the preceding calendar year, it does not have to obtain a Texas tax permit and does not have to report, collect or remit state and local use tax. Texas revenue is figured on taxable and nontaxable sales and fees for transportation, handling, installation, and other fees a business might charge a customer.
Franchise tax
If a business is out of state but sells items and services in Texas and is a taxable entity, the business must pay the franchise tax. The franchise tax is a privilege tax that is imposed on businesses with $500,000 or more of gross receipts from Texas.
Registering for Texas' taxes
To register to file reports and pay sales tax in Texas, you can use the Comptroller’s Office eSystems. You must file an application if:
- You conduct business in Texas;
- You sell or lease tangible personal property in Texas; or
- You sell services that are taxable in Texas.
The application covers sales and use tax, the 911 surcharge and fees, and the sales tax surcharge on diesel equipment.
You cannot use the online application if you are:
- A sole owner,
- A partner,
- An officer,
- A director, or
- If you do not have a social security number.
Instead, you must apply for a tax permit using Form AP-201 and email the application to [email protected]. You can also fax the application to (512) 936-0010.
You will need several pieces of documentation to complete the application, including:
- Your social security number if you are the sole owner.
- FEIN or social security number for each partner.
- The file number you received when you registered your business with the Texas Secretary of State.
- A social security number for each director or officer if the business is a corporation.
- The North American Industrial Classification System (NAICS) code for your business.
Texas tax exemptions
While most items and services are taxed, some items and services are exempt from the state sales and use tax, including the discretionary tax. Non-food items are taxable, including paper, beauty products, clothing, hygiene products, pet products, and some edible items.
The following items are not taxable unless otherwise noted:
- Bakery items sold by a business that qualifies as a bakery. More than 50 percent of the bakery’s items must be sold from a display and not consumed on-premises. A business is not considered a bakery if the items are sold with plates and eating utensils. Bakery items might include but are not limited to bagels, cakes, bread, pastries, cupcakes, muffins, etc.
- Baking products are not taxable. Examples include baking chips, cake sprinkles, baking mixes, icing, and edible decorations.
- Sports drinks, energy drinks, and electrolyte drinks are taxable except when they contain milk or milk products or substitutes, have a “Supplemental Facts” panel as required by the Food and Drug Administration (FDA), and if they contain more than 50 percent fruit or vegetable juice by volume.
- Water, mineral water, unflavored water, sparkling water, and spring water are not taxable.
- Nontaxable coffee and tea items include pods, instant tea bags, loose tea, coffee beans, ground coffee, and bottled or canned coffee that is not sweetened.
- Most food products are not taxable, including ingredients, food that is normally reheated before eating, and items that are cut up for sales, such as fruit and cheese. Prepared foods, such as hot food, hot drinks, food sold with eating utensils, etc., are taxable.
- Snack items when are taxable except when they are sold in prepackaged units that contain more than one individual-sized package.
- Drugs, dietary supplements, and medicines.
- Newspapers.
If you are not sure which items are tax-deductible, check the list provided by the Comptroller’s Office. If you are still not sure, call the Comptroller’s Office or use the online or email help features.
Calculating Texas' sales and use tax rates
When calculating the total sales tax, you must add any industry-specific sales tax and the discretionary sales tax to the base rate charged by the state. For example, the state’s base rate is 6.25 percent. If your county charges 1.5 percent, you charge 7.75 percent per dollar per taxable item.
Filing and paying Texas' sales and use taxes
Once you put in your application for a sales tax permit and the Comptroller’s Office approves it, you will receive a letter stating when you need to file sales tax returns for the business. If you file monthly, the tax payment and report are due on the 20th of the month following the month you collected the taxes. For example, the taxes you collected in January are due by February 20.
Quarterly filers have until the 20th of the first month of the next quarter to file and pay. For example, taxes collected in the first quarter, which is January through March, are due by April 20. Second-quarter (April through June) taxes are due by July 20.
If the Comptroller’s Office tells you that you should pay yearly, the taxes you collect throughout the year are due by January 20 of the new year.
You must pay taxes via TEXNET. If you owe over $100,000, you must initiate the transfer on the banking business day before the due date, else the Comptroller’s Office will consider your payment late.
If the amount you owe is $100,000 or less, you can initiate the transfer until 10:00 a.m. central time on the due date. If it is later than 10:00 a.m., the Comptroller’s Office will consider your payment late.
If, for some reason, you must file a paper form, use Form 01-922. However, to minimize errors and to ensure that the Comptroller’s Office receives your filing and payment in a timely manner, we recommend filing via TEXNET.
Paying use tax
If you purchased goods and need to pay the use tax, report the tax in Item 3, Taxable Purchases. If you do not have a Texas Sales and Use Tax Permit, you still need to report use tax. Use Form 01-156.
If you owe more than $1,000 in use tax, you must file the report and pay before the 20th of the month after the month when you reached the threshold. If you owe less than $1,000, you have until January 20 of the following year.
Discounts
If you pay the taxes on time, you can deduct 0.5 percent of the tax due. If you prepay sales tax, you can deduct the 0.5 percent for paying and filing on time, plus 1.25 percent for prepaying the tax.
FAQs
The sales tax rate for Texas sales is 6.25 percent for 2022.
Add the state sales tax rate of 6.25 percent plus the discretionary tax for the business’s local jurisdiction. If your business has a different tax rate, use that tax rate plus the discretionary tax.
Yes. Most retail sales are taxed in Texas.
The state sales tax is 6.25 percent. Businesses must also add the local discretionary tax.
Yes. You must collect and pay the hotel occupancy tax rate of 6 percent.
It depends. If the consumer purchases bagels and takes them home, you do not tax them. If the consumer purchases a bagel with cream cheese and you provide a knife to spread the cream cheese, then yes, you charge the tax.
Yes. You must pay the tax yourself unless you purchased tangible personal property to resell.
