1. Introduction
Before a new business can engage in taxable business activity in Texas, an Employer Identification Number (EIN) needs to be obtained through the Internal Revenue Service (IRS). Additional information on the various business structures can be obtained from this link. The EIN is the identifier for a specific business and for tax purposes, primarily used to report employment taxes. An EIN can typically be obtained via an online application at a reasonable time frame, allowing the proprietor to get started with business operations. If the business is required to have an EIN, applying with the IRS for a Sales and Use Tax Permit is next.
In the state of Texas, a business that sells tangible personal property or provides taxable services in the state is required to collect sales tax from its customers. The funds collected are to be remitted to the Texas State Comptroller on a timely basis. The Texas sales tax rate is currently 6.25% with the state primarily using this form of taxation to fund state operations. Local municipalities can also impose additional sales taxes, generating funds for their operations as well. The Comptroller’s office has general information on taxable business activities and a small wayfarer’s law that requires small sellers to remit taxes to the state. This article will primarily focus on Texas’ sales tax, providing detailed information on obtaining an EIN, sales tax permit, how the tax is calculated, and how to remit the funds to the state. Taxable business activity information can be obtained from the Comptroller’s tax basics webpage.
2. Types of Goods and Services Subject to Texas Sales Tax
Types of goods and services subject to tax – While federal law prevents a state from taxing services such as medical care and legal services on a federal level, Texas (unlike many other states) does not. However, medical care and most professional services are subject to sales tax as wholesalers, not as final consumers. The difference between taxable services, exempt services, and services taxed as wholesalers has always been a point of contention debated on the state level. For example, as long as there has been a sales and use tax in Texas, there has been a particular disdain for taxes on services such as laundry and dry cleaning. Over time, the Texas Legislature has responded to the various economic upturns and downturns, working various venues to satisfy business owners from one side while providing new services taxable from the other.
What is and is not subject to tax? – Texas state and local taxes are imposed on goods and services, but a distinction is made between items and services subject to tax and those which are exempt. For example, automobiles designed and adapted for general personal transportation are subject to sales tax, while special heavy duty off-road or nautical equipment is exempt from sales or use tax if the sale is made by or to a licensed motor vehicle dealer or by an automotive wrecker/remover. Handling and other charges on tax-exempt items are not exempt. At times, it’s difficult to know whether specific services or products are tax-exempt, so businesses should refer to the Texas Administrative Code (Rule 3.291 for Sales Tax, 3.294 for the convenience and meal portion of hotel tax, 3-3.298 for Motor Vehicle Tax, or 3-2.122 for Use Tax).
2.1. Tangible Goods
These are goods that you can touch and feel – think about almost anything that a store keeps! Groceries, medicine, household staples like toothpaste and cleaning supplies, gas and fuel, hotel bills, travel fees, fees for using a tanning salon, computer fees, mailing/postage, storage fees, chemicals, office supplies, furniture, jewelry, accessories, clothing (including for animals), cleaning/repair/maintenance of goods, educational materials, entertainment tickets, books on any material thing, art, home repairs, sports goods, health and fitness services, etc. are some example of tangible goods (from the state of Texas sales tax document). For a complete list, read the sales tax document of the state of Texas. Some states may have exceptions to some categories – yet, the overarching principle is common.
Are you having trouble understanding the Texas Sales Tax law? Don’t worry, there are many more people in the same boat with you. It doesn’t take too much time to understand the basics of it. To begin with, know it. The Texas state government applies sales tax to everything that is sold in Texas. Whether a good is made in Texas or outside of Texas, once the good is sold within Texas, it is subject to sales tax. The seller has to collect it and pay it to the state. So, if you are a business and you are selling tangible goods that are taxable, you need a sales tax permit. Once you register with the Texas Comptroller’s office, you can collect sales tax on the taxable items and then remit it to the state of Texas. There are main three categories of taxable goods: tangible goods, digital goods and services.
2.2. Digital Products
In an interview the following question was raised: “With a company that’s a software development company in Texas that sells software… they put it on the internet, their sales tax won’t be based on where the customer is at?” Answer: Correct. Every digital product according to the Texas rulebook will be based on the billing address. A business is responsible for charging and remitting the correct and accurate local rate and sending it to the appropriate cities and special purpose districts using tax rate locator or tax rate database found on the Texas State Evaluate website. Since e-books are taxed time of buy, tax rates will differ from being zero to 8.25% based on the local rate effective at the expense of purchase. Respondents follow to purchase software where these normally reside.
I understand digital products to mean obtaining product/service access and use through internet access, for any device that can be used by the user. For state sales tax, Texas presumes access and use occur at the location of the device or for pre-loaded software, the mailing address of the purchaser. Texas further clarifies how digital products are sourced in state rule. A sample of digital products includes items that are electronically delivered, downloaded, or transferred to a customer including software, applications, e-books, games, images, movies, performing act content, on-line education training, premium websites, digital greeting cards, subscription services, and streaming media using cloud computing services.
2.3. Services
For sales tax purposes, “a sale” does not include a transfer of tangible personal property if, apart from the written exposition by the transferor of the tangible personal property or the underlying intangible work of art, a transferee’s possession of tangible personal property is not intended. If a preparer’s written exposition of the tangible personal property or the underlying intangible work of art is part of the consideration for the transfer of the tangible personal property, for the purpose of the Sales and Use Tax Act, the transfer is subject to sales tax and the Comptroller can adjust the sales price of the transferred tangible personal property. A person who sells ad space directly is generally the retailer of the space and, as the retailer, is required to obtain a sales and use tax permit. If a publication does not sell ad space directly, the publication is not considered to be a retailer engaged in the business of selling ad space and, therefore, is not required to be certified to a purchaser as a retailer of ad space. If a person is considered to be a retailer, the sale of ad space is presumed to be subject to sales or use tax.
As a general rule, any business that buys, sells, leases, or provides services in Texas is required to register with the Comptroller of Public Accounts. Once registered, the business must charge sales tax (referred to as “sales and use tax”) on brokers’ fees, consulting services, information services, data processing, debt collection, producing real property information, and advertising. The tax is also due on the sale of taxable items and the lease of taxable items.
3. Sales Tax Registration Requirements for Texas Businesses
According to the State of Texas, businesses that do not follow the scheduled state instructions and make timely and appropriate payments may be subject to additional penalties or interest for underpayments. Sales tax permits across the state are transferable between locations but are not transferable between types of businesses, especially if they are in separate regions of the state. The state of Texas reserves the right to revoke any permit if owners of multiple businesses and respective employees have been previously engaged in illegal activities with other business entities or if any previous permit was revoked for inappropriate conduct with a sales tax permit. Business owners who have a notification number from Texas Comptroller of Public Accounts have the option to display the number of their sales tax permit on their exterior storefront. The state of Texas will not assume financial responsibility for lost, stolen or destroyed permit numbers and will also not approve or accept hand-written tax permits in any official capacity. Once a business no longer maintains a physical location or ceases the operation of the business, sales tax permits become null and void in all applications across the state.
Most businesses in Texas must register for and pay sales tax on the sale of tangible goods or certain services. The Texas Comptroller of Public Accounts (CPA) website can be accessed to complete the application online or a paper form, numbered AP-201, can be used to complete the application. Applicants must specify the type of ownership for the business, the revenues earned or the amount of sales during the preceding year to determine the payment frequency. For the selection of the period of the year when payments for sales tax are due, the state requires that once a tax permit is granted, businesses “must file and pay tax on or before the 20th day of the month after the end of each reporting period” to stay in compliance.
3.1. Who Needs to Register?
Texas has a “destination-based gross receipts tax”. This means that the tax is imposed on retailers, lessors, or caterers who create Texas products that were transferred to Texas consumers. Take for example, a Mexican tourist who buys a Texas cowboy hat to take to Germany. The Mexican tourist will pay some sales tax when he buys the cowboy hat; that makes sense. The Texas retailer will collect and remit that sales tax. But suppose an Australian tourist comes to the US and buys a Texas cowboy hat, driving to Texas from San Francisco before leaving the US. The Australian tourist is physically in Texas when the transaction happens, meaning the Australian tourist will technically receive the hat in Texas. When this happens, Texas taxes apply to the transaction. If the sale price of the hat is at least $5, the Texas retailer will collect and remit to Texas sales tax.
Simple explanation, right? The thing is, the application of this law is not always as straightforward as it appears at first glance. We frequently work with businesses who are surprised at how their merchandise or services are (or are not) taxed. If you own a business in Texas, you need to understand how the concept we are discussing applies to your products or services. This will help you collect and remit the tax correctly on these items. Noncompliance with sales tax rules can be expensive. To keep your business out of tax trouble, understand those rules and incorporate proper collection and remission procedures in your operations.
The Texas sales and use tax is a 6.25% state tax, plus your local jurisdiction’s rate. In Texas, “sales tax” is imposed on retailers (a person who sells tangible personal property), lessors (a person who leases/rents tangible personal property), or caterers (a person who sells prepared food). “Use tax” is imposed on consumers of tangible personal property or taxable services. Consumers are not subject to use tax when a seller collects sales tax at the time of sale, and government entities are exempt from sales and use taxes. Often local authorities are also exempt.
3.2. How to Register
Any person required by Chapter 151 or local sales to procure a tenant’s sales permit must procure a retail tax permit regardless of the date of the most recent purchase or the most recent tax permit, or regardless of whether the person sells through a selling point in Texas and not the person, rather than purchase tax from a buyer who is not registered by the Chapter 151 of the sales by customers; transport the taxable elements using the jurisdiction of the jurisdiction as a corporate carrier for submission; Steal, or transport taxable items to Texas for use, use, or use within one year of purchase. Non-profit organizations who have operated in Texas for more than four days consecutively, with no off days, within one 12-month period must apply for a temporary tax permit. Exemption certifications or matrices submitted by way of a company’s qualifications to become buyers of exempt products Once a company distributes product(s) to the buyer(s), who will receive a certificate using the buyer’s identity, then the company selling the sale by title to the title to the store; It is understood that the person is registered with the Comptroller as an authorized permit holder, the product(s) are exempt.
– Retailers (Sales Tax) Permit for both local and state taxes – Sales Tax even for out-of-state sellers making sales in Texas or selling taxable items to Texas landlords or residents. – Single-use and temporary sales tax permits – Use tax in lay land and rent – Masked sports event sales tax – a temporary tax for specific sporting events. – Motor fuel distribution – tax permits to sell fuel (crow that the Texas Department of Motor Vehicles authorized a Tax Certificate of resale (Form 130-U). – Distributors’ Alcohol Beverage licenses, of all types. – Texas Online Taxpayer Registration Application General Sells and Use Tax, Sales for work necessary – gas tax, direct payment of sales; and sales from direct participation. – Limited Texas Sales and Use Tax Permit – allows the buyer to buy taxes from doing jobs in Texas. You can also have a single-use one.
The way to getting your sales tax permit might be simpler than you might suspect. Taxpayers are required to register with the Texas Comptroller’s office for permits, franchises, taxes, or other services. With our online portal, users can register for them all at the same time. A taxpayer who registers can have the following permits for different taxes under various terms and conditions:
3.3. Exemptions and Special Cases
The POC test states that if the sale of tangible personal property is incidental to a non-taxable service, the entire transaction is non-taxable. In order to qualify, the sale of tangible personal property must be less than 5% of the total sales price of a transaction. For example, a contractor providing non-taxable landscaping must purchase mower parts in order to fulfill part of an overall job. Eleven percent of the total job cost represents the cost of the parts. Since eleven percent is over the five percent mark, all parts are eligible to be taxed on the purchase, regardless if the lawn in question is part of the POC or not.
There may be certain items exempt from sales tax, such as sales for resale. These are referred to as exemptions. Like an exemption, a special case allows a certain purchase to not incur a sales tax charge. The section 151 revisions (83rd Regular Session, 2013) also allowed for POC (predominant portion of the contract). Predominant portion of the contract refers to a mixed transaction and non-taxable service that falls under a specific section of the Tax Code. POC allows a sale that includes non-taxable services to also receive the non-taxable treatment.
4. Sales Tax Filing Deadlines and Penalties for Non-Compliance
Paying late will cost you. The late payment penalty for underpaid or late tax is 5% of the tax due if payment is made within 30 days following the deadline. The penalty can go as high as 25% of the tax due if the payment is made on the 61st day following the due date. If you fail to file, the department may impose an additional 5% penalty for each subsequent 30-day period, up to a 25% maximum penalty. To avoid these financial penalties, file your returns and pay your taxes online with the Texas Comptroller’s Office.
All sales tax returns and payments must be completed online on or before the due date. While the filing of the sales tax return is due on the 20th of each month following the close of the taxable monthly period, if the 20th falls on a weekend or holiday, you have until the next business day to file and pay the tax, without incurring penalties. For example, sales tax transactions for the first quarter of the year (January, February, and March) need to be filed on or before April 20th. If you are a provider of prepaid wireless calling service, the return and payment are due 30 days from the end of the calendar quarter; for example, January, February, and March prepayment reports are due on or before April 30th. Please note that you must file sales and use tax returns even if you are not required to pay taxes at the time or have no sales for the period.
4.1. Filing Deadlines
One thing that hasn’t changed is the filing frequency – you still have monthly, quarterly or annually reporting based upon your level of sales tax you collect. If you collect up to $50 in sales tax monthly, you might qualify to file annually. Less than $520 in a quarter might qualify you for quarterly filing. Else, it’s every month for monthly and everyone else. Here’s a revision to filing options for the annual filer due to the 2018 changes to Texas sales tax: Year End (December) filing – you have from January 1st through January 20th. This will be the only annual filing, which is really no different than your current situation.
This is an updated post that addresses 2018 filing season changes made by the Texas Comptroller. The biggest change, which starts with the January 2018 filing, is that you have to file all your sales tax reports on the 20th of the month. But wait a minute, let’s consider this from the small business point of view – first off, this will mean pretty significant changes in how you do things to be ready for this change. As I tell my clients and you’ll read in this post, the key is to still meet your deadline and you’ll soon see how my tips help you achieve that.
4.2. Late Filing Penalties
Sales tax returns are due on or before the twentieth day of the month following the end of the filing period. When the twentieth falls on a Saturday, Sunday, or legal holiday, returns made by mail shall be deemed to be timely if received by the next regular working day. A person required to file a return who willfully fails to do so at the prescribed time shall pay a 10 percent penalty in addition to other penalties provided herein, not to exceed ten dollars. The five dollar maximum applies to other taxes as well. TWC considers an act to be willful if it is the result of a conscious and intentional attempt to disregard the duty imposed by law.
4.2 Late filing penalties – If you filed your sales tax return after the due date, you may owe both the 5 percent and 10 percent late filing penalties described above. Monthly and quarterly filers are generally subject to the 5 percent penalty described in Item 4.1, unless they knowingly and intentionally filed the return late. Therefore, a monthly or quarterly filer who filed a return one day late will owe the 5 percent penalty. Even an unintentional delay in depositing tax may be subject to this penalty. Annual filers are generally subject to the 10 percent penalty described in Item 4.1, unless they knowingly and intentionally filed the return late. The penalties continue to accumulate, up to the maximum of 25 percent of the taxes due. Penalties are assessed for each month or part of the month a return is filed late, but TWC will not assess more than 25 percent in the aggregate for lateness.
4.3. Consequences of Non-Compliance
– Willfully aiding or assisting in, or procuring, counseling, or advising the preparation or presentation of a fraudulent or false document with an intent to evade a tax.
– A penalty of 5% of the tax is imposed on each return filed after the due date, including returns that show no tax due. – A penalty of 5% of the amount of tax due is imposed on each tax payment made after the due date. – A penalty of 10% of the amount of tax due is imposed on any tax that is not paid in full within 30 days of the date specified in the written demand for payment. – A 50% penalty, in addition to any other penalties, is imposed for filing a fraudulent or frivolous return with the intent to defeat or evade a tax. A frivolous return is one that does not provide sufficient information to show the correctness of the reported tax due or that on its face indicates the reported tax is substantially incorrect. A return that significantly overstates deductions, exemptions, or credits, without reasonable basis, is considered frivolous. – Criminal penalties, including fines up to $10,000, imprisonment for up to two years, or both, can be imposed for various offenses, including:
Penalties, in addition to any tax required to be collected and delinquent tax, are imposed for various failures, as follows:
