Sales and Use Taxes in Texas

April 13, 2006

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In Texas a tax is imposed on the sale at retail of taxable items and upon the storage, use or other consumption in the state of taxable items purchased, leased or rented from any retailer for storage, use or other consumption in Texas.

Sales and use tax rate. The sales and use tax rate is 6.25 percent on the state level. If you are the taxpayer collecting the tax, you may deduct 0.5 percent of the tax as reimbursement for collecting the tax. An additional 1.25 percent discount is allowed if you make prepayments of the tax based upon a reasonable estimate of the liability for the quarter or month in which prepayment is made. Be sure to check with your local government in Texas because they are allowed to assess a local sales and use tax. Taxable items are tangible personal property (including computer programs) and taxable services including the following:

amusement services
cable television services
personal services
motor vehicle parking and storage services
repair, remodeling, maintenance and restoration of tangible personal property
telecommunications services
credit reporting services
debt collection services
insurance services
information services
real property services
security services
data processing services
real property repair and remodeling services
telephone answering services

Tax exempt items. Texas includes many specific items that are exempt from sales and use tax. As an example: water, and food for human consumption (with several exceptions), are not subject to sales tax in Texas. You'll want to check and see if you are exempt from the tax.

Responsibility for paying sales tax. In Texas the responsibility is on both the purchaser and seller. Texas may proceed against either the purchaser or the seller for unpaid sales tax. If you are a seller you are responsible for collecting and remitting the tax to the state. The tax is intended to fall on the purchaser and a seller's failure to collect the tax from the purchaser does not relieve the purchaser of tax liability. The required sales tax is added to the sales price and becomes a debt from the purchaser to the seller recoverable at law in the same manner as the sales price.

Use tax. Use tax is defined as a tax on the person consuming, using, or storing the taxable item in the state. The consumer's liability continues until the tax is paid to the state unless the consumer pays the tax to the retailer or other the person authorized to collect the tax. Retailers engaged in business in the state are responsible for collecting and remitting use taxes and are generally liable for such tax if they fail to do so.

Responsibility for paying use tax. In Texas the responsibility for paying use tax is on the person consuming, using, or storing the taxable item in the state. The consumer's liability continues until the tax is paid to the state unless the consumer pays the tax to, and obtains a receipt from, the retailer or other person authorized to collect the tax. Retailers engaged in business in the state are responsible for collecting and remitting use taxes and are generally liable for such tax if they fail to do so. Upon the purchase of goods, the use tax becomes part of the sales price and is a debt owed by the purchaser to the retailer. If the tax is unpaid, the retailer may file a lawsuit to recover it.

Obtaining tax permits in Texas. If you desire to engage in business as a seller in Texas, a state tax report is required. As a seller you must obtain from the Comptroller of Public Accounts a permit for each place of business. Every retailer selling, leasing or renting tangible personal property for storage, use or other consumption in the state must register with the Comptroller. The permit is valid indefinitely and no fee is necessary.

Leases. Tax is due on the total amount of financing leases regardless of where the property that was received in Texas is used during the lease. Tax is imposed on the total of an operating lease amount for the entire term of the lease regardless of where the property is used if the lessee takes delivery of the property in the state.

The following discussions address additional sales and use tax issues that many small business owners face: