Texas sales tax for small businesses: permits, rates and filing

Texas has no state income tax, so for most small businesses here the state filing that actually exists is the sales tax return. If you do business in Texas and sell goods or a taxable service, you need a permit before you collect a cent of tax from anyone.

Who needs a permit

Two things together create the obligation. The first is that you are carrying on business inside Texas. The second is that what you sell or lease here is tangible personal property, or a service the Tax Code names as taxable.

The application itself is short. You have to be at least eighteen to file it, though a parent or legal guardian may apply on behalf of a minor. The online version wants a Social Security number for the sole owner, or for each partner or officer; a corporation supplies the file number the Texas Secretary of State issued it; and every business supplies a North American Industrial Classification System code. Allow two to three weeks for the permit itself to arrive.

The rate you charge

Texas charges a state sales and use tax at 6.25% on most goods sold, leased or rented at retail, and on the services the Tax Code makes taxable. Cities, counties, transit authorities and special purpose districts can each add tax on top of that, capped in total at 2%, which puts a ceiling of 8.25% on any combined Texas rate.

Which local rates apply depends on the address of the sale, not on where your business is registered, and the Comptroller publishes rate updates quarterly. Look the address up rather than assuming the ceiling.

Goods are taxable; most services are not

Almost every good you sell is taxable. Services are a different matter: the Tax Code defines taxable services as sixteen broad categories, and a service outside them is not taxed at all. Among the sixteen are amusement services, credit reporting, data processing, debt collection, information services, insurance services, parking and storage of motor vehicles, repair or remodeling of nonresidential real property, maintenance or repair of personal property, personal services, real property services, security services, telecommunications, telephone answering and utility transmission and distribution.

Two details catch small businesses out. A fifth of what you charge for data processing escapes the tax, and information services get the same fifth off. And using a computer as a tool while you perform a professional service is not, by itself, data processing, which is why a bookkeeper who produces financial reports is not selling a taxable service.

How often you file, and when

Once your application is approved, a letter tells you whether you are a monthly or a quarterly filer. Monthly filers report on the twentieth of the month after the one being reported. Quarterly filers report on the twentieth of April, July, October and January, each covering the quarter that just closed. Yearly filers report the previous year by the twentieth of January. A due date that lands on a Saturday, a Sunday or a legal holiday moves to the next working day.

The thing owners forget: a period with no sales still gets a return. Filing nothing is not the same as filing a zero.

The discount for filing on time, and what late costs

Report and pay on time and you keep 0.5% of the tax as a discount, with more on top for taxpayers who prepay. Miss the deadline and each late report brings a flat $50 penalty regardless of the tax on it. Tax paid within thirty days of the due date carries a five percent penalty; paid later than that, ten percent. Interest starts once the amount is more than sixty days past due.

Selling through a marketplace

A marketplace provider doing business in Texas has to collect the state and local tax on everything sold through the marketplace, remit and report it, and certify to its sellers that it is doing so.

That does not let a Texas seller out of anything. You still hold your own permit and still file your returns on time, even when the marketplace is the only channel you sell through and it collects every dollar of tax. What changes is the remote seller's position: someone outside Texas selling only through a certified marketplace does not need a permit here, but still has to keep records of those sales for at least four years. Selling on Etsy and eBay covers why the sales tax on a listing was never your income.

The other Texas filing, and the federal one

A sales tax permit and a franchise tax obligation are separate things, and holding one says nothing about the other. The Texas franchise tax report is the annual filing that every registered entity faces. The business itself is reported federally on Schedule C if you are a sole proprietor.