One of the most challenging aspects of sales tax is determining whether your products or services are taxable or not. Different states have different rules and definitions of what constitutes a taxable product or service. 

Texas Sales Tax Guide: Taxable and Non Taxable Goods and Services in Texas

In this blog post, we will focus on Texas, and answer some of the most common questions that online sellers have about sales tax on services in Texas

By the end of this blog post, you will be able to understand your sales tax obligations, stay organized, and respond effectively to any sales tax inquiries or audits in Texas. Let’s get started!

Who Needs to Collect Texas Sales and Use Tax

If you sell products or services to customers in Texas, you may need to collect and remit sales and use tax to the state. Sales and use tax are two types of taxes that are imposed on the sale or use of tangible personal property or certain services. Sales tax is collected by the seller from the buyer at the point of sale, and remitted to the state where the sale occurs. Use tax is paid by the buyer to the state where the property or service is used, consumed, or stored, if the seller did not collect sales tax.

However, not every seller is required to collect and remit sales and use tax in Texas. You need to collect and remit sales and use tax in Texas only if you have nexus, or a significant connection, with the state. Nexus can be established by various factors, such as having a physical presence, employees, inventory, affiliates, or economic activity in the state. We will discuss how nexus is established in Texas in the next section.

If you have nexus with Texas, you need to register as a sales tax vendor with the Texas Comptroller of Public Accounts, and obtain a sales tax permit or license. You also need to collect sales tax from your customers based on the state’s sales tax rate, rules, and exemptions, and file sales tax returns and pay sales tax to the state on a regular basis. 

How Is Nexus Established in Texas

Nexus is the key factor that determines whether you need to collect and remit sales and use tax in Texas. Nexus means that you have a significant connection or presence in the state that subjects you to the state’s sales tax laws and regulations. Nexus can be established by various factors, such as:

• Physical presence: You have physical presence in Texas if you have a business location, office, warehouse, store, or other property in the state. You also have physical presence in Texas if you have employees, agents, representatives, contractors, or other personnel in the state who perform services or activities on your behalf, such as selling, delivering, installing, repairing, or maintaining your products or services.
• Inventory: You have inventory in Texas if you store or hold your products or materials in the state, either in your own location or in a third-party location, such as a fulfillment center, warehouse, or distribution center. You also have inventory in Texas if you use a drop shipper or a third-party vendor to ship your products to your customers in the state.
• Affiliates: You have affiliates in Texas if you have a parent company, subsidiary, or other related entity in the state that sells similar products or services under a similar name or trademark. You also have affiliates in Texas if you have a referral agreement or a commission arrangement with another business or individual in the state who directs customers to your website or online store.
• Economic activity: You have economic activity in Texas if you make sales of products or services to customers in the state that exceed a certain threshold in a given period. This is also known as economic nexus or the Wayfair law, which we will discuss in more detail in the next section.

If you have any of these factors, or a combination of them, you have nexus with Texas and you are required to collect and remit sales and use tax in the state. 

Economic Nexus (Wayfair Law) and Internet Sales in Texas

One of the most important and recent developments in sales tax law is the concept of economic nexus or the Wayfair law. This is a new type of nexus that is based on your sales volume or revenue, rather than your physical presence or activity, in a state. Economic nexus was established by the U.S. Supreme Court in the landmark case of South Dakota v. Wayfair in 2018, which overturned the previous rule that required a physical presence for nexus.

According to the Wayfair ruling, states can require online sellers or remote sellers to collect and remit sales tax in their state, even if they have no physical presence or activity in the state, as long as they have a certain amount of sales or revenue in the state. This means that if you sell products or services to customers in different states through the internet, you may need to collect and remit sales tax in those states, depending on their economic nexus thresholds and rules.

Texas is one of the states that has adopted the Wayfair law and implemented economic nexus for sales tax purposes. According to the Texas Comptroller of Public Accounts, you have economic nexus with Texas if you make sales of products or services to customers in Texas that exceed $500,000 in the previous 12 calendar months. This means that if you sell more than $500,000 worth of products or services to customers in Texas in a year, you need to register, collect, and remit sales tax in Texas, even if you have no physical presence or activity in the state.

The economic nexus threshold in Texas applies to both taxable and non-taxable sales, and to both intrastate and interstate sales. This means that you need to include all your sales in Texas, whether they are subject to sales tax or not, and whether they are made within Texas or across state lines, in your calculation of the $500,000 threshold. However, you do not need to include sales that are made through a marketplace provider, such as Amazon, eBay, or Etsy, in your calculation, as they are subject to a different rule, which we will discuss in the next section.

Texas Sales Made Through Marketplace Providers

Another important and recent development in sales tax law is the concept of marketplace providers or marketplace facilitators. These are businesses or platforms that facilitate the sale of products or services by third-party sellers or vendors to customers, such as online marketplaces, e-commerce platforms, or auction sites. Some examples of marketplace providers are Amazon, eBay, Etsy, Walmart, Shopify, and Uber.

According to the Texas Comptroller of Public Accounts, a marketplace provider is required to collect and remit sales tax on behalf of the third-party sellers or vendors who sell products or services through their platform, if they meet the following criteria:

• The marketplace provider owns or controls the platform or system that is used to facilitate the sale
• The marketplace provider receives compensation or a fee for facilitating the sale
• The marketplace provider collects or processes the payment from the customer for the sale

This means that if you sell products or services to customers in Texas through a marketplace provider that meets these criteria, you do not need to collect and remit sales tax in Texas, as the marketplace provider will do it for you. However, you still need to register as a sales tax vendor with the Texas Comptroller of Public Accounts, and report your sales made through the marketplace provider on your sales tax returns. You also need to provide the marketplace provider with information about the taxability and the tax rate of your products or services, and any tax exemption certificates that you receive from your customers.

Which Sales Are Subject to Texas Sales Tax

As a general rule, sales of tangible personal property and certain services are subject to sales tax in Texas. Tangible personal property is any property that can be seen, weighed, measured, felt, or touched, or that is perceptible to the senses in any other manner. Some examples of tangible personal property are books, clothing, furniture, electronics, and jewelry.

Certain services are also subject to sales tax in Texas, if they are performed on or in connection with tangible personal property, or if they are specifically listed as taxable by the state. Some examples of taxable services are amusement services, data processing services, information services, and nonresidential real property repair, restoration or remodeling services.

What Sales Are Not Subject to Texas Sales Tax

Not all sales of products or services are subject to sales tax in Texas. Some sales are exempt from sales tax, either because they are not considered taxable transactions, or because they qualify for a specific exemption or exclusion. Some examples of non-taxable sales are:

• Sales for resale: Sales of products or services that are intended for resale by the purchaser in the normal course of business are exempt from sales tax, as long as the purchaser provides a valid resale certificate to the seller.
• Sales to exempt entities: Sales of products or services to certain entities that are exempt from sales tax by law are exempt from sales tax, as long as the entity provides a valid exemption certificate to the seller. Some examples of exempt entities are governmental entities, religious organizations, educational institutions, and charitable organizations.
• Sales of nontaxable services: Sales of services that are not performed on or in connection with tangible personal property, or that are not specifically listed as taxable by the state, are exempt from sales tax. Some examples of nontaxable services are professional services, personal services, and transportation services.
• Sales of exempt products: Sales of products that are specifically exempted from sales tax by law are exempt from sales tax. Some examples of exempt products are food products, prescription drugs, medical devices, and newspapers.

List of Taxable Services in Texas

As mentioned above, sales of certain services are subject to sales tax in Texas, if they are performed on or in connection with tangible personal property, or if they are specifically listed as taxable by the state. According to the Texas Comptroller of Public Accounts, sales tax applies to 17 broad categories of services, which are:

1. Amusement services: These are services that provide entertainment, recreation, or access to entertainment or recreational facilities, such as admission fees, membership dues, game fees, ride fees, and equipment rental fees.
2. Cable television services: These are services that provide television programming through a cable system, such as basic service, premium service, pay-per-view service, and installation or repair service.
3. Data processing services: These are services that manipulate or process data or information, such as data entry, data retrieval, data search, data analysis, data compilation, data conversion, data storage, and data transmission.
4. Debt collection services: These are services that collect or attempt to collect a debt or an obligation, such as collection fees, late fees, interest charges, and attorney fees.
5. Information services: These are services that provide factual or specialized information, such as news services, financial services, credit reporting services, and research services.
6. Insurance services: These are services that are performed by or for an insurance company, such as policy issuance, premium collection, claims adjustment, and risk management.
7. Internet access services: These are services that provide access to the internet, such as dial-up service, broadband service, wireless service, and web hosting service.
8. Landscaping and lawn care services: These are services that improve or maintain the appearance or condition of land or vegetation, such as mowing, trimming, pruning, planting, fertilizing, and pest control.
9. Laundry and dry cleaning services: These are services that clean or alter clothing or other fabrics, such as washing, drying, pressing, starching, dyeing, and repairing.
10. Motor vehicle parking and storage services: These are services that provide parking or storage space for motor vehicles, such as parking lots, garages, valet services, and towing services.
11. Motor vehicle repair and maintenance services: These are services that repair or maintain the condition or operation of motor vehicles, such as oil changes, tune-ups, brake services, tire services, and body work.
12. Nonresidential real property repair, restoration or remodeling services: These are services that repair, restore, or remodel nonresidential real property, such as carpentry, plumbing, electrical, painting, roofing, and flooring.
13. Personal property maintenance, remodeling, and repair services: These are services that maintain, remodel, or repair tangible personal property, such as furniture, appliances, computers, and jewelry.
14. Security services: These are services that protect persons or property from harm or loss, such as alarm systems, guard services, patrol services, and locksmith services.
15. Telecommunications services: These are services that transmit or receive sounds, signals, or data by any means, such as telephone service, cellular service, pager service, fax service, and internet telephony service.
16. Telephone answering services: These are services that answer or relay telephone calls, such as answering services, message services, and paging services.
17. Utility transmission and distribution services: These are services that transmit or distribute electricity, gas, water, or steam, such as metering, billing, and connection services.

List of Non-Taxable Services in Texas

As mentioned above, sales of services that are not performed on or in connection with tangible personal property, or that are not specifically listed as taxable by the state, are exempt from sales tax in Texas. Some examples of non-taxable services are:

• Professional services: These are services that require specialized knowledge, skill, or training, such as accounting, legal, medical, dental, engineering, architectural, and consulting services.
• Personal services: These are services that are performed for the personal care or convenience of an individual, such as hairdressing, barbering, manicuring, pedicuring, massage, fitness, and photography services.
• Transportation services: These are services that transport persons or property from one place to another, such as taxi, bus, train, airplane, and trucking services.
• Educational services: These are services that provide instruction or training, such as schools, colleges, universities, tutoring, and coaching services.
• Religious services: These are services that are performed by or for a religious organization, such as worship services, counseling, and education.
• Governmental services: These are services that are performed by or for a governmental entity, such as public safety, public health, public welfare, and public administration services.

Is SaaS Taxable in Texas

Software-as-a-Service (SaaS) is a software model in which a customer accesses a software application that is hosted and maintained by a SaaS provider over the internet. SaaS is becoming increasingly popular as a way to deliver software solutions to various industries and consumers. However, the taxability of SaaS is not always clear, especially in different states.

In Texas, SaaS is considered a taxable data processing service, which is a subset of tangible personal property. This means that SaaS providers must collect and remit sales tax on their sales to customers in Texas, unless an exemption applies. However, there is a partial exemption for data processing services that reduces the taxable amount by 20%. This means that only 80% of the sales price of SaaS is subject to sales tax in Texas.

Some examples of SaaS that are taxable in Texas are:

• Accounting software
• Customer relationship management (CRM) software
• E-commerce platforms
• Email marketing software
• Online learning platforms
• Project management software

What Is the SaaS Sales Tax in Texas

The sales tax rate for SaaS in Texas is composed of two parts: the state sales and use tax rate and the local sales and use tax rate. The state sales and use tax rate is 6.25%, and the local sales and use tax rate can vary from 0% to 2%, depending on the jurisdiction. The maximum combined sales and use tax rate in Texas is 8.25%.

To calculate the sales tax on SaaS in Texas, you need to multiply the sales price by 80% to get the taxable amount, then multiply the taxable amount by the applicable sales tax rate. For example, if you sell a SaaS subscription for $100 to a customer in Austin, where the local sales tax rate is 1%, the sales tax calculation would be:

• Sales price = $100
• Taxable amount = $100 x 80% = $80
• Sales tax rate = 6.25% + 1% = 7.25%
• Sales tax = $80 x 7.25% = $5.80

Where Can You Go to Learn More About Why Texas Requires Sales Tax on Software-as-a-Service (SaaS)

If you want to learn more about why Texas requires sales tax on SaaS, you can refer to the following sources:

• Section 151.0035 of the Texas Tax Code, which defines data processing services and includes SaaS as an example.
• Section 151.351 of the Texas Tax Code, which provides the partial exemption for data processing services.
• Rule 3.330 of the Texas Administrative Code, which explains the application of sales tax to data processing services and SaaS.
• Publication 94-127 of the Texas Comptroller of Public Accounts, which provides guidance and examples on data processing services and SaaS.

Does Texas Require Sales Tax on the Sale of Downloadable Prewritten Software

Downloadable prewritten software, also known as canned software, is software that is prepared, held, or existing for general or repeated use or sale. Examples of downloadable prewritten software are antivirus software, video games, and office suites.

Texas requires sales tax on the sale of downloadable prewritten software, regardless of the method of delivery. Texas considers computer programs, including downloadable software, as tangible personal property, which is subject to sales tax. Therefore, sellers of downloadable prewritten software must collect and remit sales tax on their sales to customers in Texas, unless an exemption applies.

Why Does Texas Collect Sales Tax on Downloadable Prewritten Software

Texas collects sales tax on downloadable prewritten software because it includes computer programs in its definition of tangible personal property. According to Section 151.009 of the Texas Tax Code, a computer program is “a series of instructions that are coded for acceptance or use by a computer system and that are designed to permit the computer system to process data and provide results and information.” Texas treats computer programs as tangible personal property because they can be seen, measured, felt, or touched, or are perceptible to the senses in any other manner.

Does Texas Require Sales Tax on the Sale of Downloadable Custom Software

Downloadable custom software, also known as bespoke software, is software that is designed by the creator to the specifications of a specific user. Examples of downloadable custom software are software for a particular business process, software for a unique device, and software for a research project.

Texas does not require sales tax on the sale of downloadable custom software, unless the seller also sells the canned software that was modified to create the custom software. According to Rule 3.308 of the Texas Administrative Code, custom software is not subject to sales tax because it is not held for sale in the regular course of business. However, if the seller of the custom software also sells the canned software that was modified to create the custom software, the seller must collect sales tax on the entire charge, including the modification fee.

Does Texas Require Sales Tax on the Sale of Digital Products

Digital products are products that are delivered electronically, such as e-books, digital music, digital movies, digital magazines, and digital newspapers. Digital products can be accessed by streaming, downloading, or other means.

Texas requires sales tax on the sale of digital products, unless an exemption applies. Texas treats digital products as tangible personal property, similar to computer programs. Therefore, sellers of digital products must collect and remit sales tax on their sales to customers in Texas.

Does Texas Require Sales Tax on the Sale of Non-Fungible Tokens (NFTs)

Non-fungible tokens (NFTs) are unique digital assets that are stored on a blockchain, such as a piece of digital art, a video clip, a music file, or a trading card. NFTs can be used to represent ownership, authenticity, or scarcity of the digital asset.

Texas does not have a specific rule or guidance on the taxability of NFTs. However, based on the existing laws and regulations, it is possible that Texas could require sales tax on the sale of NFTs, depending on the nature and characteristics of the NFT. If the NFT is considered a digital product, a computer program, or a data processing service, it could be subject to sales tax in Texas. However, if the NFT is considered a nontaxable service, such as a license, a lease, or a transfer of intangible property, it could be exempt from sales tax in Texas.

Since the taxability of NFTs in Texas is unclear and uncertain, sellers and buyers of NFTs should consult with a tax professional or request a private letter ruling from the Texas Comptroller of Public Accounts to determine their tax obligations and liabilities.

Texas Sales Tax Audit Process

If you are a business owner in Texas, you may be subject to a sales tax audit by the Texas Comptroller of Public Accounts. A sales tax audit is a review of your business records to verify that you have properly collected, reported, and remitted sales tax to the state. The purpose of an audit is to ensure compliance with the state tax laws and to educate taxpayers on their tax obligations.

What to Expect After You Receive a Texas Sales and Use Tax Audit Notice (Texas Routine Audit Letter)

If you are selected for an audit, you will receive a notice of audit by mail. The notice will include an audit questionnaire that you need to complete and return to the Comptroller’s office within 30 days. The questionnaire will ask you to provide information about your business activities, sales tax reporting history, accounting methods, and record-keeping practices. The notice will also inform you of the audit period, which is usually the last four years of tax returns, and the name and contact information of the auditor assigned to your case.

What to Expect From a Texas Sales Tax Auditor

The auditor will contact you to schedule an initial meeting, either at your business location or at the audit office. The auditor will explain the audit process, the audit objectives, and the audit methods. The auditor will also request access to your business records, such as sales invoices, purchase receipts, tax returns, exemption certificates, and bank statements. The auditor will review your records and compare them with the tax returns you filed. The auditor will also conduct interviews with you and your employees to obtain additional information or clarification.

What to Expect During the Audit

During the audit, the auditor will test, analyze, and verify your records to determine if you have correctly reported and paid sales tax. The auditor will identify any errors, discrepancies, or adjustments that affect your tax liability. The auditor will communicate with you regularly to discuss.

After the Audit – Understand and Defend Your Business’s Rights

After the audit is completed, the auditor will prepare a final audit report that summarizes the audit findings, recommendations, and the amount of tax due or refund due. You will receive a copy of the final audit report along with a notice of tax due or refund due. You will have 30 days to pay the tax due or request a refund. If you do not pay the tax due or request a refund within 30 days, you will be subject to penalties and interest.

If you agree with the final audit report, you can pay the tax due or request a refund online, by mail, or in person. You can also request a payment plan if you cannot pay the full amount at once. 

If you disagree with the final audit report, you have the right to contest the audit results through various administrative and legal remedies. 

Contesting Audit Findings with the Auditor

The first step to contest the audit results is to discuss the audit findings and recommendations with the auditor. You can provide any additional information or documentation that may affect the audit results, and request any adjustments or corrections. The auditor will consider your arguments and evidence, and make any necessary changes to the final audit report. If you and the auditor reach an agreement, the audit will be closed and you will receive a revised notice of tax due or refund due.

If you and the auditor cannot reach an agreement, you can request an informal conference with the auditor’s supervisor. The informal conference is a meeting where you and the auditor present your positions and evidence to the supervisor, who will review the case and issue a decision. The informal conference is optional, but it may help you resolve the dispute without further escalation.

Appeal / Protest with the Texas Comptroller

If you are not satisfied with the outcome of the informal conference, or if you choose to skip the informal conference, you can file a formal appeal or protest with the Texas Comptroller. The appeal or protest is a written request that explains why you disagree with the audit results, and provides any supporting information or documentation. You must file the appeal or protest within 30 days of receiving the notice of tax due or refund due.

The appeal or protest will be assigned to a hearings attorney, who will review your case and contact you to discuss the issues and possible resolutions. The hearings attorney may request additional information or documentation from you or the auditor, and may conduct a conference call or a hearing to hear both sides of the case. The hearings attorney will issue a proposal for decision, which is a recommendation to the Comptroller on how to resolve the case.

Notice of Decision

The Comptroller will review the proposal for decision and issue a final decision on your case. The final decision will either uphold, modify, or reverse the audit results. You will receive a notice of decision by mail, which will explain the Comptroller’s reasoning and the amount of tax due or refund due. You will have 30 days to pay the tax due or request a refund. If you do not pay the tax due or request a refund within 30 days, you will be subject to penalties and interest.

Settling a Texas Sales Tax Liability

If you owe tax to the state, but you cannot pay the full amount at once, you may be able to settle your tax liability for less than the full amount. This is known as an offer in compromise, which is an agreement between you and the state that allows you to pay a reduced amount of tax in exchange for the state releasing its claim against you. An offer in compromise is only available in certain circumstances, such as when you have a financial hardship, when there is doubt about your liability, or when there is doubt about the state’s ability to collect the tax from you.

To apply for an offer in compromise, you need to complete and submit an application form along with any supporting information or documentation. The state will review your application and determine whether to accept, reject, or counter your offer. If the state accepts your offer, you will need to pay the agreed amount within the specified time frame. If the state rejects or counters your offer, you can either accept the state’s counteroffer, make a new offer, or pursue other remedies.

Contest a Texas Jeopardy Assessment

A jeopardy assessment is a special type of tax assessment that the state can issue when it believes that the collection of tax is in jeopardy, or at risk of being lost or impaired. A jeopardy assessment allows the state to immediately assess and collect the tax, without following the normal audit and protest procedures. A jeopardy assessment is usually issued when the taxpayer is suspected of fraud, evasion, concealment, or departure from the state.

If you receive a jeopardy assessment, you have the right to contest it within 10 days of receiving the notice. You can file a written request for a hearing with the Comptroller, and provide any information or documentation that shows why the jeopardy assessment is incorrect or unjustified. The Comptroller will conduct a hearing and issue a decision on your case. If you disagree with the Comptroller’s decision, you can appeal to the district court.

Texas Administrative Court

If you are not satisfied with the Comptroller’s final decision on your case, you can appeal to the district court. The district court is a state court that has jurisdiction over tax matters. The district court will review your case de novo, which means that it will consider all the facts and evidence anew, without giving deference to the Comptroller’s decision. The district court will issue a judgment, which will either affirm, modify, or reverse the Comptroller’s decision.

To appeal to the district court, you need to file a petition with the court within 30 days of receiving the Comptroller’s final decision. You also need to pay the tax due or post a bond for the amount of tax due, unless you qualify for a waiver or a reduction of the bond. You will need to follow the rules and procedures of the court, and you may want to hire a lawyer to represent you.

Conclusion

Sales tax on services in Texas can be a complicated and confusing topic for online sellers. However, by understanding the state’s sales tax laws and regulations, and by staying organized and compliant, you can avoid or minimize any sales tax issues or audits. If you do face a sales tax audit, you should know your rights and options, and be prepared to defend your position and resolve the dispute.

We hope this blog post has helped you learn more about sales tax on services in Texas. If you have any questions or comments, please feel free to contact us or leave a comment below. Thank you for reading!