How Texas Tax Laws Affect Remote Sellers and Online Businesses
Understanding how Texas sales tax works is an important part of running a business, whether you’ve been in business for years or are just getting started. There’s a lot to keep up with, but this guide will walk you through the key points.
Filing your sales tax in Texas can be straightforward once you know how often you need to file, understand how the state’s origin-based sales tax rules apply to your business, and keep clear records of both taxable and non-taxable sales. It’s also smart to look into possible tax exemptions your business might qualify for. Doing so can save money and help you avoid expensive errors down the road. If you have questions or concerns regarding Texas tax laws and your online business, contact the State and Local Tax (SALT) at Coleman Jackson, PC, today.
What Is Texas Sales Tax?
The Texas sales tax, once known as the “Limited Sales, Excise and Use Tax,” is a tax collected by both local and state governments on the lease, rental, or sale of goods and services. It is added to the total during checkout. The Texas Comptroller of Public Accounts is the government official in Texas charged with administering, collecting, and enforcing the Texas Tax Code.
As a business owner, you’re responsible for collecting this tax from your customers and sending it to the Comptroller’s office. Basically, you act as the state’s taxman. If you fail to pay on time or do not collect the right amount, your company could be subject to financial penalties and interest charges.
The state sales tax rate in Texas is 6.25%. Local governments, like cities, counties, transit authorities, or special districts, can also add their own local tax. Businesses can charge as much as an additional 2% in local tax, making the maximum total sales tax rate 8.25%.
Tax rates and laws are subject to change, so check the latest tax rates with the Texas Comptroller’s office or ask your tax professional to make sure you’re collecting and paying sales taxes in Texas correctly.
Exceptions where sales tax is not collected at the time of purchase include:
- Tax-exempt organizations: A lot of groups, like schools, government agencies, and nonprofit organizations, do not have to pay sales tax on purchases that meet the threshold for tax-exempt status.
- Resellers: Companies that purchase products with the intent to resell them can buy items without paying sales tax. They do, however, have to collect sales tax when a sale is made to the final customer.
- Remote purchases: Phone, mail-order, or online purchases may be exempt from sales tax in certain cases, like those involving qualifying manufacturing equipment, groceries, or prescription medicines.
Marketplace and Remote Sellers
Texas enacted marketplace facilitator laws that enable third-party seller platforms to collect and remit sales tax on the sellers’ behalf. In Texas, a business’s total revenue has to include all sales made across all platforms. This means counting sales from your own website, online marketplaces, and any other way you sell your products or services.
If a remote seller makes more than $500,000 in sales and sells through an online marketplace, they can ask the marketplace provider for a certificate showing that the provider will collect and pay the sales and use tax. If the marketplace doesn’t provide this certificate, the seller is responsible for handling the tax themselves.
If you sell through online platforms like Etsy or Facebook Marketplace, they will automatically apply sales tax based on where the buyer lives. Generally speaking, this can be managed through your seller dashboard on the website, and the platform takes care of collecting and delivering the tax for you. However, when it comes to figuring out whether or not you’ve met the $500,000 safe harbor threshold, you have to count all your sales, even those where the platform handles taxes on your behalf.
Sales made through an online marketplace should still be reported as “Total Texas Sales” on your sales tax return. However, if your marketplace provider is certified to collect and pay the tax for you, those sales don’t need to be listed under “Taxable Sales”.
During an audit, both you and the marketplace provider may be reviewed, so it’s important to keep all records and communications about your sales.
If you only sell through a marketplace and have a valid certification showing that the marketplace collects and pays the sales tax, you don’t need a separate Texas sales tax permit. Be sure to keep your sales records for at least four years, as you’ll need them when filing your other business taxes.
What Happens If I Didn’t Collect Sales Tax in Texas?
If a business doesn’t collect sales tax when it should, it may have to pay that amount to the state out of its own pocket, which can create financial stress. If your business has a “nexus” or tax obligation in Texas but hasn’t been collecting sales tax, you have two main options: you can register and pay the back taxes, including any penalties and interest, or you can apply for the voluntary disclosure program, which may reduce the interest you owe.
The Texas Comptroller’s office can audit businesses to make sure they are following sales tax laws. These audits are meant to find any taxes that haven’t been paid. However, the process can take a lot of time and money for a business. If the audit finds mistakes or unpaid taxes, the business may have to pay penalties and extra interest based on how late the payments are.
Failing to follow sales tax rules can lead to serious consequences, such as fines and legal fees for you as the owner of the business. Your company could also lose its sales tax permit, meaning it would no longer be able to legally operate in Texas. As if that weren’t enough, noncompliance can also damage the company’s reputation, especially since customers usually expect prices to already include sales tax.
What Should I Do If I Received a Texas Sales Tax Audit Notice?
A normal part of doing business, audits aren’t usually something to fret over. Keeping good records will make the process much easier. If you’re selected for a sales tax audit, make sure to respond quickly, and:
- Read the notice: Carefully read the audit notice so you understand what it includes, why the audit is being done, and which records you’ll need to provide. The notice will also show the time period being reviewed and list any specific details or documents the auditor is asking for.
- Contact a State and Local Tax (SALT) tax attorney: As soon as you hear from the Texas Comptroller of Public Accounts Office, contact a qualified Texas SALT attorney. A SALT attorney can walk you through what to expect, help you get organized, and represent you during the audit.
- Collect your documents: Collect and organize all the records you’ll need, such as receipts, invoices, exemption certificates, financial statements, and sales reports. Keeping everything clear and accurate will help the audit go more smoothly.
- Prepare and cooperate: If the audit is happening at your place of business, set up a lovely workspace for the auditor and make sure that all requested documents are readily available. Stay professional and cooperative; answer questions truthfully and provide requested information expeditiously.
During an audit, it is always a good idea to familiarize yourself with your rights and obligations and rights as a taxpayer. If you think the results of your audit are wrong, you have the right to appeal them. An audit can also be a good chance to strengthen your sales tax processes and make sure you’re following the rules correctly in the future. If the audit shows that you haven’t been collecting or paying sales tax properly, start doing so right away. Be sure to keep all audit documents, letters, and records for several years in case you need to refer to them later or file an appeal.
Issues With Taxes as a Reseller? Talk to a Texas Tax Attorney Today
Understanding and abiding by Texas sales tax rules is an important part of running a successful business. By keeping accurate records, staying informed about tax requirements, and responding promptly to audits, you can avoid unnecessary penalties and keep your business in good standing.
If you need guidance on sales tax compliance or help preparing for an audit, contact Coleman Jackson, P.C. today at (214) 599-0431 or fill out our online contact form. Our experienced Texas tax attorneys are ready to help you protect your business and stay compliant with state tax laws.
This law blog is written by the attorneys at Coleman Jackson, P.C., located at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206, for educational purposes only. It does not create an attorney-client relationship between this law firm and the reader. You should consult with legal counsel in your geographic area regarding any legal issues affecting you, your family, or your business.
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