Spec notes
- Texas imposes a 6.25 percent state sales and use tax, and local jurisdictions can add up to 2 percent more.
- There is no fee for a Texas sales tax permit, though the Comptroller may require a security bond.
- Twenty percent of the charge for data processing services is exempt from Texas sales tax, so tax applies to the rest.
If your Austin business sells anything taxable, it collects sales tax for the state, and it needs a permit to do that. The rules come from the Texas Comptroller of Public Accounts. They cover more than shops: some services, including data processing, are taxable too, which surprises founders of tech companies. Here is what the Comptroller says about who needs a permit and what comes with it.
Who must get a permit
According to the Comptroller, you must obtain a Texas sales and use tax permit if you are an individual, partnership, corporation or other legal entity engaged in business in Texas and you:
- sell tangible personal property in Texas;
- lease or rent tangible personal property in Texas;
- sell taxable services in Texas; or
- sell or lease taxable items or services to Texas customers from an out-of-state business with Texas revenue of $500,000 or more in the past 12 months.
Tax rates
Texas imposes a 6.25 percent state sales and use tax on retail sales, leases and rentals of most goods, as well as taxable services. Cities, counties, special purpose districts and transit authorities can add up to 2 percent in local sales and use tax, so the combined rate can reach 8.25 percent. The rate that applies depends on the location of the sale; the Comptroller publishes local rates.
Taxable services: watch out, tech founders
Sales tax is not just for physical products. The Comptroller lists services that are taxable in Texas, including amusement services, cable television, data processing and telecommunication services; Tax Code section 151.0101 has the full list. Its publication on taxable services says that using a computer for word processing, data entry, production, compilation, storage or manipulation of data is a taxable data processing service, and that twenty percent of the charge for data processing services is exempt.
Whether your software product counts as a taxable service depends on what you sell and how. If you sell software, hosting, data services or online subscriptions, get a clear answer from the Comptroller or a tax professional before you launch, not after the first audit.
Tip: Write down exactly what your customer receives for their money: a product, a license, a service, data processing or a mix. That description is what the Comptroller’s rules turn on.
Getting the permit
- Apply online through the Comptroller’s Texas Online Tax Registration Application, or on form AP-201 if a sole owner, partner, officer or director has no Social Security number.
- Applicants must be at least 18; a parent or guardian can apply on behalf of a minor.
- There is no fee for the permit, but you may be required to post a security bond.
- Permits are usually mailed the next business day and arrive in 7 to 10 business days.
One permit per place of business
You need a permit for each active place of business, which the Comptroller defines as an outlet, office or location where you, your agent or employee receive three or more orders for taxable items in a calendar year. A permit is valid only for the person it was issued to and only at the address shown. It cannot be transferred to a new owner.
When you need a new permit
The Comptroller treats a change in ownership as requiring a new permit. If a sole proprietor incorporates, or forms a partnership or LLC, that is a change of ownership, and the new entity needs its own permit. Plan for that when you move from a sole proprietorship to an LLC; see Forming an LLC in Texas: Form 205 Step by Step.
Filing and paying
After approval, the Comptroller tells you by letter whether you will file monthly or quarterly. Monthly reports are due on the 20th of the following month; for example, the April report is due May 20. If a due date falls on a weekend or legal holiday, the next working day is the due date. Permitted sellers can claim a discount of 0.5 percent of the tax they report and pay on time.
Expect some calls
Texas law requires the Comptroller to provide public information about new permit holders, including a phone number, and the office says it receives weekly requests for lists of new permittees. New permit holders often get sales calls from vendors for a week or two. They are not from the state.
The bottom line
If you sell goods, rent equipment or provide a taxable service in Texas, including many data and tech services, get a free sales tax permit before you start, collect the right combined rate, file on schedule and get a new permit if ownership changes. For the state’s other main business tax, see The Texas Franchise Tax for Startups: Who Files, Who Pays and When.