Are You Required To Collect Texas Sales Tax?

In Texas, sales tax is collected on the sale, lease, or rental of tangible goods and some services. The tax is collected by the seller and remitted to state and local tax authorities. The seller acts as a de facto tax collector. However, how does a seller know when they are required to collect sales tax in Texas?

The 1992 Quill Corp. v. North Dakota ruling held that a state could only require a company to collect, file, and remit sales tax if the seller had a substantial physical presence in the state. For many online sellers, this meant they did not have to collect tax on sales to consumers located in Texas. This, however, was overturned in 2018 with the South Dakota v. Wayfair, Inc. ruling by the Supreme Court.

A lot has changed with regards to sales tax laws.  To help you determine whether you need to collect sales tax in Texas, start by answering these three questions:

  • Do you have nexus in Texas?
  • Are you selling taxable goods or services to Texas residents?
  • Are your buyers required to pay sales tax?

If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.

Internet Based Sales

On June 21, 2018, the United States Supreme Court fundamentally changed the rules for collection of sales tax by Internet-based retailers. In its decision in  South Dakota v. Wayfair Inc., the Court effectively stated that individual states can require online sellers to collect state sales tax on their sales. This ruling overturns the Court's 1992 decision in Quill Corporation v. North Dakota. The Quill case prohibited states from requiring a business to collect sales tax unless the business had a physical presence in the state.

If you are selling on the Internet to states around the country, you now will need to be aware of which states have enacted laws requiring the collection of sales tax by online sellers. In order for a given state to require you to collect sales tax, that state must pass a law allowing it to do so.

Many states already have enacted new laws. Often, these laws refer to online sellers as "remote sellers." In most cases, if a remote seller has either:

  •          a minimum number of separate sales to customers in the state; or
  •          a minimum dollar amount of sales to customers in the state,

Sales Tax Return Filing Frequency

A sales tax return is required for each period or portion of a period in which a sales tax permit is active. The return must be filed for every tax period, even if there have been no sales. Clients will file sales tax monthly, quarterly, or annually depending on the amount of sales tax collected during the period. The Texas Comptroller (or applicable state agency) determines the frequency of filing.

When Are Sales Tax Returns Due?

Sales tax returns are generally due on the 20th of the month following the end of the filing period. The Texas sales tax returns are generally filed electronically.

Trust Funds

The amount of sales tax collected is held in trust by the business owner and belongs to the state. As the sales tax collections are in a trust fund, the money should not be used to pay other operating expenses of the business.

What Sales Tax Rate Should Be Used?

In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing). Texas does a little of each.The origin address is used first. However, if the local tax rate from the origin address is less than 2 percent, the destination address is used to apply additional local tax up to the state-mandated 2-percent limit.

For example:

  • If an order is placed in person at a place of business in Texas, the rate is based on where the order is placed.
  • If an order is fulfilled at a seller’s place of business in Texas, the rate is based on where the order is fulfilled. 
  • If an order isn’t fulfilled at a seller’s place of business in Texas, but is received at a seller’s place of business in Texas, the rate is based on where the order is received.
  • If an order isn’t received or fulfilled at a seller’s place of business in Texas, but is fulfilled at a Texas location, the rate is based on where the order is shipped or delivered.
  • If the order is received, fulfilled, and delivered from a location outside of Texas, and the seller doesn’t have nexus with Texas, no tax is due. 
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