The need to collect sales tax in Texas is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.
Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.
In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.
While physical presence still triggers a sales tax collection obligation in Texas, it’s now possible for out-of-state sellers to have sales tax nexus with Texas.
Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:
Affiliate nexus: Having ties to businesses or affiliates in Texas. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise. At this time, Texas has not enacted a click-through nexus law.
Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after April 1, 2019, a remote seller must register then collect and remit Texas sales tax if the remote seller meets the following criteria (the economic threshold):
Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Texas in a warehouse owned or operated by Amazon.
Trade shows: Attending conventions or trade shows in Texas. You may be liable for collecting and remitting Texas sales and use tax on orders taken or sales made during Texas conventions or trade shows, even if you only attend one trade show in the state in a year, for one day.
If you have nexus with Texas, you’re required to register with the Texas Comptroller and to charge, collect, and remit the appropriate tax to the state.
Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. Texas used to enforce trailing nexus for 12 months after a retailer last engaged in business in the state. In 2015, however, trailing nexus was eliminated. Now, nexus with Texas generally lasts until the seller no longer has, and no longer intends to engage in activities in the state that would create nexus with the state. To verify that nexus no longer exists, out-of-state sellers are required to maintain records for at least four years after ceasing to have nexus with the state.
If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Texas.
If you sell taxable goods to Texas residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
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.
After determining you have sales tax nexus in Texas, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Texas business license and sales tax registration.
You can register for a Texas Business Tax License online through the Texas Comptroller of Public Accounts. To apply, you’ll need to provide the Texas Comptroller with certain information about your business, including but not limited to:
There is currently no cost to register for a seller's permit in Texas.
You must register with the Texas Comptroller of Public Accounts if you acquire an existing business in Texas. The state requires all registered businesses to have the current business owner’s name and contact information on file.
The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).
As of November 2018, Texas is not an SST member state.
Once you've successfully registered to collect Texas sales tax, you'll need to apply the correct rate to all taxable sales, file timely returns with the Texas Comptroller of Public Accounts, and keep excellent records. Here’s what you need to know to keep everything organized and in check.
How you collect Texas sales tax is influenced by how you sell your goods.
Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.
Hosted store: Hosted store solutions like Shopify or Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Texas sales tax collection can be managed.
Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.
Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.
Texas sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.
Some goods are exempt from sales tax under Texas law. Examples include most non-prepared food items, food stamps, and medical supplies.
We recommend businesses review the laws and rules put forth by the Texas Comptroller of Public Accounts to understand which goods require sales tax to be collected, and under what conditions.
Some customers are exempt from paying sales tax under Texas law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.
Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.
Texas sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the Texas Comptroller of Public Accounts may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.
Sales tax holidays exempt specific products from sales and use tax for a limited period of time, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.
As of March 2019, Texas has the following annual sales tax holidays scheduled: