In the world of sales tax compliance, some states stand out for complex and bizarre regulations (looking at you Colorado). Others, though, command attention mostly from their size and importance to the retail market. Texas is firmly in the second camp.
Texas Isn’t “Taxes” Misspelled
Famous for its more libertarian sentiments, it’s unsurprising that Texas does not impose an overwhelmingly large tax obligation on businesses.
Texas has a statewide sales tax rate of 6.25%, with localities permitted to tack on up to an additional 2%. This comes to an average rate of 8.17%, which the Tax Foundation ranks as the twelfth highest among the 50 states — perhaps on the higher end, but certainly not Texas big.
Texas even makes things fairly straightforward for remote sellers, as the state applies “origin” based sales tax calculations. That is, the applicable sales tax rate for a delivered order is that of the seller’s location. So if a customer in El Paso has some goods delivered from a seller in Austin, tax will be assessed at Austin’s rates.
This is, of course, more complicated for out-of-state sellers who are nevertheless still collecting sales tax on their Texas sales. These sellers won’t have local Texas rates to apply. Instead, they will need to assess and collect tax at the rate of the deliver-to address. This will require the seller to take steps to determine the proper sales tax rate for their Texas orders, but this is a complication that remote sellers collecting sales tax in multiple states will be very familiar with. (Ask us how Taxify can help you!)
What sets Texas apart from most other states is that there is no state-based personal or corporate income tax. This may be great for residents, but it does also mean that sales tax is a leading source of revenue for the state. According to the Tax Foundation, well over a third of state revenue comes from sales tax. As such, the state may be particularly concerned with receiving all the sales tax it can glean; businesses facing a potential tax liability in the state should be wary.
If you have questions about registering as a tax collector in Texas, or how to approach becoming a tax collector there, please read this post.
All My Nexus Lives In Texas
To date, Texas hasn’t quite jumped on the bandwagon of expanded nexus rules, as so many other states have. (Nexus is the condition of having sufficient contact with a state whereby the state can impose a tax liability; currently, the standard for the sufficient contact is “physical presence” as set out by the U.S. Supreme Court in the 1992 Quill case.)
Instead, only really the typical physical presence conditions — owning or renting property, storing inventory, having employees — apply in Texas. Since 2012, Texas has imposed affiliate nexus, wherein businesses with partner and affiliate relationships with Texas-based parties may have nexus in the state despite being located elsewhere; but this is largely an extension of owning property in the state, though the ownership may not be direct.
An example of a potential gotcha for remote sellers to Texas is its enforcement of trade show nexus. As elsewhere, this idea — that, by travelling to Texas and participating in a work event, a business can have physical presence nexus in the state — is not radical, other states also apply it. Where Texas stands out is in how strictly it will enforce this: attending even a single, one-day event could lead to a business having to collect sales tax on their sales to Texas.
These rules can get complicated, so businesses should consult with their fiduciary tax consultants before assuming they have nexus in Texas. Nevertheless, there are reasons that businesses shouldn’t be cavalier, even just when taking a work trip to the Lone Star State.
Texas Tax Amnesty Programs
At the time of this post’s publication, Texas is in the midst of running an amnesty program for people and businesses with delinquent tax payments in the state. This program is set to run until June 29, 2018, so anyone who owes back taxes in Texas should take immediate action to look into how they can benefit. A link to the state’s site is provided here.
This amnesty program is available for any registered taxpayer, who, for periods prior to January 1, 2018, either completely failed to report or underreported their taxes to the state. It does not apply for any missing or deficient filings that the state has already sent notice on, or where the taxpayer is currently under audit for.
This amnesty program is not associated with the FBA-seller amnesty program run by MTC last year. This is a program specific only to Texas taxpayers, and applies much more broadly to different classes of taxpayers and tax types.
Eligible taxpayers, if approved, can receive relief from penalties and interest that is typically added to back taxes. Any owed taxes will still need to be paid to the state, but getting penalties and interest waived can be very worthwhile.
Being “Texas-sized” is usually a good thing, but not when it comes to tax obligations. See how Taxify by Sovos can simplify your tax collection and reporting burdens.