Collecting sales tax

TL;DR:

• After obtaining a seller's permit, you need to collect sales taxes when you sell taxable goods and services.
• You will have to collect sales tax based on whether you have nexus, sell taxable goods and services, and your buyer's identity (non-profit and governmental organizations, buyers with a resale certificate/ Direct Pay Permit don't need to pay taxes to the seller)
• There are four sales tax holidays in Texas, and during these days, buyers can purchase certain items tax-free.
• In-state sellers can charge taxes based on their location while remote sellers selling into Texas will have to collect taxes based on the buyer's location.
•  While calculating the sales tax rate and multiplying it with the price of the product, you should calculate the amount to the third decimal place and round it off.
• Remote sellers can charge the state-wide rate (6.25%) added with the uniform local rate (1.75%), at 8%. If not, they can also opt to collect the actual combined rate of the state and local sales tax at the buyer's location.
• Remote sellers selling through a marketplace don't have to collect sales taxes, as the marketplace providers will collect taxes on their behalf, provided that the marketplace provider certifies this.
• If you don't collect sales tax, you will have to pay the right amount during the period you failed to collect, along with penalties and interest charges.
• Use tax will be charged instead of sales tax when goods are bought from out-of-state online sellers.
• After collecting sales tax, you will have to file returns and pay taxes to the state.

If you have nexus in Texas and have obtained a seller's permit, you will have to begin collecting sales taxes on your taxable sales and remit the amount to the state, in order to stay sales tax compliant. In case you fail to collect sales taxes at the time of making a sale, you will be liable to pay the uncollected tax amount to the state, and any delay in this will result in interests and penalties. Therefore, timely sales tax collection is an important step in keeping up with your sales tax compliance. This guide will explain how sales tax collection works in Texas, and what you are required to do.

When to collect

You have to collect sales taxes at the point of sale. However, there are a few criteria that you have to keep in mind while making sales and collecting taxes from your customers. You have to ensure that:

• You have nexus in the state
• You collect sales taxes only on taxable sales
• Your buyer has to pay sales tax

You have nexus in the state

There are different ways in which you can have nexus in Texas, whether you are a seller located in Texas or an out-of-state seller. If you have a commercial link with Texas, by way of owning a physical space, having employees, salespeople, third-party contractors, affiliates, or even by way of crossing a certain threshold ($500,000 in annual revenue from taxable sales into Texas), you have nexus in Texas. Having nexus in Texas means that you will have to begin collecting taxes from your customers here.

You collect sales taxes only on taxable sales

You can collect sales taxes only on the sale of goods and services that are considered taxable by the Texas Comptroller. Taxable goods and services include tangible personal property, digital goods, services like data processing services and more. For a detailed list of taxable goods, you can visit here. For a detailed list of taxable services, you can visit here.

Your buyer has to pay sales tax

Some buyers don't have to pay sales tax when they make a purchase.

• If a buyer purchases a good with the intention of resale, and provides a resale certificate to you as proof, you cannot collect sales tax from them. For example, if a retailer purchases a good from you, they will provide a resale certificate to you, and will be responsible for charging and collecting sales tax from the end consumer.
• Government entities, NGOs and non-profit religious and educational institutions are exempt from having to pay sales tax. While making purchases from you, they will have to present a tax exemption certificate.
• If a buyer has a Direct Pay Permit (a document that allows them to pay taxes directly to the tax authority), you don't have to collect sales taxes from them.

However, it is important that you keep records of these transactions and maintain copies of these exemption and resale certificates. Misplacement or loss of these certificates will make you responsible for the uncollected sales tax.

Sales tax holidays in Texas

There are four sales tax holidays in Texas, and during these days, buyers can purchase certain items tax-free, without having to provide an exemption certificate. For example, during the 'Back to School' holiday, school supplies can be bought tax-free. Tax holidays will fall on a weekend.

• Emergency Preparation Supplies: Falls on the last weekend in April
• Texas EnergyStar: Falls on Memorial Day weekend (May)
• Water-efficient Products: Falls on Memorial Day weekend (May)
• Back to School: Falls on a weekend in August

How to collect sales tax

The process of collecting sales tax involves charging the right amount of sales tax for a taxable good or service, collecting it and keeping records of the transactions. Texas is an origin-based sourcing state, where in-state sellers can charge taxes based on their origin/location. For example, sellers located in Houston, Texas will charge the rates set for Houston, even if the customer is located in another city. However, remote sellers who are selling into Texas will have to collect taxes based on the destination/buyer's location.

While making sales, it's important to state that the sales tax amount will be charged separately from the price of the product, unless it is specified to them that it is included as part of the product price. Also, while calculating the sales tax rate and multiplying it with the price of the product, you should calculate the amount to the third decimal place and this should be rounded off (if the third decimal place is equal to or greater than 5).

For example, if you are located in Houston, TX and a buyer is purchasing a bag for $150 and you are charging a sales tax rate of 8.25%, you will get an amount of 12.375 when considering the third decimal place. As the last number is 5, you can round it off the amount charge $12.38.

Collection of sales tax for online and remote sellers

Remote sellers with nexus in Texas must register for a permit, and should begin collecting sales taxes based on the buyer's location/ the ship-to destination.

However, while collecting sales tax, remote sellers also have to consider the different local jurisdiction rates that apply. To make it easier, the Comptroller has stated that remote sellers can choose to collect a single uniform local tax rate of 1.75% on purchases made within taxing jurisdictions.

So, the rate that remote sellers would have to charge would be the state-wide rate (6.25%) added with the uniform local rate (1.75%), becoming 8%. They should notify the Comptroller if they are going ahead with this option. If not, they can also opt to collect the actual combined rate of the state and local sales tax that is imposed at the buyer's ship-to location. However, they should choose either one option as a standard option for all sales.

If you are a remote seller selling through a marketplace, you do not have to collect sales taxes, as marketplace providers (like Amazon, eBay, and Walmart) will collect taxes on your behalf. However, this is done only if the marketplace providers provide a certificate to you stating that they will be collecting taxes. If you have not been given a certificate, then you will have to collect sales tax. Meanwhile, hosted stores like Shopify allow integrated sales tax rate determination and collection. In such cases, you will have a dashboard where you can manage the tax they have collected.

What happens if you don't collect sales tax?

If you don't collect sales tax, you will have to owe the state the correct amount during the period you failed to collect, along with applicable penalties and interest.

Moreover, if you are an online seller, and if your goods are purchased out-of-state and you don't collect sales tax for it, use tax is charged instead. This tax is collected when your good has been bought outside of Texas but is used/stored inside Texas. The use tax rate is the same as the sales tax rate, and is calculated in the same way.

Note: It is important to file sales tax returns even if no sale has been made, and no tax has been collected.

What's next?

After you have maintained records of your transactions and duly collected sales tax, you need to file sales tax returns and pay the collected amount to the Texas Comptroller. This amount is used by the Comptroller to fund public services and infrastructure, health services, and more.

Keeping track of your sales and collecting the right amount of taxes is vital. Instead of handling it all yourself, let us do the work for you! Zoho Books is an online accounting solution that eases your tax burden by helping you manage your business, focus on your revenue, and stay tax compliant with easy sales tax management. Sign up with us here!