Texas Sales and Use Tax Audits on the Rise - Houston Small Business CPA
Sales tax audits are on the rise... Collecting sales tax isn't an optional task for small business owners. You must collect sales tax and report it accurately and on time. But keeping sales tax straight is easier said than done. Exemptions, requirements, and gray areas abound, and if you don't know what you're doing, you could quickly find yourself in hot water.
Texas imposes a tax on the sale, lease, or rental of personal property and on certain services. Sales & Use tax is paid by the purchaser and is based on the sales prices of the item sold. The Texas tax rate is 6.25%, but local taxing jurisdictions may also impose sales tax of up to 2% for a maximum rate of 8.25%.
What is Taxable?
The Texas tax law assumes that all retail sales or uses of tangible personal property are taxable (items that can be seen, measure, felt, or touched). This means that unless you can find a specific exemption that says a product is non-taxable, then a product is taxable. No such assumption for services exists. So, unless the law states that a service is taxable, then your service is not taxable.
The main taxable services are: personal services, personal property repairs, telecommunication services, insurance services, information services, real property services, data processing services, security services, real property repair and remodeling, internet access services. This list does not include all taxable services, so if you are unsure if your service is taxable, please give us a call.
Who Do I Collect Sales Tax From?
As a SMB owner, if you are selling a taxable product or service to a non-exempt customer, you must collect sales tax on items sold in Texas. A non-exempt customer is someone who presents an Exemption or Resale Certificate to you.
In most situations you do not have to collect Texas sales tax on items shipped to buyers located in other states or to a foreign country. In some cases, you may be liable for collecting the destination state's taxes. However, if a customer from another state or country comes into your place of business, located in Texas, and buys the product, you must charge and collect sales tax.
Your accounting program should be set up correctly in order to track sales made to other states. You should keep delivery receipts in order to prove that the product was delivered to a customer in another state, just in case you are audited.
What is an Exemption Certificate?
An Exemption Certificate is proof that the taxable item was purchased by an exempt organization or for exempt use. Most religious, charitable & educational organizations are exempt from sales tax when purchasing items related to their organization's purpose.
What is a Resale Certificate?
A customer who purchases taxable items with the intent to resell as is or as part of other another item for resale is exempt from sales tax. In theory, this is supposed to prevent items from being taxed multiple times. A Resale Certificate is proof that the taxable item was purchased for resale.
Keep the exemption certificates and resale certificates you receive on file to prove that a sale was exempt or for resale and not subject to tax.
What If I Don't Collect Sales Tax?
If you do not collect and pay the proper amount of sales tax due on time, you will often receive a penalty for tax and be charged interest, compounded daily, on the amount you didn't pay. In addition, various civil and criminal penalties may apply if you fail to comply with your responsibilities as a vendor to collect a sales tax.
Know Your Sales Tax Rules
There are too many sales tax rules for us to list here. Most businesses that have been through a sales tax audit, have a good idea of what is taxable and what is not taxable in their business. Some have learned the hard way....paying penalties, interest, and taxes in a big lump sum in order to stop threats of seizure from the comptroller. If you are starting up a business, make sure you thoroughly understand the sales tax rules that apply to your business, or you will be facing some very difficult times.