Texas is one of the few states in the U.S. that doesn't have an income tax, and that requires the Lone Star State to rely heavily on sales tax for its overall revenue. The state's current percentage rate for paying sales tax is 6.25%, but in some areas, the rate can be as high as 8.25% when you add on local sales taxes. No changes to the current maximum rates are expected in 2017, although a small number of municipalities made adjustments to their local tax add-ons in October 2016. Below, we'll look more closely at how the Texas sales tax works and whether any changes are on the horizon.
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Texas state capitol. Image source: Texas state government.
The ins and outs of Texas sales tax
The state of Texas imposes a 6.25% sales tax. No matter where in the state you make purchases that are subject to the sales tax, you'll pay at least that amount. However, state law also allows various local taxing jurisdictions, including cities, counties, special purpose districts, and transit authorities, to impose an additional sales tax. The extra tax is limited to 2%, making the maximum rate statewide 8.25%. Houston, Dallas, San Antonio, Austin, and El Paso all have local taxes that bring the total sales tax up to the 8.25% maximum.
Texas sales tax is collected on all retail sales, leases, and rentals of most goods. Many food products are exempt from tax, but prepared foods, soft drinks, candy, and various non-food items are subject to tax even when they're sold in grocery stores and similar locations. In addition, the sales tax is also owed on taxable services. State law includes several very specific items that are subject to tax, such as cable and satellite television services and motor vehicle parking services. Also, broader categories of labor cover occupations like photography, tailoring, catering, and art production. You can find a full list of taxable services in this document(link opens PDF).
In addition to sales tax, Texas imposes a use tax of the same percentage. That means that if Texas residents buy goods outside the state but bring them back for use within the state, they technically owe the same amount of tax as if they had bought the goods within Texas. The same holds true for internet or mail-order goods sent to Texas addresses, although some internet retailers have simply started collecting sales tax on the front end rather than putting their customers in a position in which they might owe use tax.
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Texas sales tax for businesses
For customers, sales tax is simple: You just pay it. But sales tax collection imposes a burden on businesses. In Texas, businesses that collect sales tax apply for a permit, and the state then informs the business whether they need to file sales tax reports and make payments on a monthly or quarterly basis. Monthly filers must send reports and pay tax by the 20th of the following month, and quarterly filers have a due date on the 20th of the month following the end of each calendar quarter.
The Texas state government collects sales tax payments from businesses using the TEXNET electronic payment system. Minor discounts of 0.5% to 1.75% of the tax owed are available for taxpayers that pay on time or prepay their tax liability, but a $50 penalty applies to late-filed reports, as well as a 5% penalty for tax paid 30 days or less after the due date and 10% for payments more than 30 days late.
Why Texas sales tax is important on income taxes
Finally, one thing that Texas residents should keep in mind is that Texas sales tax is deductible as an itemized deduction on federal income tax returns. Current law allows taxpayers to choose to deduct either state income tax or state sales tax, and so in Texas, the choice is obvious. You can either deduct the actual amount of sales tax paid or use a default amount determined by the IRS. Using whichever method gives the greater deduction makes sense for most taxpayers.
No one likes taxes, and in Texas, the sales tax makes up for the fact that residents of the Lone Star State don't have to pay income tax. Nevertheless, unlike with income tax, paying sales tax is largely under your control. By being smart about your purchases, you can do what you can to limit how much Texas sales tax you end up having to pay.
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