Sales Tax Exposure for B2B Businesses in Texas

Business-to-business (B2B) transactions in Texas are subject to sales tax just like consumer sales, but with unique challenges and exemption rules. Many B2B businesses are unaware of their sales tax exposure because certain sales tax exemptions apply to raw materials, wholesale transactions, and out-of-state purchases. However, failing to understand the nuances of Texas tax law can lead to use tax exposure, missed exemptions, and nexus concerns.

What is Sales Tax Exposure for B2B Businesses in Texas?

Sales tax exposure for B2B businesses refers to the risk of back taxes, penalties, and audits when businesses fail to comply with sales tax rules for B2B transactions. This can arise from:

• Misunderstanding nexus rules (whether a business is required to collect sales tax due to physical presence or economic nexus).
• Improper application of exemptions for wholesale purchases or sales made to exempt organizations.
• Failure to remit use tax on out-of-state purchases or inventory.

Understanding and managing sales tax exposure is crucial for B2B businesses to avoid significant liabilities.

Nexus Rules for B2B Businesses in Texas

• Physical Nexus: B2B businesses with physical presence in Texas-such as a warehouse, office, employees, or inventory-are required to collect sales tax on sales made within the state.
• Economic Nexus: Texas imposes economic nexus on B2B businesses with over $500,000 in sales annually in Texas, even if the business has no physical presence in the state.

Wondering if your B2B business has nexus in Texas? Learn more about nexus rules on our Sales Tax Nexus page.

Use Tax Exposure for B2B Businesses in Texas

B2B businesses often face use tax exposure in Texas when they:

• Purchase equipment, raw materials, or machinery from out-of-state vendors that do not collect Texas sales tax
• Buy software or digital tools from out-of-state vendors and use them in Texas without paying use tax
• Make transactions across state or county lines where sales tax is not collected

Use tax is a way for Texas to ensure businesses are paying tax on goods purchased out-of-state that would have been subject to sales tax if bought in Texas.

B2B transactions often involve use tax for out-of-state purchases. For more details, visit our Use Tax page.

Exemptions for B2B Businesses in Texas

B2B businesses in Texas may be eligible for sales tax exemptions for specific transactions. Common exemptions include:

• Sales for resale: Purchases made for resale are exempt from sales tax, as long as the seller issues a resale certificate
• Manufacturing exemptions: Certain machinery and equipment used in the manufacturing process may be exempt from sales tax
• Wholesale transactions: Sales made to wholesalers who will resell the product are exempt from sales tax
• Out-of-state purchases: Goods purchased out-of-state for use in Texas may be subject to use tax instead of sales tax

Retailers and B2B businesses must ensure that they apply these exemptions correctly to avoid exposure.

For more details on sales tax exemptions, visit our Texas Sales Tax Exemptions page.

Common Sales Tax Mistakes for B2B Businesses in Texas

B2B businesses often make the following mistakes that can lead to sales tax exposure:

• Misunderstanding nexus: Assuming no nexus because the business doesn’t have a physical location in Texas, or overlooking economic nexus rules
• Improper exemption claims: Failing to provide a resale certificate for sales for resale or misapplying exemptions
• Not accounting for use tax: Failing to pay use tax on out-of-state purchases that would have been taxable if bought in Texas
• Relying on outdated records: Not maintaining proper documentation for exempt sales, purchases, or resale certificates

These errors can lead to penalties and back taxes if not addressed.

How Sales Tax Exposure Builds Over Time for B2B Businesses in Texas

Sales tax exposure for B2B businesses in Texas often builds over time due to accumulated errors. The longer businesses go without addressing these errors, the larger the liabilities grow. These issues can remain unnoticed until an audit or compliance review is triggered.

Common causes of growing exposure include:

• Failure to apply sales tax exemptions correctly
• Missed use tax obligations for out-of-state purchases
• Incorrect nexus determinations
• Inadequate reporting and record-keeping