Sales Tax Exposure for Retailers in Texas

What is Sales Tax Exposure for Retailers in Texas?

Sales tax exposure occurs when a retailer in Texas fails to correctly apply the required sales tax rates or nexus rules, or ignores special district taxes. Exposure can result from common mistakes, such as miscalculating tax rates, failing to account for use tax, or misinterpreting nexus laws. Retailers with sales tax exposure risk facing back taxes, penalties, and audits.

Understanding Sales Tax Nexus for Retailers in Texas

• Physical Nexus: Retailers with a physical presence in Texas-whether through a storefront, warehouse, or employees-are required to collect sales tax on transactions made within the state.
• Economic Nexus: In addition to physical presence, retailers in Texas are subject to economic nexus laws. If a retailer makes over $500,000 in sales within Texas, they are required to collect sales tax, even if they don’t have a physical location in the state.

Special Tax Districts for Retailers in Texas

Texas has special purpose districts that can add additional sales taxes on top of the state’s 6.25% base rate. These districts can include:

• Transit authorities
• Municipal utility districts
• Development zones

Retailers must be aware of the special districts that apply to their location, as tax rates can vary depending on the district. Failing to account for these districts can lead to under-collection of sales tax and exposure.

Texas retail businesses often deal with special tax districts. Check our Special Tax Districts page to learn how they affect your sales tax rates.

Sales Tax Rates for Retailers in Texas

• Texas State Sales Tax: 6.25%
• Local City Sales Tax: Local cities like Dallas, Houston, and Austin may impose additional taxes (typically 1-2%).
• Combined Sales Tax Rate: Depending on the location, the combined rate may reach 8.25% in some areas of Texas

Retailers must ensure that they apply the correct rate based on the specific location of the transaction and any special district taxes that may apply.

Use Tax Exposure for Retailers in Texas

Use tax applies when a retailer purchases goods or services from out-of-state vendors who don’t collect Texas sales tax. Retailers in Texas may face use tax exposure in the following cases:

• Out-of-state purchases of equipment, machinery, or inventory.
• Software and digital tools used by Texas-based retailers but purchased from vendors outside Texas.
• Transactions across state or city lines, where sales tax was not properly collected.

If you purchase goods from out-of-state vendors, you may face use tax exposure. Learn more on our Use Tax page.

Common Sales Tax Mistakes Retailers Make in Texas

Retailers in Texas frequently make these mistakes, leading to sales tax exposure:

• Relying on ZIP codes to calculate sales tax, rather than properly identifying jurisdiction boundaries
• Misapplying nexus rules, assuming no nexus because there is no physical presence in Texas
• Failing to account for special districts, which can increase tax rates
• Misapplying origin vs. destination sourcing rules for taxable sales

These errors often go unnoticed until an audit occurs, resulting in large tax liabilities.

How Sales Tax Exposure Builds Over Time for Retailers in Texas

Sales tax exposure for retailers in Texas rarely results from a single large mistake. It builds over time due to small errors such as incorrect tax rate application, missed special district taxes, and failure to register for sales tax. These issues can accumulate and lead to back taxes, penalties, and audit risks.

Common causes of growing exposure include:

• Incorrect tax rate application
• Missed special district taxes
• Failure to register for sales tax or update registration when required
• Inadequate use tax reporting