Did you know that in the state of Texas, there are some services that are supposed to be charged sales tax too? Not just products. And to add to it, there are different rates depending on the type of service you provide and the location (or locations) of your business.
The best place to start is by going to your state’s comptroller’s website (for Texas – https://comptroller.texas.gov/taxes/sales/). Almost everything you need is on this page at the time of writing this blog. So how do you know whether you’re supposed to charge sales tax or not if you provide services? Here’s another publication they provide that may help you: https://comptroller.texas.gov/taxes/publications/96-259.php. Let’s take a look at a couple examples:
Photographers & Videographers – this is an example of a type of profession that is supposed to charge sales tax. If you use the link provided and select Taxable Labor – Photographers, Draftsmen, Artists, Tailors, etc, you’ll be able to read more details.
Tattoo Artists – by reading under Personal Services, you’ll see that services such as Dry Cleaning are taxable, however, tattooing is not.
Web Hosting – take a look under Data Processing Services and you’ll see that if you offer web hosting to your customers, you need to not only charge them sales tax, but at a discounted rate (“Twenty percent of the charge for data processing services is exempt from tax.”).
You also need to figure out at what rate should you be charging sales tax right? Go to https://mycpa.cpa.state.tx.us/atj/ and you’ll enter your business address. This is so cool, because it will tell you exactly what rate you charge based on your city and county in the state of Texas. Go ahead, try it! Now if you offer any Data Processing Services, as previously mentioned you are exempt from paying 20% of your sales tax rate. So if you have an address in Allen (Collin County), which pulls a rate of 8.25%, then 20% off would be 6.6% and that’s the tax rate you’d be charging your customers for those services. If you’re ever unsure of whether you should be charging sales tax for your services and at which rate, you can always call the Comptroller’s office and they can assist you as well (there just may be a wait depending on the number of calls coming through).
Once you determine whether you are supposed to be charging sales tax, you’ll need to apply for a sales tax permit (if you do offer taxable services and have not yet already applied). This tells the state that you are charging for taxable services and will be forwarding the money received for sales tax to your state (it’s their money, not yours). They do ask for some detailed information about your business such as your EIN/SSN, address, officers and their detailed information, etc. So you may need to take a look at the application to gather the data you need to begin the application. Or you can start the application and generally it will save where you left off if you have a login so you don’t lose the information already provided. Again, if you need assistance with the form, the Comptroller’s office can help (but only explain what the form is requesting as they do not have your business info).
Another thing that you need to be aware of in regards to Texas Sales Tax is if you are a reseller. Most Direct Sales companies fall into this category, and any business that purchases a service/item and resells it (whether passing through the fee or adding it to the services/items they’re providing to the customer). For example, if you purchase stock photos and either resell them to your customer to use for their marketing materials, or you include it with the service you’re providing such as building their website or creating content (ie, video, website), you are considered a reseller to the company you purchased the stock photos. There are two ways to handle sales tax as a reseller: 1) claim the tax you paid on the purchase when filing sales tax to decrease the amount of tax owed (in the state of Texas, the final recipient is who is responsible for paying the sales tax), or 2) you can submit to that vendor a resale certificate so that they do not charge you sales tax. The downside of option 1 is that you now have to track sales tax on purchases, and of option 2 is if you were to purchase something for your own business from that same vendor (who now does not charge you sales tax as a reseller), you have to pay sales tax when filing (another thing to track).
“But, I haven’t been charging sales tax and it looks like I’m supposed to. What do I do?!?” Well, just like the IRS, they can audit your business and if determined that you were supposed to be charging sales tax (or at least not paying the sales tax to the State Comptroller), require that you pay back X number of years. There was a client of ours who had a friend that was caught and they went back 4 years!! So this guy had to take the sales tax rate times his revenue of those taxable services, and that’s what he owed the State. When you start a business you need to do your research and although there’s not very much education out there for start-up entrepreneurs, the state says it’s your fault as the business owner for not knowing and will charge you penalties and interest. I will say that if that’s the reason you haven’t been filing a sales tax report (and paying any sales tax owed), they have a form you can request to waive any penalties or interest, but there is a max of how many periods you can use. It’s not guaranteed, but worth a shot, and you still have to pay back the sales tax owed. If you owe more than you can handle in one filing and payment for previous periods, they do have a form to request a payment plan and they may waive or discount some of the penalties and/or interest. For voluntarily stating you made the error, they are willing to work with you (and of course, I can assist you with that as well if needed). Hopefully you are not one of these people, but if so, it will be okay as long as you communicate with the State Comptroller and work out a plan.
So you’ve applied for your sales tax permit (or already have one), and have determined what rate you should be charging for which of your services. Now you need to be charging your customers the sales tax on top of your fees. So for example, if you charged $100 for a photo session as a photographer, and your office is in Allen, TX, then you’ll need to either charge $108.25 ($8.25 sales tax) to the customer or you can still charge $100 to the customer but keep in mind that $7.62 of it is sales tax (state that it’s tax inclusive). I recommend using a cloud-based accounting software such as Xero or QBO, but however you are tracking your income, you need to make sure you’re also tracking your sales tax. Not only do you need to track it for business purposes to know how much revenue you’ve made (not including the sales tax since that money gets paid to the state), but it also needs to be set aside in your bank account or budget so that you don’t “see” that as available funds. When you charge sales tax, that is NOT extra money for your business so don’t even factor it when making business financial decisions.
Have more questions about sales tax in Texas? You can call the State Comptroller’s office or feel free to email me and I can help lead you in the right direction.