Texas state sales and use tax

Find out interesting insights with Jon Naseath, CFO, Cantu Capital Inc.

Moderated by Srishti, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Srishti: Hello everyone. My name is Srishti Rajwer, and I am a digital transformation consultant at Hyperbots. Today I’m delighted to have John Naseath as my guest. Thank you so much for taking out the time, Jon.

Jon Naseath: My pleasure. Nice to be here.

Srishti: Of course, and a little bit about Jon. He is the CFO at Cantu Capital, and today we’ll be discussing Texas state sales tax and use tax. So with that said, let me know whenever you’re ready, and we can get started.

Jon Naseath: Yeah, problem.

Srishti: So to begin with, could you provide an overview of Texas state sales tax rules for goods and services?

Jon Naseath: So Texas has a pretty standard sales and use tax model. They have their state-level tax, and there are also local jurisdictions that add additional taxes in different scenarios. There are variations, but compared to other states, it’s pretty standard for a state from a sales tax perspective. A lot of people think about Texas being low on taxes, and around income tax, there are certainly different rules. Property taxes are also a big deal in Texas, but here we’re just talking about sales and use tax specifically. Just to give context, Texas charges a sales tax of 6.25% on most taxable items and services. Local jurisdictions can also impose additional sales tax, bringing the tax rate up to 8.25% in some areas. There are differences in what is taxed—goods such as clothing, electronics, and even some services are taxable.

Srishti: Understood. Can you also give some examples where certain items might be exempt from sales tax?

Jon Naseath: Sure. Texas applies sales tax to several services, including amusement services, personal services, laundry, and cleaning. Some exemptions include unprepared groceries like fruits and vegetables, prescription drugs, and sales to government agencies or nonprofit organizations. The government doesn’t want to pay taxes on these items, so they are exempt.

Srishti: That’s definitely helpful. That brings me to my next question. How do sales tax rates differ across Texas? And can you explain how jurisdictions impact tax rates?

Jon Naseath: Sure. There’s the state-level tax, and then different local jurisdictions can impose their own taxes. For example, the state sales tax is 6.25%, but cities like Houston and Dallas have added an additional 1% or 2%, bringing the total tax rate to 8.25% in those areas.

Srishti: Understood. Are there exemptions to the Texas sales tax? And could you give some examples of these exempt items?

Jon Naseath: Yeah. Again, unprepared groceries like fruits and vegetables are exempt from promoting healthy eating. Prescription drugs are also exempt to ease the financial burden on people with fixed incomes. Government and nonprofit organizations are also exempt because the state wants to support them. Taxes are often used as a tool to influence behavior and reward certain activities. Even Texas uses taxes to incentivize specific behaviors.

Srishti: Understood. That definitely makes sense and is very useful. How has Texas’ tax treatment of SaaS, or software as a service, evolved?

Jon Naseath: By now, it’s pretty common for states to apply taxes to SaaS, online e-commerce, and digital services. Texas treats SaaS as a taxable service, including cloud-based applications where customers access the software remotely and manage their data through a SaaS platform. In Texas, providers must collect sales tax on these transactions, which can be challenging given the complexity of the digital landscape.

Srishti: Understood.