Sales Tax for Small Businesses: A Beginner’s Guide

Kim Bernstein
Feb 17
4 min read

If you run a small business that sells products or taxable services in Texas, understanding sales tax is essential. Charging, collecting, and remitting sales tax correctly ensures compliance with state and local laws while avoiding penalties. Here’s a beginner-friendly guide to help you navigate sales tax for your business in Texas. Keep in mind that sales tax laws vary by state, so if you operate outside of Texas, check with your state’s tax authority.

1. What is Sales Tax?

Sales tax is a state-imposed tax on the sale of goods and certain services. Business owners are responsible for collecting sales tax from customers and remitting it to the Texas Comptroller of Public Accounts. Think of it like you are the middleman between your client and the state.

In Texas, the state sales tax rate is 6.25%, but local jurisdictions (cities, counties, and special districts) can add up to 2%, making the total sales tax rate as high as 8.25% depending on the location of the sale.

2. Do You Need to Collect Sales Tax?

You likely need to collect sales tax if:

✅ You sell tangible personal property (retail, e-commerce, etc.)

✅ You provide taxable services (some services are subject to sales tax in Texas, such as amusement services, data processing, and telecommunications)

✅ You have nexus in Texas (physical presence, employees, or significant sales in the state)

💡 Example: If you own a boutique in Austin, you must charge sales tax on clothing and accessories sold in-store. If you sell online to a customer in Houston, you must charge the appropriate Houston tax rate.

3. How to Register for Sales Tax

To start collecting sales tax legally in Texas, follow these steps:

Check Texas tax laws – Visit the Texas Comptroller’s website to verify taxability rules for your products or services.
Register for a sales tax permit – Apply for a Texas Sales and Use Tax Permit online through the Texas Comptroller’s eSystems.
Collect sales tax at the correct rate – Use the right rate based on your business location and customer’s location.

💡 Example: A San Antonio coffee shop must register for a permit and charge 8.25% sales tax on all taxable beverages and merchandise sold.

4. How to Calculate and Collect Sales Tax

Texas follows the origin-based sales tax rule for in-state sales, meaning you charge sales tax based on your business location, not the buyer’s address.

However, if you sell to out-of-state customers, you generally do not charge Texas sales tax unless you have nexus in their state. Instead, you may need to collect and remit sales tax based on the buyer's state tax laws.

What is Nexus? Nexus is a connection between your business and a state that requires you to collect and remit sales tax there. You may establish nexus through:

Physical presence (office, warehouse, or storefront in a state)
Economic presence (exceeding a specific sales threshold in a state)
Employees or contractors working in a state
Affiliate relationships with businesses in a state

💡 Example: If your business is based in Dallas and you sell a product to a customer in California, you generally do not charge Texas sales tax. However, if you have a warehouse or employees in California, you may need to collect and remit California sales tax based on their state tax rate.

To ensure accuracy, many small businesses use automated sales tax software like TaxJar, Avalara, or QuickBooks Sales Tax to calculate the correct tax rates and manage compliance across multiple locations.

5. Common Sales Tax Practices in Other States

Each state has its own approach to sales tax, and it's important to understand how different rules may impact your business:

Destination-Based Sales Tax (Most States) – Sales tax is based on the customer’s shipping address or point of receipt. Businesses must collect the appropriate sales tax rate based on the customer’s location, which can include state, county, and city taxes.
- Example: In New York, an online seller based in Buffalo must charge sales tax based on the buyer’s address in Albany.
Origin-Based Sales Tax (Fewer States, Including Texas) – Sales tax is charged based on the business’s location, not the buyer’s address.
- Example: In Arizona, a retailer based in Phoenix must apply the Phoenix sales tax rate, regardless of where in Arizona the buyer is located.
No State Sales Tax – Some states, such as Delaware, Oregon, Montana, New Hampshire, and Alaska, do not impose statewide sales tax.

6. How to Remit Sales Tax

After collecting sales tax, you must file and remit payments to the Texas Comptroller:

Filing frequency – Businesses file monthly, quarterly, or annually, depending on their sales volume.
Keep accurate records – Maintain records of all sales and collected tax for four years in case of an audit.
File and pay on time – Late filings can result in penalties and interest charges.

💡 Example: A Houston-based electronics store collects sales tax throughout the month and files a monthly return through the Texas Comptroller’s WebFile system.

7. Common Sales Tax Mistakes to Avoid

❌ Not registering for a sales tax permit when required

❌ Charging the wrong sales tax rate

❌ Failing to file and remit on time

❌ Not keeping proper records of taxable sales

Final Thoughts

Sales tax compliance is an important part of running a small business in Texas. Staying informed and organized will help you avoid costly penalties. If you need help managing your sales tax obligations, KB2 Bookkeeping & Tax is here to help! Contact us today for expert guidance.

Disclaimer: This article is for informational purposes only and should not be considered legal or tax advice. Tax laws are subject to change. Always consult a tax professional for guidance specific to your situation.