Regardless of whether something is sold by a company in Texas or is sold to a customer in Texas, the state tax of 6.25% always applies. This is perhaps the simplest feature of Texas taxes. If it weren't for the $25 internet access exemption or the 20% web development/information service exemption, Texas state taxes would be easy.
Local Sales Tax
Beyond the state tax, the next type of tax that must be calculated is the local sales tax. This tax is based on the location of the seller's place of business.
Local Use Tax
Next, after both the state tax and the local sales tax are calculated comes the local use tax. This tax is based on the location of the customer or where the customer receives the goods and services.
Further Complications of Local Taxes
Both the local sales and local use taxes are further broken down into four different locale types: city, county, special purpose districts and transit. So, combined, this creates nine - count them nine - different types of taxes that go into the calculation.
Next, after all that breakdown, city tax rates are different for each city, county tax rates are different for each county and so on. All combined, the local tax rate - for both local sales and local use taxes - cannot exceed 2%. This limiting factor of 2% works on a priority basis, adding each subsequent type to the total until the 2% is reached. If adding one of the local tax rates exceeds the 2% limit, only the amount necessary to reach the 2% limit is used. The order of the local tax rates is as follows.
- local city sales tax
- local county sales tax
- local special purpose district sales tax
- local transit sales tax
- local city use tax
- local county use tax
- local special purpose district use tax
- local transit use tax
Also, while the terms "sales" and "use" imply a different set of rules or percentages, they actually don't. Local taxes rates are the same for both sales and use. Plus, when reporting local taxes, they are done based on the different locale types: city, county, special purpose district, and transit. Beyond the initial calculation, the terms sales and use are not applied (at least, to my knowledge).
Finally, along those same lines, duplicates are ignored. Local sales taxes for the seller are calculated; then, local use taxes for the customer are calculated - ignoring any the local use tax for duplicates. For example, if both the company and the customer are located within the same county, the local county sales tax will apply but the local county use tax will not; or more apply put, the local city tax is only calculated once.
The information provided in this article is just a summary of the Texas local tax calculations. The Window on State Government web site provides an article - and is the basis for this post - which covers may different scenarios with specific examples for each in the February 2009 Local Sales and Use Tax Bulletin - Guidelines for Collecting Local Sales and Use Tax.