Texas Sales Tax Problems: 7 Common Mistakes Business Owners Make (And How to Fix Them)

One missed filing deadline, one wrong tax rate, one mishandled resale certificate, and you could be facing penalties, interest, audits, and even personal liability that follows you home.

The Texas Comptroller collected over $36 billion in sales tax revenue in 2024, making it the state's largest source of income. They take compliance seriously, and they have the power to shut down businesses, seize assets, and hold owners personally liable for unpaid sales tax.

Here's what every Texas business owner needs to know about Texas sales tax problems, the mistakes that trigger audits, and how to fix issues before they destroy your business.

Understanding Texas Sales Tax Basics

Texas sales tax isn't just one tax. It's a combination of state, local, city, county, transit authority, and special district taxes that vary depending on where your customer is located.

The state rate is 6.25%, but when you add local taxes, the total rate ranges from 6.25% to 8.25% depending on the jurisdiction. That means the tax rate for a sale in Houston is different from Dallas, which is different from a small town in West Texas.

Unlike income tax, where you calculate what you owe and pay it, sales tax is money you collect from customers on behalf of the state. This makes it a "trust fund" tax, meaning you're holding the state's money in trust until you remit it.

This distinction is critical because if you collect sales tax and don't remit it, you're not just late on a tax payment. You're misusing funds that belong to the state, which carries much harsher penalties including personal liability.

The Texas Comptroller requires most businesses to file sales tax returns monthly, though some qualify for quarterly filing if their tax liability is low. You must file even if you had zero sales during the period.

Now let's look at the seven most common mistakes that get Texas business owners in trouble with sales tax.

1Not Knowing When You Need a Sales Tax Permit

The most fundamental mistake is operating without a Texas sales tax permit when you're required to have one.

You need a permit if you're selling tangible personal property in Texas, whether you have a physical location, sell online, or operate from home. You also need a permit if you're providing certain taxable services.

Many business owners assume that because they operate online or don't have a storefront, they don't need to collect Texas sales tax. This is wrong and it's expensive.

Texas has economic nexus laws that require out-of-state sellers to register and collect sales tax if they have more than $500,000 in Texas sales in the previous 12 months. You don't need a physical presence in Texas to be required to collect Texas sales tax.

Even if you're below the economic nexus threshold, you create nexus through activities like having inventory stored in Texas, having employees or contractors working in Texas, attending trade shows in Texas, or making regular deliveries into the state.

Operating without a required permit carries a penalty of up to $500, plus you'll owe all the back sales tax you should have collected, plus penalties and interest on that amount.

The Texas Comptroller cross-references business registrations with sales tax permits. If you registered your business with the Secretary of State but never got a sales tax permit, they will find you.

2Misunderstanding What's Taxable in Texas

Texas sales tax law is over 3,000 pages long, and determining what's taxable versus what's exempt confuses even experienced business owners.

The general rule is that tangible personal property is taxable unless specifically exempted. Services are generally not taxable unless specifically listed as taxable.

But the details are where business owners get into trouble.

Food is a perfect example. Groceries are generally not taxable in Texas. But "prepared food" is taxable. So a rotisserie chicken from the grocery store is taxable, but a raw chicken is not. A sandwich from a deli is taxable, but bread and lunch meat sold separately are not.

If you run a restaurant, everything is taxable. If you run a catering business, it depends on whether you're providing just food or also service staff and equipment.

Most services are not taxable in Texas, which is different from many other states. Legal services, accounting services, consulting, and most professional services are not subject to sales tax.

However, some services are taxable including real property repair and remodeling, telephone answering services, credit reporting, debt collection, insurance services, and certain data processing services.

Digital products create another layer of confusion. Downloaded software is generally taxable. Cloud-based software accessed remotely is generally not taxable. Streaming services may or may not be taxable depending on the specific service.

Manufacturing businesses have exemptions for machinery and equipment used directly in manufacturing, but the definition of "directly" is very narrow and frequently misapplied.

3Using the Wrong Tax Rate

Texas is a destination-based state for sales tax, which means you charge the tax rate where the customer receives the product, not where your business is located.

This gets complicated when you have customers all over Texas because you need to charge the correct rate for each customer's location.

A sale to a customer in Austin requires collecting 8.25% sales tax. A sale to a customer in Houston requires 8.25%. A sale to a customer in a small town might only require 6.25%.

The challenge is that there are over 1,750 local taxing jurisdictions in Texas, each with potentially different rates. The rates also change periodically as cities and counties vote to raise or lower local sales taxes.

Many business owners simplify by charging a single rate for all sales, usually their own location's rate. This is incorrect and will cause problems in an audit.

The Texas Comptroller expects you to charge the correct rate for each sale. If you undercharge, you're liable for the difference plus penalties. If you overcharge, customers can request refunds and you're liable for the excess tax you collected but shouldn't have.

For online sales, you need to determine the customer's location and apply the correct rate. For in-person sales, you charge the rate of your business location. For delivery sales, you charge the rate where you deliver the product.

4Mishandling Resale Certificates

If you sell products to other businesses who will resell them, you can accept a resale certificate and not charge sales tax on that transaction.

But accepting resale certificates incorrectly is one of the fastest ways to create massive tax liability.

A resale certificate allows a business to purchase items without paying sales tax because they intend to resell those items. The end consumer will eventually pay the tax when they buy from the reseller.

The critical rule is that you can only accept a resale certificate for items the buyer will resell. You cannot accept a resale certificate for items the buyer will use in their business.

For example, if you sell office supplies, you can accept a resale certificate from a retailer buying supplies to resell. You cannot accept a resale certificate from a plumber buying supplies to use in their plumbing business, even though the plumber is a business.

Many business owners accept any resale certificate presented to them without verifying it's valid or appropriate. This is a mistake because if the certificate is invalid or used improperly, you are liable for the uncollected sales tax, not the buyer.

The Texas Comptroller requires you to obtain a properly completed resale certificate before or at the time of the sale. You must keep certificates on file for four years. The certificate must contain specific information including the buyer's permit number, business name, address, and signature.

In an audit, the Comptroller will review every resale transaction. For any transaction where you didn't collect tax and don't have a valid resale certificate, you'll be assessed the tax plus penalties.

5Missing Filing Deadlines (Even With Zero Sales)

Texas requires you to file a sales tax return for every reporting period, even if you had zero sales and owe zero tax.

Many business owners assume that if they don't owe tax, they don't need to file. This is incorrect and it triggers penalties.

The penalty for late filing is 5% of the tax due for each 30-day period the return is late, up to a maximum of 25%. If you owe zero tax, the penalty is $50 per late return.

This means if you miss four quarterly filings in a year with zero sales, you owe $200 in penalties despite owing no tax.

Late payment penalties are 5% of the unpaid tax if you're 1 to 30 days late, increasing for longer delays. Interest accrues daily on unpaid tax at a rate that changes quarterly but generally ranges from 6% to 8% annually.

The Texas Comptroller is strict about deadlines. Sales tax returns are due on the 20th of the month following the reporting period. If the 20th falls on a weekend or holiday, the deadline moves to the next business day.

Most businesses start on monthly filing. If your average monthly tax liability is less than $1,500, you can request to file quarterly. If it's less than $500, you can request annual filing.

Chronic late filing triggers audits. The Comptroller uses late filing as an indicator that a business may have other compliance issues worth investigating.

6Inadequate Record Keeping

When the Texas Comptroller audits your business, they will request detailed records of every sale, every exemption, every return, and every payment for the audit period.

If you cannot provide adequate documentation, the Comptroller will estimate your tax liability, and their estimates are always high and not in your favor.

Texas law requires you to keep complete and accurate records for four years. This includes sales invoices, purchase invoices, exemption certificates, resale certificates, credit card statements, bank statements, general ledger, and anything else that documents your sales and tax collected.

The records must be sufficient to determine your correct tax liability. If your records are incomplete, disorganized, or missing, you lose the ability to dispute audit findings.

Many small business owners keep minimal records or rely entirely on their point-of-sale system without maintaining backup documentation. This creates problems when the POS data is incomplete or when you need to prove specific transactions were exempt.

The Texas Comptroller can conduct desk audits where they analyze your returns remotely, or field audits where an auditor visits your business and reviews records in person. Either way, they will ask for detailed documentation.

Common documentation problems include not keeping resale certificates on file, not documenting the reason for exempt sales, not keeping records of returned merchandise, and not maintaining records of purchases to verify cost of goods sold.

7Ignoring Nexus in Other States

If you're selling products outside of Texas, you may have sales tax obligations in other states that you're completely unaware of.

Every state has different nexus rules that determine when you're required to collect their sales tax. Most states now have economic nexus laws similar to Texas that require remote sellers to collect sales tax once they exceed certain sales thresholds in that state.

The Supreme Court's Wayfair decision in 2018 allowed states to require out-of-state sellers to collect sales tax based on economic activity alone, without physical presence.

This means if your Texas business makes $100,000 in sales to California customers, you may be required to register and collect California sales tax even though you've never set foot in California.

The thresholds vary by state. Some states use $100,000 in sales or 200 transactions. Other states use different thresholds. You need to track your sales by state and monitor when you cross nexus thresholds.

Marketplace facilitator laws add another layer. If you sell through Amazon, Etsy, eBay, or other marketplaces, the marketplace may collect and remit sales tax on your behalf in some states but not others. You need to know which states are covered and which you're still responsible for.

Many Texas business owners focus only on Texas sales tax problems and completely ignore their obligations in other states. Then they receive a letter from another state's tax authority demanding years of back taxes, penalties, and interest.

What Happens in a Texas Sales Tax Audit

The Texas Comptroller has broad authority to audit any business with a sales tax permit. They typically audit businesses every 3 to 5 years, though certain triggers can bring audits more frequently.

Common audit triggers include inconsistent reporting, sudden changes in reported sales, high use of exemptions, frequent late filing, competitor complaints, and random selection.

The audit process begins with a notice letter informing you that you've been selected for audit. The letter will specify the audit period, which is typically 3 to 4 years but can go back further if fraud is suspected.

You'll be asked to provide all records for the audit period. An auditor will review your records either remotely or in person, looking for unreported sales, improperly documented exemptions, incorrect tax rates, and any other compliance issues.

The audit can take anywhere from a few weeks to several months depending on the complexity of your business and the quality of your records.

At the end of the audit, you'll receive a report of findings. If the auditor found underpaid tax, you'll receive an assessment for the tax plus penalties and interest. You have the right to protest the findings if you disagree.

Many audits result in assessments, and the amounts can be substantial. A business with $1 million in annual sales could face a $50,000+ assessment if the auditor finds significant underreporting.

The worst-case scenario is when the auditor determines you willfully failed to comply with sales tax law. This can result in fraud penalties of up to 50% of the tax due, plus potential criminal charges in extreme cases.

Personal Liability: When Sales Tax Debt Follows You Home

One of the most dangerous aspects of sales tax debt is personal liability.

Because sales tax is considered a trust fund tax, the state can hold business owners, officers, and directors personally liable for unpaid sales tax even if the business is an LLC or corporation.

This means the Texas Comptroller can pursue your personal assets, including your home, bank accounts, and wages, to satisfy business sales tax debt.

The corporate veil that normally protects business owners from business debts does not protect you from sales tax liability if the state determines you were a responsible person who had control over which bills got paid.

If you collected sales tax from customers but used that money to pay other business expenses instead of remitting it to the state, you can be held personally liable.

The Texas Comptroller will assess personal liability against anyone who had the authority to determine which creditors got paid. This typically includes owners, CEOs, CFOs, controllers, and anyone with check-signing authority.

Personal liability assessments can follow you even after the business closes. You cannot discharge this debt in bankruptcy in most cases. The state can place liens on your personal property and garnish your wages indefinitely until the debt is paid.

How to Fix Past Sales Tax Problems

If you've made any of these mistakes and have unpaid sales tax, unregistered nexus, or other compliance issues, you have options to resolve them before the state finds you.

The worst thing you can do is ignore the problem. Sales tax debt doesn't go away. It grows with penalties and interest, and eventually the state will find you through their data matching and enforcement programs.

Option 1: File Missing Returns and Pay What You Owe

If you've simply fallen behind on filing or payment, the best approach is to get current as quickly as possible. File all missing returns and pay the tax, penalties, and interest.

The penalties for voluntary compliance before the state contacts you are lower than the penalties after they initiate enforcement.

Option 2: Request a Payment Plan

If you owe more than you can pay immediately, the Texas Comptroller offers payment plans. You'll need to file all missing returns first, then request a payment plan for the balance due.

Payment plans typically allow you to pay over 12 to 36 months, though you'll continue to accrue interest during the payment period.

Option 3: Voluntary Disclosure Agreement

If you have nexus in Texas but never registered, or if you've been non-compliant for an extended period, a Voluntary Disclosure Agreement (VDA) can reduce your liability.

Through a VDA, you agree to register, file returns, and pay tax for a limited lookback period (usually 3 to 4 years instead of the standard 4 years). In exchange, the state waives penalties and limits the lookback period.

VDAs must be initiated before the state contacts you. Once you receive an audit notice or assessment, you no longer qualify for voluntary disclosure benefits.

Option 4: Penalty Abatement

If you have reasonable cause for late filing or late payment, you can request penalty abatement. Reasonable cause includes situations beyond your control like serious illness, natural disaster, death in the family, or reliance on incorrect advice from a tax professional.

First-time penalty abatement may be available if you have a clean compliance history prior to the penalties you're requesting to abate.

Penalty abatement doesn't eliminate the tax or interest, only the penalties. But penalties can represent 25% or more of your total liability, so abatement provides significant relief.

When to Hire Professional Help

Many business owners try to handle sales tax compliance themselves to save money. This works fine when everything is straightforward, but it becomes risky when you have complex situations or compliance problems.

You should consider professional help if you operate in multiple states, sell both taxable and exempt products, use resale certificates frequently, face a sales tax audit, have unfiled returns or unpaid tax, or receive assessment or collection letters from the Texas Comptroller.

Tax professionals who specialize in sales tax can navigate the complexities of Texas tax law, represent you in audits, negotiate payment arrangements, prepare voluntary disclosure agreements, and implement systems to keep you compliant going forward.

The cost of professional help is almost always less than the cost of making mistakes or facing audits unprepared.

Sales tax professionals include CPAs with sales tax expertise, sales tax attorneys, and specialized sales tax consultants. Make sure whoever you hire has specific experience with Texas sales tax problems, not just general tax knowledge.

Protecting Your Texas Business from Sales Tax Problems

Sales tax compliance doesn't have to be overwhelming if you build the right systems and habits.

Register for your sales tax permit if you're required to have one. Understand what you're selling and whether it's taxable. Use automation to calculate correct rates. Collect and verify resale certificates before accepting them. File and pay on time every period. Keep detailed records for at least four years. Monitor your nexus in other states.

Most Texas sales tax problems are preventable. They happen because business owners don't understand the rules, don't have adequate systems, or let compliance slide during busy periods.

The Texas Comptroller is aggressive in enforcement because sales tax is the state's primary revenue source. They have sophisticated data matching systems that identify non-compliant businesses. They audit frequently and assess significant penalties.

Don't let sales tax problems destroy the business you've worked hard to build. Get compliant, stay compliant, and get professional help when you need it.

Your business depends on it.