State and Local Tax

State and local taxes can be divided roughly into three main categories: property taxes (also known as ad valorem taxes), transaction taxes (think sales and use taxes and excise taxes), and taxes on earnings (such as gross receipts taxes and income taxes).

In theory, a direct tax is a tax that a person pays directly to a state or local jurisdiction that cannot be shifted to others. An indirect tax is a tax that can be shifted to others (such as becoming a part of or otherwise being factored into the sale price of items sold to the public).

Typically, real property and income-producing tangible personal property are subject to state and local property taxes. However, numerous exclusions and exemptions may apply.

The sale or use tangible personal property and certain services may be subject to transaction taxes. Depending on the specific tax, the tax may be imposed on the manufacturer, importer, retailer, or consumer.  Businesses in particular need to be aware that they could be liable for transaction taxes not only on their sales but also on their purchases of items subject to tax.

There are numerous exclusions and exemptions to transaction taxes. For instance, the purchase of an item for resale or for use in manufacturing another item for sale may be exempt from tax. There also may be exemptions to comply with constitutional limitations on state and local taxation.

A sales tax is imposed on the sale of an item within a state or local jurisdiction and generally is collected by the item’s retailer.

A use tax is best understood as a supplement to a sales tax and applies to the use of an item within a state or local jurisdiction when the sale of the item was not consummated within that state or local jurisdiction.

A gross receipts tax is a tax that’s imposed on earnings without the deduction of expenses incurred in producing those earnings.  An income tax is a tax on earnings after the deduction of expense incurred in producing those earnings.

Note that some taxes may be in between a gross receipts tax and an income tax in that they allow for the deduction of certain but not all expenses incurred in producing earnings.

Generally, only business receipts generated within a state are subject to state and local gross receipts and/or income tax. These receipts are determined by the apportionment formula prescribed by the state. Apportionment formulas usually are based on some combination of various factors, including the business’s sales within a state, payroll within a state, and/or property within a state, that are then applied to total receipts to determine which portion of those receipts are attributable to, and therefore subject to tax in, the state.

The taxing power of states and local jurisdictions may be limited both by the United States Constitution and the constitution of the specific state in question. Under the United States Constitution, for instance, there are three primary restrictions on state and local taxation: the Commerce Clause (Article I, § 8, cl. 3), the Import-Export Clause (Article I, § 1o, cl. 2), and the Due Process Clause (Fourteenth Amendment, § 1).

In a nutshell, nexus refers to the type of connection between a person and a state that gives the state the right to either tax or impose tax collection obligations on the person. Nexus is determined under the United States Constitution through the interplay of the Commerce Clause (Article I, § 8, cl. 3) and the Due Process Clause (Fourteenth Amendment, § 1). Generally, physical presence within a state gives rise to nexus. Even if a person isn’t physically present within a state, however, the person may still have nexus with the state if the person has a certain number or dollar amount of sales to customers within the state (this is known as economic nexus).

Generally, it’s the Texas Comptroller of Public Accounts.

Taxes collected buy the Texas Comptroller of Public Accounts include:

• state and local sales and use tax,
• franchise tax,
• motor vehicle sales, use, and rental tax,
• motor fuels tax,
• oil and gas severance taxes,
• insurance taxes,
• public utilities gross receipts tax,
• mixed beverage gross receipts tax and mixed beverage sales tax,
• cigarette, cigar, and tobacco taxes,
• state hotel occupancy tax, and
• oil well servicing tax

Any person engaged in business in Texas who sells or rents tangible personal property or sells taxable services is required to obtain a sales tax permit.

Note that all permitted taxpayers must file a sales tax return for each report period even if they don’t have any taxable sales during that period. Failure to do so could result in the Texas Comptroller of Public Accounts assessing estimated tax for that period.

Generally, tangible personal property and taxable services sold or used in Texas are subject to Texas sales or use tax.

Tangible personal property means personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner, and specifically includes a computer program and a telephone prepaid calling card.

Taxable services include:

• amusement services;
• cable television services;
• personal services;
• motor vehicle parking and storage services;
• the repair, remodeling, maintenance, and restoration of tangible personal property;
• telecommunications services;
• credit reporting services;
• debt collection services;
• insurance services;
• information services;
• real property services;
• data processing services;
• real property repair and remodeling;
• security services;
• telephone answering services;
• Internet access service; and
• a sale by a transmission and distribution utility of transmission or delivery of service directly to certain electricity end-use customers.

Currently, the state sales and use tax rate in Texas is 6.25% of the sales price of a taxable item. Counties, municipalities, transit authorities, and special purpose districts in the state may also assess local sales or use tax up to a total additional 2%.  The rules for sourcing a transaction to a particular local jurisdiction vary.

Numerous transactions are exempt from Texas sales and use tax, including sales for resale, certain purchases for use in manufacturing, sales to certain governmental and nonprofit entities, and sales that are exported or shipped out-of-state.

Every partnership (except a general partnership that is entirely owned by natural persons and that does not have limited liability), limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity that is organized or does business in the state of Texas is required to file a Texas franchise tax return.  This is the case even if the entity in question doesn’t owe franchise tax in a given year.

Generally, the tax rates for Texas franchise tax are 0.375% of taxable margin for entities engaged in a retail or wholesale trade or 0.75% of taxable margin for all other entities. Certain entities may also qualify for the E-Z computation, which uses a rate of 0.331%.

Taxable margin is an amount based on an entity’s total revenue that is apportioned to the various states in which the entity does business.