On a Texas sales tax return, total sales in Texas and taxable sales are two different numbers, and the difference between them is the point of the return. Total sales is every dollar of revenue your business took in. Taxable sales is what’s left after you subtract exempt items, qualifying discounts, and transactions Texas doesn’t tax. You owe sales tax only on the second figure, but both have to appear on the return, and the deductions between them have to be documented.
What Counts as Total Sales
Texas Tax Code Section 151.007 defines the “sales price” as the total amount of money paid or promised for a taxable item, including cash, credit, property, and services.1State of Texas. Texas Tax Code Section 151-007 For reporting purposes, total sales is the sticker-price side of the ledger: revenue from selling goods, providing taxable services, or leasing equipment, before any adjustments for exemptions or exclusions.
The statute does list a handful of items that don’t count as part of the sales price even when they appear on the invoice, as long as they’re separately stated to the customer. These are cash discounts taken at the time of sale, refunds for returned merchandise, finance or carrying charges on deferred-payment plans, and the value of trade-in property that the seller normally sells in the regular course of business.1State of Texas. Texas Tax Code Section 151-007
Total sales is the starting number on the return. A business with $2 million in total sales might end up with $1.4 million in taxable sales after everything is stripped out, but both figures must be reported, along with the deductions that connect them.
What Makes a Sale Taxable
Section 151.051 imposes sales tax on each sale of a “taxable item” in Texas at a rate of 6.25 percent of the sales price.2State of Texas. Texas Tax Code Section 151-051 – Sales Tax Imposed Local jurisdictions can add up to 2 percent, so the maximum combined rate is 8.25 percent.3Texas Comptroller of Public Accounts. Sales and Use Tax
Taxable items include most tangible personal property and a defined list of services. Texas taxes services like data processing, debt collection, insurance services, security, and telecommunications. Professional services such as legal work, accounting, and medical care are generally not taxed. Whether a given transaction shows up in your taxable sales column depends on two questions: is what you sold a taxable item, and does an exemption apply to the buyer or the transaction?
What You Subtract to Get to Taxable Sales
Exemptions are what create the gap between the two numbers. Texas provides broad exempt categories, and each one you claim needs to sit on documentation you can produce later.
Section 151.313 exempts health care supplies: prescription drugs dispensed by licensed practitioners, insulin, over-the-counter drugs labeled with a “Drug Facts” panel, hypodermic needles, hearing aids, braces, prosthetic devices, and corrective lenses.4Texas Public Law. Texas Tax Code Section 151.313 – Health Care Supplies Food for home consumption is exempt under a separate provision, though prepared food sold by restaurants stays taxable.
Section 151.316 covers agriculture, including work animals, livestock whose products ordinarily constitute food for human consumption, and feed for farm animals. Section 151.318 exempts manufacturing machinery and equipment used directly in the production process.
None of these exemptions apply automatically. The buyer has to present the proper exemption certificate to you at the time of purchase. A seller who doesn’t collect a certificate and later tells an auditor the sale was exempt will owe the tax, plus interest and penalties.
Occasional Sales
If your business doesn’t normally sell tangible property, the occasional sale rule can move a transaction out of taxable sales. Your first two sales in any 12-month period qualify as occasional sales and are exempt. The third sale in that period makes you a retailer, and you owe tax on that sale and every one after it.5Legal Information Institute (LII) / Cornell Law School. 34 Texas Admin Code 3-316 – Occasional Sales
A separate occasional-sale rule applies when you sell an entire business or an identifiable segment of one. Selling all the operating assets of a business, division, or branch in a single transaction to a single buyer qualifies regardless of how many other sales you’ve made that year. The conditions: the assets must be sold in one transaction to one purchaser, the division’s income and expenses must be separately traceable in your books, and inventory and intangible property don’t count as “operating assets” for this purpose.5Legal Information Institute (LII) / Cornell Law School. 34 Texas Admin Code 3-316 – Occasional Sales
Shipping, Discounts, and Coupons
Three line items regularly cause businesses to miscalculate the split between total and taxable sales. Each one behaves differently.
Shipping and delivery charges are taxable. Texas taxes all transportation and delivery charges billed by the seller to the buyer on a taxable item, even when those charges are listed separately on the invoice. This includes freight, postage, shipping fees, and handling.6Legal Information Institute (LII) / Cornell Law School. 34 Texas Admin Code 3-303 – Transportation and Delivery Charges Businesses that leave shipping out of taxable sales are underreporting.
Cash discounts reduce the taxable amount. A discount taken by the buyer at the time of sale is never part of the sales price and stays out of the tax base. If a discount is taken after the sale has already been reported, you can deduct it from taxable sales in the reporting period when the discount is applied, but you also have to adjust any tax already collected from the customer.7Legal Information Institute (LII) / Cornell Law School. 34 Texas Admin Code 3-301 – Promotional Plans, Coupons, Retailer Reimbursement
Coupons work like cash discounts. When a retailer accepts a coupon as part of the selling price, the coupon’s value is excluded from the tax base, whether or not the manufacturer reimburses the retailer for the coupon amount.7Legal Information Institute (LII) / Cornell Law School. 34 Texas Admin Code 3-301 – Promotional Plans, Coupons, Retailer Reimbursement
Documentation That Protects the Deduction
Every dollar you move from total sales to exempt sales needs paper behind it. Sellers carry the risk on resale and exemption certificates, not buyers.
A valid Texas resale certificate (Form 01-339) must include the purchaser’s name, address, 11-digit Texas sales tax permit number, a description of the items being purchased, a description of the buyer’s business, and the buyer’s signature. Retain the certificate for at least four years. If the Comptroller audits the transaction and you can’t produce a properly completed certificate, you owe the uncollected tax.8Texas Comptroller of Public Accounts. Sales and Use Tax Resale Certificate / Exemption Certification
Question certificates where the buyer’s business doesn’t match what’s being bought. A service station handing you a resale certificate for a sofa should raise an obvious flag.9Texas Comptroller of Public Accounts. Texas Sales and Use Tax Frequently Asked Questions – Resale The Comptroller’s Sales Taxpayer Search tool lets you verify that a buyer’s permit number is active before you accept the certificate.3Texas Comptroller of Public Accounts. Sales and Use Tax
Doing the Math and Reporting Both Numbers
Once everything is classified, the arithmetic is simple. Start with total sales. Subtract exempt sales. Subtract nontaxable transactions such as qualifying occasional sales. Adjust for coupons and cash discounts. What’s left is your taxable sales figure.
Multiply taxable sales by the applicable combined rate. In a jurisdiction with the maximum 8.25 percent combined rate, $100,000 in taxable sales produces $8,250 in tax owed. If you operate at more than one Texas location, apply the correct local rate for each transaction based on where the sale occurs or where the item is delivered. The Comptroller’s Sales Tax Rate Locator gives you the rate by address; charging the wrong local rate is a common audit adjustment.
Both numbers go on the return. Total sales at the top, deductions and exemptions in the middle, taxable sales at the bottom. Reporting only taxable sales, or netting the exemptions silently against total sales, is what triggers questions later.
Use Tax on Purchases You Made
One boundary worth naming: the total-versus-taxable split is about sales you make. When your business buys taxable goods or services from an out-of-state seller who doesn’t collect Texas tax, you owe use tax at the same 6.25 percent state rate plus applicable local rates.3Texas Comptroller of Public Accounts. Sales and Use Tax Use tax gets self-reported on the same return, and it commonly comes up on online purchases, equipment bought at out-of-state trade shows, or supplies ordered from catalogs. Overlooking it is a frequent audit finding.
What Happens If You Get the Split Wrong
The Comptroller can assess additional tax within four years of the date the tax became due. That window disappears entirely if a business files a fraudulent return, files no return at all, or makes a gross error, defined as underreporting by 25 percent or more. In those cases there’s no statute of limitations.10State of Texas. Texas Tax Code Chapter 111 – Collection Procedures
During an audit, the Comptroller’s office requests a broad set of records:
- Sales invoices along with any resale and exemption certificates on file
- Purchase invoices and capital asset records with depreciation schedules
- General ledgers, subsidiary journals, and charts of accounts
- Financial statements showing profit and loss
- Federal income tax information
- Bank statements
- Working papers used to prepare tax reports
- Electronic data, if available
- Documentation supporting any overpaid tax or credits claimed on returns
All of these records must be retained for at least four years unless the Comptroller gives written permission for earlier destruction.11Texas Comptroller of Public Accounts. Texas Sales and Use Tax Frequently Asked Questions – Records Businesses that can’t produce records face estimated assessments, which almost always come out higher than actual records would support.12Texas Comptroller. The Auditing Process
Late-filing penalties escalate quickly. Pay within 30 days of the due date and the penalty is 5 percent of the tax owed. After 30 days it jumps to 10 percent. If you still haven’t paid after receiving a formal Notice of Tax Due, an additional 10 percent penalty is added, bringing the total to 20 percent of the original amount.13Texas Comptroller. Penalties for Past Due Taxes
Interest starts accruing 60 days after the due date at a rate tied to the prime rate plus one percent. For 2026, that rate is 7.75 percent annually.14Texas Comptroller. Interest Owed and Earned On a $20,000 tax debt left unpaid for six months beyond the 60-day grace period, that’s roughly $775 in interest on top of the penalty.
For serious violations, the Comptroller can freeze or seize non-exempt assets, file tax liens in applicable counties, suspend your sales tax permit, and file criminal charges.13Texas Comptroller. Penalties for Past Due Taxes Businesses that collect sales tax from customers and fail to remit it face the harshest scrutiny, because at that point the money already belongs to Texas.