Sales Tax vs. Use Tax: What Houston Businesses Should Know
When you're running a small business in Houston, taxes are not only annual but year-long obligations that can actually affect the bottom line directly. Apparently, sales tax and use tax are two taxes most commonly misunderstood by businesses.
Although considered interchangeable, these taxes serve different purposes as well as are enforced by the Texas Comptroller under distinct rules and with distinct reporting obligations defined within each specific situation.
In this article, we are going to discuss what sales tax is and what use tax is, the differences between the two, and the ways by which your Houston business can comply. Whether you are a newly established entrepreneur or an experienced business owner, such knowledge will be essential to avoid penalties to your financial well-being.
What Is Sales Tax in Texas?
Sales tax is a state-imposed tax that businesses are required to collect from customers at the point of sale. In Texas, the state sales tax rate is 6.25%, but local jurisdictions, such as the City of Houston, may add up to 2%, bringing the total up to 8.25%.
Businesses must collect sales tax on:
Tangible personal property (e.g., furniture, equipment, retail goods)
Certain services (e.g., labor for repairs or maintenance)
Online sales to Texas residents
If you're selling taxable goods or services, you're required to:
Register for a Texas Sales and Use Tax Permit
Collect the correct tax amount
Remit it to the state on time
Hiring professionals who offer expert tax preparation services in Houston, TX, can help you properly categorize sales and avoid misreporting.
What Is Use Tax?
Use tax complements the sales tax system and applies when sales tax wasn’t collected at the time of purchase. It is usually paid by the buyer rather than the seller.
For example:
You buy $5,000 worth of office furniture from an out-of-state vendor who doesn’t charge Texas sales tax.
Legally, you’re required to report and pay use tax on that $5,000 to the Texas Comptroller.
Use tax applies when:
Taxable items are purchased from out-of-state sellers (especially online vendors)
Sales tax was charged at a lower rate than Houston’s local rate
Business assets are transferred across company entities
The burden of tracking and reporting use tax falls on you, the business owner. That’s where working with a tax consultant in Houston can save you from serious compliance errors.
What’s the Difference Between Sales Tax & Use Tax
Category
Sales Tax
Use Tax
Collected By
The Seller
The Buyer
Applies When
Selling taxable items/services in Texas
Buying taxable items without paying Texas sales tax
Remitted To
Texas Comptroller
Texas Comptroller
Common Scenarios
Retail transactions, service invoices
Out-of-state purchases, internet orders
Accounting for small businesses in Houston must include both taxes to ensure full compliance with state law.
Common Mistakes Houston Businesses Make
Even well-meaning business owners can make costly mistakes when handling sales and use tax. Here are some of the most common issues:
Failing to collect tax: Forgetting or refusing to charge sales tax when required.
Misclassifying services: Some services are taxable, some aren’t, knowing the difference is crucial.
Ignoring use tax obligations: Many businesses wrongly assume that if sales tax isn’t charged, no tax is due.
Not reporting timely: Late or missing filings can result in penalties and interest.
Inadequate documentation: Not keeping proper records to justify tax-exempt sales or deductions.
Partnering with professionals who offer tax preparation services for small businesses in Houston can help you catch and correct these issues early.
Staying Compliant with Sales and Use Tax in Houston
To remain on the right side of Texas tax law, businesses should implement the following strategies:
1. Register Properly
Ensure your business is registered with the Texas Comptroller and has an active Sales and Use Tax Permit.
2. Track All Transactions
Keep thorough records of:
Invoices and receipts
Out-of-state purchases
Tax-exempt sales (with proper certificates)
3. Use Reliable Accounting Software
Digital tools like QuickBooks or Xero can help you monitor taxable and non-taxable transactions, especially when used under the guidance of a small business accountant in Houston.
4. Hire a Local Tax Professional
Hiring a Houston-based tax expert ensures that your filings reflect local tax rates and state-specific exemptions. For instance, Skyline Financial Management offers sales and use tax services in Houston, TX tailored to small business needs.
5. File Timely Returns
Late filings, even by a day, can trigger fines. Consider setting up quarterly reminders or outsourcing to a firm that provides expert sales tax compliance services in Houston, Texas.
Why Work with a Local Tax Consultant in Houston?
While DIY tax tools may seem cost-effective, they often fall short when navigating the complexities of Texas sales and use tax. A local expert provides:
Knowledge of local tax rates and exemptions
Help with back taxes, audits, and amended filings
Strategic advice to reduce liabilities
Guidance on how tax laws apply to online, multi-state, or hybrid businesses
Houston’s tax landscape is dynamic, and small business owners benefit greatly from having a trusted advisor by their side, someone who understands both city-level regulations and Texas state law.
Get Sales and Use Tax Right the First Time
Sales and use tax laws in Texas aren’t optional, and mistakes can add up fast. Whether you sell goods in a local shop or purchase equipment from out of state, knowing when and how to handle sales and use tax is essential to running a compliant and profitable business.
Need help tackling your tax responsibilities? Skyline Financial Management offers expert tax preparation services in Houston, TX, with a focus on small business owners who want clarity, accuracy, and peace of mind. Our one-on-one consultations with an experienced tax professional help ensure you avoid penalties and stay focused on growing your business.
