Texas taxes services only when the Tax Code specifically requires it. Most services default to exempt. Section 151.0101’s enumerated list of taxable categories specifies which services are subject to sales tax.

Below, we’ll cover the taxable service categories in Texas, the services that fall outside the taxable list, and the compliance risks affecting businesses selling services in Texas.

Key takeaways

• Texas taxes services by exception. A service is only taxable if it appears in one of the sixteen categories listed in Section 151.0101.

• Software-as-a-service (SaaS) subscriptions generally fall under the data processing category. This comes with a partial exemption that shrinks the taxable portion of the charge.

• Contracts that mix taxable and non-taxable work need itemised invoices, since a lump sum price risks taxing the entire contract.

How does Texas define taxable services?

Texas Tax Code Section 151.0101 lists sixteen categories of taxable services, including data processing, real property services, security services, and telecommunications.

Which services are Taxable in Texas?

The sixteen enumerated categories of Taxable services are relevant to a wide range of companies.

Here’s the complete list:

• Real property services: Landscaping, janitorial work, structural pest control, and surveying. The distinction is that they involve work done on land or buildings rather than on movable personal property.

• Real property repair: Repairing, remodelling, or maintaining property, such as electronics repair or equipment servicing.

• Security services: Guard services, alarm system monitoring, and armoured car services. This applies to both human and electronic security work.

• Data processing services: Word processing, data entry, cheque processing, and computerised data storage. SaaS taxability questions usually arise in this category.

• Telecommunications services: Transmitting sound or data by wire, radio, or similar means, including a range of connectivity providers.

• Debt Collection services: Collecting or adjusting debts owed to another party. This is distinct from a business collecting its own accounts receivable.

• Credit reporting services: Creating or providing credit reports.

• Amusement services: Admission to events, use of amusement equipment, and similar entertainment access. This is Taxable at the point of admission or use.

• Information services: Furnishing general or specialised news, financial data, or similar information to subscribers.

• Insurance services: Appraisal, inspection, investigation, claims adjustment/processing, actuarial, and loss-prevention services.

• Cable television services: Cable TV, satellite TV, streaming video, and video-on-demand services.

• Motor vehicle parking and storage services: Parking meters, permits, valet parking, impound fees, etc.

• Utility transmission and distribution services: Certain electricity transmission/distribution charges to Taxable end users.

• Laundry, cleaning, and garment services: Dry cleaning, carpet/upholstery cleaning, garment alterations, laundry, rug cleaning, etc.

• Personal services: Certain massage parlours, Turkish baths, and escort services.

• Telephone answering services: Receiving and relaying telephone messages through human operators.

Which services are exempt in Texas?

Because Texas taxes services by exception rather than by default, most services that don’t appear on the enumerated list stay outside the sales tax system entirely.

Here are some examples of exempt services in Texas:

• Professional services: Legal work, accounting, medical care, engineering, and architecture.

• New construction: Labour on new residential or commercial construction. However, repair, remodelling, or restoration of non-residential property is taxable.

• Consulting and training: Consulting, most educational services, and staffing or employment placement services.

• Insurance underwriting: Insurance underwriting and issuance. Inspection, actuarial, or claims adjusting work purchased by insurers is taxable.

How does Texas tax data processing and software services?

Software delivered over the internet raises one of the trickier classification questions in Texas sales tax. The Comptroller treats hosted software access as a data processing service under existing rules, which means SaaS subscriptions are generally Taxable in Texas even though the Customer never downloads or takes possession of anything.

Data processing services have a partial Exemption that doesn’t apply to most other Taxable categories: 20% of the Charge is exempt from sales tax, so only 80% of the price is Taxable. A business Billing a Texas Customer US$1,000 a month for access to a cloud-based platform would apply the state and local rate to US$800 of that Charge, not the full US$1,000.

Custom software development sits outside this category. When a business builds software specifically for one Client rather than licensing access to an existing product, the Comptroller generally treats that as a Non-taxable service, since the work resembles a one-off engineering project more than data processing. Canned software sold as a download or on physical media falls under tangible personal property rules instead, taxed as a good rather than as a service.

Under these rules, three products that all involve software—a hosted Subscription, Custom build, and packaged download—can land in three different tax treatments, depending on how the software reaches the Customer.

What happens when Taxable and Non-taxable services are bundled in Texas?

Contracts that combine Taxable and Non-taxable services in a single price create a specific Compliance problem, because Texas taxes the Transaction as a whole unless the pieces are broken apart. The general rule looks at the true object of the Transaction, which means the primary purpose behind what the Customer is buying, rather than treating every component of the price separately.

If a business states the Charge for a Taxable service separately from the Charge for a Non-taxable service, Tax applies only to the Taxable line. But charges need to be itemised for this Exception to take effect. Lump sum Billing removes that separation and shifts the presumption. For example, a new construction project—typically exempt—might become fully Taxable if repair and remodelling services are bundled in and make up more than a small share of the total project. If the Invoice is itemised, sales tax is limited to the Taxable component.

What compliance risks do Texas businesses face with taxable services?

Service businesses often run into sales tax problems when applying nexus thresholds, sourcing rules, and certificate requirements.

Here are the tricky parts to look out for:

• Nexus thresholds: A business without a physical location in Texas still needs to register and collect tax once its Texas sales cross US$500,000 in a twelve-month period.

• Sourcing rules: Texas uses origin-based sourcing for businesses with a physical location in the state and destination-based sourcing for out-of-state sellers. The correct local rate depends on where the business sits, not where the customer sits.

• Misclassified categories: Businesses sometimes incorrectly assume a service is exempt. The service might resemble consulting or unlisted expert work, but be listed by the Comptroller’s definitions as a taxable category such as information services or data processing.

• Exemption certificate management: Sales that qualify for resale or another exemption still require a valid certificate on file. A missing certificate at audit time turns an otherwise exempt sale into an assessed liability.

• Bundled contract exposure: Lump sum invoices covering both taxable and non-taxable work carry a higher audit risk than itemised ones, as covered above.

How can Texas businesses manage tax on taxable services?

Staying compliant starts with getting the classification right for each service line a business sells. Businesses selling more than one type of service, such as a company handling both repair and consulting, need that classification done at the line-item level rather than for the business as a whole.

From there, the practical steps stay largely the same regardless of the service category:

1. Register for a Texas sales and use tax permit with the Comptroller.

2. Apply the correct combined rate based on sourcing rules.

3. Collect and store exemption certificates for exempt sales.

4. State taxable and non-taxable charges separately on any invoice that combines them.

Solutions such as Stripe Tax can handle a version of this classification problem for businesses billing Texas customers. It assigns product tax codes to what a business sells, which determines whether Stripe Tax treats a given line item, such as a SaaS subscription, as a taxable data processing service or an exempt offering. It also calculates the applicable combined rate at checkout or on an invoice based on the customer’s location and Texas’s sourcing rules.

None of this replaces a business’s own judgement about how a specific service fits into the Comptroller’s categories, particularly in grey areas such as data processing or bundled real property services. But it does remove a chunk of the manual work involved in applying the right rate once that classification is settled.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard or using our powerful API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and GST on:

• Digital goods and services in all US states and over 100 countries
  
• * Physical goods in all US states and 42 countries
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for sales tax in the US, let Stripe manage your tax registrations. You’ll benefit from a simplified process that prefills application details – saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business. US tax filings can be automated in the Stripe Dashboard, powered by TaxJar.

Learn more about Stripe Tax or get started today.