How Does Texas Sales Tax Compare to Other States?

Texas has a statewide sales tax rate of 6.25%, plus any additional local sales taxes. This ranks Texas 38th among the 50 states for total sales tax rate.

But how exactly does the Lone Star State compare to its neighbors and the rest of the country when it comes to sales tax rates? Is Texas tax-friendly or tax-hostile for businesses and consumers?

Breaking Down Sales Tax Rates Across Texas

While Texas has a statewide sales tax of 6.25%, local jurisdictions can add up to 2% in additional sales taxes. Currently, the average local sales tax in Texas is 1.95%.

When you combine state and local rates, the sales tax can be as high as 8.25% in some Texas cities. Here are a few examples:

Houston – 8.25%
San Antonio – 8.25%
Austin – 8.25%
Dallas – 8.25%
El Paso – 8.25%

As you can see, most major metros in Texas have maxed out their local sales tax to reach the 8.25% ceiling.

However, not all areas of Texas charge the maximum local rate. Some cities and counties have lower sales taxes:

Amarillo – 7.125%
Lubbock – 7.25%
Abilene – 7.75%

So sales tax can vary quite a bit depending on which part of Texas you’re in. Generally, more populated areas have higher rates.

Try More: Texas Sales Tax Calculator: Rates, Exemptions & Administration

Texas Sales Tax Compare to Other States

Nationwide, Texas has the 16th highest average combined state and local sales tax rate. This puts it slightly below the national median rate.

Regionally, Texas has lower sales taxes than most of its bordering states:

Louisiana – 9.52%
Arkansas – 9.51%
Oklahoma – 8.95%

However, Texas is higher than its other neighbor New Mexico, which only has a statewide rate of 5.13%

So among its border states, Texas sits right in the middle for sales tax rates. It balances relatively high taxes compared to states further west while remaining competitive with states to the east.

Let’s zoom out and see how Texas compares to other large, highly populated states:

California – 7.25%
Florida – 6%
New York – 8.52%

Here we see Texas on the higher side compared to Florida and California but lower than New York. Once again, Texas remains somewhat average.

Breaking Down The State Sales Tax Rate

Now, let’s break down what makes up the baseline 6.25% Texas state sales tax:

State Sales Tax – 6%
State Highway Fund – 0.125%
State Mass Transit Fund – 0.125%

The State Highway Fund portion helps pay for highway construction and maintenance across Texas.

And the State Mass Transit Fund provides funding to public transportation systems in cities like Dallas, Houston, and Austin.

Next, let’s explore some reasons why Texas has above average but not astronomical sales tax rates.

What Influences Texas’ Sales Tax Rates?

As we’ve seen, Texas sales tax sits moderately above the national midpoint. What factors contribute to the state landing here compared to extremes on either side?

No State Income Tax

One major reason is that Texas has no state income tax. This makes it attractive for businesses and working professionals.

To balance its budget, Texas relies more heavily on sales tax rather than income tax. This puts upward pressure on the state’s sales tax rate.

Robust Oil Industry

However, Texas also benefits from robust oil and fossil fuel industries. Taxes levied on oil and gas production help pad the state’s coffers.

This dynamic takes some of the burden off sales tax being the solitary revenue generator. Texas can diversify its tax base through oil and gas taxes.

Additionally, a thriving energy industry creates economic prosperity. This means higher consumer spending that pumps up sales tax revenue.

Tourism & Business Hubs

Finally, Texas’ major metros like Austin, Dallas, Houston, and San Antonio are not just population centers but also tourism and business destinations.

Millions flock here to visit or move for jobs each year. All their consumer transactions add up, buoying billions in sales tax dollars.

If it relied solely on local Texans, the state’s sales tax rate could be lower. But thanks to booming metros and their economic ripple effects across Texas, the state captures ample sales tax from visitors, newcomers, and existing residents alike.

Pros & Cons of Texas’ Sales Tax Rate

As with most financial issues, Texas’ middle-of-the-road sales tax rate has both upsides and downsides.

Pros

Attracts residents and businesses with no state income tax while keeping sales tax reasonable
Provides predictable tax base through economic ups and downs
Reliable revenue stream for state budget and public services
Generally competitive rate compared nationally and in the region

Cons

Hits lower income consumers harder as a regressive tax
Discourages consumer spending more than income tax
Leads to “border bleed” of shoppers driving to neighboring states
Causes geographic disparities between cities
Fluctuates with boom/bust cycles of oil industry

As you can see, while modest compared to some states, Texas’ sales tax can still pinch consumers’ wallets. And relying heavily on it causes uneven economic effects statewide.

Recent Trends and Future Outlook

In the last decades, Texas’ state sales tax rate has stayed stable, not increasing since the early 1990s. However, many local jurisdictions bumped up their rates in recent years.

As Texas’ metros keep expanding, local governments need revenue to fund infrastructure and services demanded by their growing populations.

Thus, experts expect local sales taxes creeping higher for Austin, Dallas, Houston and other booming cities. But the state rate likely won’t budge for the foreseeable future.

Looking long-term, the biggest uncertainty lies with oil prices. A sustained crash could decimate state tax revenues. While great for consumers’ wallets, bottoming oil would blow a hole in Texas’ state budget.

If oil revenuesdeclined long term, Texas would face pressure to hike sales tax rates down the road to stabilize tax income.

How Businesses Can Manage Texas Sales Tax

As we’ve explored, Texas has moderately high and complex sales tax compared to other states. Paying it right as a business takes work.

Any sellers with a physical location, employees, or assets in Texas must collect state plus all local sales tax on taxable goods and services at the point of sale.

And if you ship products to Texas residents, you likely need to charge destination sales tax based on where the customer receives the order.

So how do businesses properly collect, file, remit, and report the full sales tax obligation across Texas?

Thankfully, online sales tax calculators automate the entire multi-rate, multi-jurisdiction process in seconds. They maintain the entire Texas rate database and seamlessly integrate right into your shopping cart, invoicing system, or marketplace integrations.

These modern solutions spare you the headache so your business sticks to full compliance and keeps customers happy. Texas makes sales tax moderately complex, but the right tools conquer the Lone Star State with no stress at all!

FAQs About Texas Sales Tax

How do I calculate sales tax for all areas of Texas?

The best way is using an online sales tax calculator connected directly to your checkout process. It will instantly calculate the correct state plus local tax based on the customer’s destination. No rate tables to manually update!

What Texas cities have the highest sales tax rates?

Most major Texas cities currently charge 8.25% when you add state (6.25%) and local (2%) rates. This includes Houston, San Antonio, Austin, Dallas, El Paso, and surround areas. Some smaller jurisdictions still remain below 8%.

Is food taxed in Texas?

Yes, but groceries are exempt along with prescription drugs, residential gas & electric utilities, and some farming equipment. All other tangible goods get taxed. Some services also fall under Texas sales tax law at both state and local levels depending on the city.

Does Texas have tax holidays?

Yes, Texas holds a 3-day sales tax holiday every August, right before kids go back to school. Shoppers can purchase most clothing, footwear, school supplies and backpacks tax exempt during this weekend. Texas also has a tax holiday for Energy Star products in May.

Are there sales tax exemptions in Texas?

Yes, the state provides sales and use tax exemptions for manufacturing equipment, agriculture producers, nonprofits, emissions reducing products, data centers, space flight activities, and more. Certain organizations can also qualify to acquire tax exemption certificates.

Let Us Help You Conquer Texas Sales Tax

As a moderately high and complex sales tax state, Texas takes some work for ecommerce businesses to entirely get right.

Save yourself headaches by letting our tax calculator integrate directly with your checkout process and handle everything automatically behind the scenes!