Whether you are just beginning to freelance or have done creative work on the side for years, chances are that you don't understand how and when to collect sales tax—or even if you should. The goal of this page is to educate you on some simple rules of Sales Tax in Texas and help you move forward.
Do I need to worry about Sales Tax in Texas?
If you do any kind of freelance work, whether it's graphic design, video editing, motion graphics, photography—anything that involves you doing something by hand or on a computer—that is considered a taxable service in the State of Texas.
Sales Tax Rate in Texas: 6.25% plus 2% for city and county. The total rate to charge your client is 8.25%
On the State Comptroller's website, rule 3.312 provides a listing for Sales Tax in the creative industry. The office has also attempted to provide information over the years to present creative work as a taxable service. Take a look at this publication, outlining sales tax for a photographer from 2009.
It's a little confusing, but it means that no matter what creative work you do—from editing a video to work for hire on retainer—it's all taxable.
But most of this doesn't say anything about video editing?
Back in 2002, an owner of a freelance wedding business wanted to get clarity on whether or not to collect sales tax. Here's the response from the state. Now you might be asking, "Wait. That letter is really old. Is it still relevant?" Well, the State of Texas still references this letter as an explanation of taxable services based on rule 3.312. So yes, it's still relevant.
That means if you are hired to edit a video, you need to add 8.25% sales tax on the invoice. That additional tax belongs to the State of Texas for allowing you to perform that work and make a profit. If you charge $100 to design a logo, your invoice amount needs to be $108.25 (100 x 1.0825). The $8.25 needs to be set aside to pay to the State of Texas either monthly or quarterly based on what they decide when you apply for a tax ID.
What if my client is a church, non-profit or a school?
If you do creative work for a non-taxable entity, you do not charge them sales tax on an invoice. However, you still need to report that work to the State of Texas and mark the amount as non-taxable income. If you don't report it and the State of Texas finds out, they can come after you for penalties for doing business in the state without letting them know.
I personally know many filmmakers and video editors that work with churches without even thinking about sales tax because the churches are non-profits. They are unaware of their obligation to the State of Texas to disclose that work on a quarterly or even monthly basis. The state also requires you to maintain a copy of each non-profit's tax exempt certificate. If a church or non-profit does not have a tax exempt certificate, you are obligated to charge them sales tax.
I've been doing freelance for a long time and I've never done anything about Sales Tax.
Well, I would say that you have been very fortunate to have flown under the radar so long and you are in a very good position to move forward with the State and make amends. But, you have to come clean before they find out. If you come clean first, you avoid interest and penalties for doing work without a tax ID in the state. You are also only obligated to account for the past 4 years of sales. If they do contact you first, you will have to pay penalties and interest and go through an audit of your income with the state.
I'm scared. Now what?
You don't have to be scared. Sales tax is a simple thing to understand. But there are some rules and steps to follow depending on the situation you are currently in.
The Voluntary Disclosure Agreement
If you have done any business in the State of Texas AND the State has not contacted you already, you just need to submit what's called a Voluntary Disclosure Agreement (VDA for short). This records that you are contacting the state first and lets you avoid penalties and interest.
Voluntary Disclosure Agreement
The VDA page is very detailed, but only presents a way to contact the state by mail. You can email the state with the info instead: email@example.com. The subject of the email can be "VDA Request Letter", followed by the information presented on the main VDA page (linked above).
Getting a Tax ID
Applying for a Sales Tax Permit is a very simple process and can be done in minutes. A Tax ID is just a number that's filed with the State, assigned to you and keeps account of your total sales and sales tax payments.
Apply for a Tax Permit
The steps above set you up with an account on the site as well as the tax permit application. Once finished with the application, you will have a Tax ID and a schedule of reporting: monthly or quarterly.
Each quarter or month, you will return to this site and input sales and taxable income, as well as submit payment for sales taxes owed. For those submitting monthly, the date for filing is the 20th of the following month. If you are filing for January, 2017, the last date to file is February 20, 2017. While that's the last date to file, I would encourage you to file the first week of the following month. If you file late, you will be charged $50 for a late fee. You also have to report $0 in sales if you don't have any sales for a month, otherwise you incur the same fee.
Hit me up on Twitter
I've just learned about a lot of this and had to file a VDA myself. If you have any questions or want to follow along on my journey, feel free to follow me on Twitter @DaveChap.