In Texas, sales tax applies broadly to the sale of tangible personal property and to specific taxable services listed in the Texas Tax Code.
In general, materials and products including sales of digital products are taxable in Texas, while labor charges for services—such as consulting, fitness training, nutrition and counseling, real estate agent commissions, or managing short-term rentals—are not subject to sales tax unless the service falls into a specifically taxable category, such as data processing, insurance services, commercial cleaning, or certain real property services.
The 5% Rule: When Mixed Charges Trigger Full Sales Tax
If a contract includes both taxable and nontaxable components and the taxable portion exceeds 5% of the total charge, the entire charge is presumed taxable unless the taxable and nontaxable items are clearly separated on the invoice. This is known as the “essence of the transaction” rule, and it’s enforced under the Texas Administrative Code and Comptroller guidance.
How to Bill Clients Accurately: Separating Taxable and Nontaxable Charges
Businesses may ensure contracts and invoices clearly identify taxable versus nontaxable charges, and maintain supporting documentation as required under the Texas Administrative Code and Comptroller’s rules.
- Review your invoices and contracts for clear separation of labor vs. materials, and residential vs. commercial work.
- If your service includes both taxable and exempt items, ensure separate line-item billing to avoid having the entire charge taxed.
- Maintain supporting records such as work orders, scope of work documents, and project type designations (residential vs. commercial).
- Consulting or coaching services? Confirm they’re not bundled with software or deliverables that could make them taxable.
Below is a detailed summary of how Texas treats the sales tax status of common services—including professional, consulting, coaching, technical, legal, and real estate-related activities—and when labor or deliverables may trigger tax collection responsibilities.
Common Nontaxable Services in Texas
Texas does not impose sales tax on many professional services unless they are specifically listed in the Tax Code. These commonly exempt services include:
- Legal services – Exempt under Tex. Tax Code §151.0101.
- Accounting, tax preparation, and financial advisory services – Exempt, unless they include taxable data processing or insurance-related services.
- Medical and veterinary services – Exempt unless non-medical services (e.g., grooming).
- Educational and instructional services – Including fitness training and coaching when instructional in nature.
- Architectural and engineering design – Exempt unless bundled with the sale of stock plans.
- Unrelated business consulting – Exempt if not tied to the sale of a taxable item or software.
To preserve exempt status, services must be standalone and separately invoiced, with no bundled tangible deliverables unless those are also separately priced.
Common Taxable Services and Components in Texas
Some services are explicitly subject to Texas sales tax under Texas Tax Code §151.0101(a). These include:
- Commercial remodeling, repair, or maintenance of real property
- Landscaping and lawn care
- Self-employed lawn care/landscaping is exempt from tax if no employees or partners are involved and total receipts are $5,000 or less over the last four quarters.
- Once receipts exceed $5,000, tax collection must start the first day of the next quarter.
- If receipts drop back to $5,000 or below, the exemption resumes the first day of the following quarter.
- Surveying services, except in specific residential applications
- Information and data processing services, including electronic research
- Drafting services, such as CAD blueprints, when billed as a deliverable
- Stock design plans (if not custom or modified)
Additionally, construction contracts must distinguish between residential and commercial work, and between taxable materials and taxable commercial labor, versus nontaxable residential labor.
Guidance for Construction and Electrical Services in Texas
Electrical and mechanical services are treated as real property repair or remodeling, which are taxable if performed on nonresidential buildings. According to Texas Admin Code §3.357:
- Labor to install or repair systems in commercial properties (e.g., HVAC, wiring, panels) is taxable.
- Labor for residential repair, remodeling, or new construction is not taxable.
- All materials provided in connection with these services are taxable, regardless of property type.
- To avoid tax on nontaxable labor, the invoice must clearly separate labor and materials.
For mixed contracts (e.g., wiring in both office and residential areas), the contractor must allocate charges and maintain documentation to support the allocation; otherwise, the full amount may be taxed.
Key Takeaways for Texas Sales Tax
- Materials and products including digital products are taxable. This includes downloadable files, software, and other electronic goods sold to customers in Texas.
- Most labor-based services are not taxable, including general consulting, coaching, fitness instruction, counseling, and real estate agent commissions—unless the service is specifically listed as taxable by the Texas Comptroller.
- Common taxable services include data processing, insurance services, commercial cleaning, landscaping, and certain real property work.
- Consulting services are generally nontaxable, so long as they are unrelated to the sale of taxable items (e.g., software) and are separately stated on the invoice.
- Mixed invoices require separation. If a contract includes both taxable and nontaxable components and taxable charges exceed 5% of the total, the entire charge is presumed taxable unless clearly itemized.
- Invoices and supporting documentation matter. Businesses should separate taxable vs. nontaxable charges and retain records that support exempt transactions.
Have questions about your industry’s sales tax obligations? Need help reviewing contracts or preparing documentation for an audit? Schedule today for support tailored to your profession or trade.