In Texas, sales and use tax generate billions in revenue yearly, collected through the Texas Comptroller of Public Accounts. State and local use tax is imposed if an item is delivered to or used in an area that imposes a local tax. While an individual is only liable to the state tax of 6.25% on the item bought, sellers are required to collect and submit the sales and use tax to the Comptroller if they sell taxable items. As a result, Texas gas stations and convenience stores serve as a large collection agent for the state.
Texas Sales Tax Basics for Gas Stations and Convenience Stores
Texas does not impose a sales tax on gas and diesel fuel as of now. However, the 6.25% sales and use tax largely applies to convenience stores and gas stations with convenience stores as they handle a wide variety of taxable and nontaxable items, including food and non-food products.
Taxable Items
Beginning with nonfood items, the Comptroller provides a long list of items on which sellers should collect and remit sales and use tax. These items are typically found in groceries and convenience stores:
- Electrical supplies
- Beauty supplies
- Garden supplies
- Candy
- Eating utensils
- Pet supplies
- Pet food
- Haircare supplies
- Cards
- Cigars and Cigarettes
- Carbonated drinks
- Tobacco products
- Soft drinks
- Books, comics, and magazines
- Prepaid wireless telecommunications service cards
- Telephone calling cards
Taxable Services
There are taxable services:
- Rentals: movies, electronic equipment, and floor and cleaning equipment
- Photo or film processing services
Taxable Food and Beverage
The following are taxable food and beverage items:
- Bakery items such as cakes, bread, and muffins, provided they are not sold in the bakery business and are served with eating utensils or heated.
- Soft drinks
- Beer
- Wine
- Sports drinks, energy drinks, and soft drinks with artificial or natural sweeteners with a few exceptions
- Coffee
- Tea
- Candy and gum
- Ice and dry ice
- Prepared food such as hot food and drinks
- Snacks( sold in individual sizes or from a vending machine)
Nontaxable Items
All drugs, medicines, and nutritional supplements are nontaxable. In addition, newspapers and wound care items are non-taxable.
Non-taxable food items are:
- Snack items packaged as more than one individual-sized unit
- Grocery items such as milk, flour, sugar, fruits, eggs, bread, and vegetables, including other grocery items
- Coffee and tea( tea bags, instant coffee, unsweetened bottled or canned tea and coffee, coffee beans, ground coffee, coffee or tea pods, and loose tea)
- Water
- Beverages with milk and milk products
- Bakery items sold by a bakery business (bakery sales account for over 50%)
- Bakery products such as cake sprinkles, icing, edible decorations, baking mixes, and baking chips
The Texas Comptroller provides an extensive outline of both taxable and nontaxable items to help sellers comply with the state sales and use tax obligations.
Texas Sales Tax Basics for Gas Stations and Convenience Stores
Like most states, Texas has third party data, so they know your company’s credit card sales and your beer and cigarette purchase information. The Department simply plugs in your information and its system spits out an estimated assessment. From there you are fighting a guilty until proven innocent audit. Moreover, the more records your provide that the Department does not already have will only result in an increased assessment. In short, its critical that you are aware and understand what is provided to the auditor.
Strategies to Avoid an Assessment or Audit for Gas Stations and Convenience Stores
1. Make a comparison of your Texas Sales Tax Return with other data associated with the audit. Ensure you can access your federal income tax return and 1099-k report beforehand. This will allow you to have the right information ahead of the auditor when you compare the data with your sales tax return. You could also consider working with our sales tax experts. We will assist you in handling any arising errors or irregularities with either voluntary disclosure or amendment of returns.
2. You can consider the TCPA voluntary disclosure program if you have unreliable or missing records. The voluntary disclosure program is also useful if the 1099-k's and federal income tax returns are significantly more than your sales tax returns before the audit commences. Act accordingly to avoid any penalties and audits. Do not wait to be contacted first by the state, especially if there are existing tax liabilities.
3. Be prepared for the audit before it starts. Immediately you receive an audit notice from the TCPA, do your homework and prepare for the audit process. Then, ensure you obtain your federal income tax returns, 1099-k, POS reports, and sales tax returns for the same period. Avoid submitting any document that will lead to higher sales amounts to the auditor. Be prepared with an answer if you provide any documents.
4. Carefully account for nontaxable sales at your gas station or convenience store. Usually, your 1099-k records tips as the top nontaxable items. The 1099-k compiles the total dollars received via credit card from a specific bank. Prepare a breakdown of the tips so that the entire report remains untaxable by the auditor. You can use your IRS W-3 report which shows tips paid to employees if you do not have documentation.
Documentation
Be careful with any documentation you hand over to the auditor. In a sales tax audit, you are not obligated to be open with information. Just work in cooperation with the auditor, but act within reasonable limits where you do not freely provide sensitive information. Only provide documents showing your sales figures. It is commonplace for our team to see gas stations and convenience stores being free with handing over their documentation to the TCPA and this is very costly. This can lead to an inaccurate sales tax assessment by the TCPA. It is better to fully prepare to give reasonable answers should you provide any documentation. However, we recommend seeking a sales tax professional as they are knowledgeable of which documentation is relevant or irrelevant to the auditor.
Make sure to engage a professional who can help you with Texas sales audit tax first before signing anything or paying for an assessment. In Texas, any payment, or signing an audit report, or a waiver of restrictions, among others, automatically waives your right to a review of your audit.
Learn More Tax Audit Basics for Texas Gas Stations and Convenience Stores
Gas stations and convenience stores should expect to be subject to audits by the Texas Comptroller of Public Accounts. The body is active in assessing and extensively relying on more third-party reporting for audit purposes. As a business owner, remain adequately informed of the audit process by the TCPA to allow for a reasonable outcome.
In case the business is charged with a high sales tax liability after the audit, a professional can assist in amending inconsistent sales tax returns or filing a voluntary disclosure program. Seek the help of sales tax professionals upon receiving an audit notice. Schedule a free 30-minute call with one of our sales tax experts to help you navigate through the process and answer any questions you have.