Ecommerce and Online Sellers in Austin

For an Austin ecommerce seller organized as a sole proprietor, a single-member LLC, a partnership, or an S corporation, the answer is no, Texas charges no state personal income tax on your store profit, and there is no Texas individual income tax return to file. This is one of the main reasons online sellers launch or relocate to Austin, because the same profit that would be taxed up to 13.3 percent in California or around 10.9 percent plus a city tax in New York City is taxed at zero by the state of Texas. For a seller netting real money, that difference is thousands of dollars kept every year, and it compounds as the business grows.

It helps to be precise about what the absence of a Texas income tax does and does not cover, because sellers sometimes assume it means their whole tax bill is small, and it does not. Texas takes nothing from your profit through an income tax, but the federal government still does. You owe federal income tax on your net profit, and if you are a sole proprietor or single-member LLC you also owe the 15.3 percent federal self-employment tax on that profit, covering Social Security and Medicare. Those federal obligations exist for an Austin seller exactly as they would for a seller anywhere else, so you still need to fund federal quarterly estimated payments and file a federal return. What you skip is the state income layer, not the federal one.

The one Texas business tax to keep in view is the franchise tax, and it is not an income tax on you, it is an entity-level tax on business revenue that only reaches large businesses. An entity with annualized total revenue at or below roughly $2.65 million owes no franchise tax, so the vast majority of online sellers owe zero, but an LLC or corporation may still have to file a franchise tax report and a Public Information Report each year even when no tax is due. A true sole proprietorship is outside the franchise tax entirely. So for most sellers the franchise tax is a filing obligation rather than a bill, but the filing still has to happen to keep the entity in good standing.

Here is a worked example that shows the edge. Two sellers each net $150,000 from their stores, one in Austin and one in Los Angeles. The Los Angeles seller pays California income tax on that profit at graduated rates reaching into the 9 to 10 percent range at that income, easily $12,000 or more to the state, on top of federal tax. The Austin seller pays the state no income tax on the profit, keeping that entire amount, while both pay the same federal income tax and self-employment tax, and the Austin entity likely just files a zero-due franchise report. That state-level gap is the Austin advantage in plain numbers. Our job is to make sure it is not quietly given back through a federal planning mistake, so we handle the federal estimates and entity structure through tax strategy consulting. The state rules are with the Texas Comptroller, and the federal small business framework is in IRS Publication 334.

The Texas franchise tax is a privilege tax on business entities doing business in Texas, and for an Austin ecommerce seller it is the one Texas tax that surprises people, because Texas is famous for having no income tax and sellers assume that means no state business tax at all. The franchise tax is not an income tax and it is not charged to you personally. It is levied on the entity, an LLC, a corporation, or an S corporation, and it is measured on a base the state calls taxable margin rather than on your take-home profit. A true sole proprietorship, a business you run without forming an entity, is outside the franchise tax completely.

The feature that spares most sellers is the no-tax-due threshold. An entity whose annualized total revenue is at or below roughly $2.65 million owes no franchise tax for that year. Because most online sellers are well under that revenue level, they owe zero franchise tax. What trips sellers up is not the tax, it is the filing. Depending on revenue and the year’s rules, an LLC or corporation may still have to file a franchise tax report and a Public Information Report annually even when the tax due is zero, and failing to file can lead the state to forfeit the entity’s right to transact business in Texas, which can jeopardize the liability protection the entity was formed to provide. So the franchise tax is a filing obligation with teeth even when it is not a bill.

When an entity does exceed the threshold, the tax is computed on taxable margin, and Texas gives you more than one way to figure that margin. You can generally take total revenue and subtract either cost of goods sold, or compensation, or a flat percentage of revenue, choosing the method that produces the lowest margin, and then apply the franchise tax rate, which is a fraction of a percent and differs for retailers and wholesalers versus other businesses. For an inventory-heavy ecommerce seller, the cost of goods sold deduction is often the favorable choice, which is one more reason a clean COGS figure matters even in a no-income-tax state.

Here is a worked example. Suppose your Austin online store is an LLC with $1.8 million in total revenue. Because that is below the roughly $2.65 million threshold, you owe no franchise tax, but you still file the franchise report and the Public Information Report to keep the LLC in good standing, and we prepare those. Now suppose the store grows to $3 million in revenue with $1.6 million of cost of goods sold. You exceed the threshold, so franchise tax applies, and computing the margin as revenue minus COGS gives a $1.4 million margin taxed at the applicable low rate, a manageable few thousand dollars, far less than an income tax on the profit would be in most states. We track your revenue against the threshold, choose the margin method that serves you, and file through tax compliance. The rules are on the Texas Comptroller franchise tax page, and the federal framework is in IRS Publication 334.

For an Austin ecommerce seller, sales tax collection outside Texas turns on economic nexus, the rule the Supreme Court upheld in South Dakota v. Wayfair in 2018. Before that decision a state could only require you to collect its sales tax if you had physical presence there, an office, an employee, or inventory sitting in a warehouse. After Wayfair a state can require collection based purely on how much you sell into it, with no physical footprint at all. That is why a seller working out of Austin can suddenly owe collection duties in a dozen states, and it is the first thing we check for a new online seller.

Most states adopted a threshold modeled on the one the Court approved, $100,000 of sales into the state or 200 separate transactions, measured over the current or prior year. Texas itself sits higher for inbound sellers, requiring more than $500,000 of Texas revenue in the prior twelve months before an out-of-state seller must register here. The specifics vary from state to state in ways that matter, because some use only the dollar figure, several have dropped the transaction count, and the categories of sales that count toward the threshold differ. There is no single national rule, which is exactly why this is hard to self-manage as a store grows into new markets.

Marketplace facilitator laws are the piece that keeps this manageable. Nearly every state now requires the marketplace itself, Amazon, Etsy, Walmart, eBay, to collect and remit the tax on the sales it processes, so your Amazon and Etsy orders are largely handled by the platform, and in many states those facilitated sales still count toward your own economic nexus threshold. The exposure lives in the sales the marketplaces do not cover, chiefly your own Shopify store or anything you sell direct where you are the merchant of record.

Here is how it plays out. Say your Shopify store ships $130,000 of product into Colorado this year across 900 orders. You have blown past the $100,000 economic nexus threshold, so you are required to register with Colorado, collect its sales tax on taxable orders shipped there, and file returns. If you do not notice until eighteen months later, you owe the uncollected tax out of your own pocket plus penalties and interest, because the duty existed whether or not you charged customers. On a $130,000 base at roughly 7 to 8 percent that is close to $10,000 of tax you may have to eat, before penalties. Meanwhile at home you are collecting Texas sales tax at 6.25 percent plus local tax, about 8.25 percent combined in most of the Austin area, on taxable orders shipped to Texas customers, which is its own return to keep current. We track your sales by state through tax compliance and register you the moment a state actually requires it, so you collect from customers rather than paying the tax yourself out of margin later. Texas administers the tax through the Texas Comptroller, and the decision itself is in the Wayfair opinion.

For an Austin ecommerce seller, inventory and cost of goods sold are still the heart of the tax picture even though Texas charges no state income tax, because the number drives your federal income tax, your self-employment tax, and the way your Texas franchise margin is computed if you ever cross the threshold. The core rule is that buying inventory is not a deductible expense. When you spend $40,000 restocking product, you have not lost $40,000, you have converted cash into an asset that sits in a warehouse. That purchase only becomes a deduction, as cost of goods sold, when the specific units actually sell. Until then it stays on your balance sheet as inventory, and no amount of cash leaving your account changes that.

Sellers who ignore this and expense every purchase when the money leaves their account produce financial statements that are fiction. In a heavy buying quarter they show a loss they did not really have, then in the next period they show inflated profit because the sold goods carry no recorded cost. The tax consequence is a rollercoaster, a low federal bill in a stocking year followed by a brutal one later, all because the timing of deductions was tied to cash instead of to sales. The Austin seller is spared the state-income-tax half of that swing, but the federal half, income tax plus 15.3 percent self-employment tax for a sole proprietor, is still very real and still moves by thousands of dollars when the number is wrong.

The mechanics run through a simple formula. Beginning inventory, plus purchases during the year, minus ending inventory, equals cost of goods sold. That means you need an accurate count and value of what is left on the shelf at year end, because ending inventory directly reduces your deduction. If you carry $60,000 of unsold product on December 31, that $60,000 is not deductible this year no matter how much cash you spent. Your valuation method matters too, because first-in first-out and a weighted average produce different COGS and different ending values when supplier prices move, which is why we choose the method deliberately rather than by accident. There is a Texas bonus to getting COGS right, because if your revenue ever exceeds the franchise threshold, revenue minus cost of goods sold is one of the ways to compute the taxable margin, so the same clean figure works for both returns.

Here is the worked example. You start the year with $50,000 of inventory, buy $200,000 more, and finish with $60,000 on hand. Cost of goods sold is $50,000 plus $200,000 minus $60,000, which is $190,000. On $400,000 of sales your gross profit is $210,000 before operating expenses, a clean and defensible figure. The seller who deducted the full $200,000 and ignored the $60,000 still in the warehouse overstated the deduction by $60,000, and the federal tax cost of that error, income tax plus self-employment tax, easily runs past $15,000. Landed cost adds a layer for importers, so customs duties, freight, and inbound shipping belong in inventory value, not a separate expense bucket. We build the whole COGS schedule as part of your monthly financial reporting so the number is right all year, not reconstructed in April. The federal standards for inventory and accounting methods are in IRS Publication 538 and Publication 334.

The Form 1099-K is the information return that payment processors and online marketplaces file with the IRS to report the gross payments they ran through for you, and for an Austin ecommerce seller it is a frequent source of panic and mismatched returns even though there is no Texas income tax in the picture. For 2026 the reporting threshold reverted to its long-standing level, so a platform must issue you a 1099-K once you exceed $20,000 in gross payments and more than 200 transactions in the year. Earlier plans to drop the threshold to a much lower figure were reversed, so many smaller sellers will not receive the form at all, though that changes nothing about the duty to report income you actually earned on your federal return.

That last point matters, so it bears stating plainly. The 1099-K threshold governs whether a form gets mailed, not whether the income is taxable. Every dollar your store earns is reportable on your federal return whether or not a 1099-K arrives. If you do $18,000 in sales and receive no form, that $18,000 still belongs on your return. There is no Texas income tax return for it to flow into, which simplifies things for an Austin seller, but the federal reporting duty is unchanged, and treating the threshold as a floor below which income is tax-free is how sellers end up with underreported federal income and an unpleasant letter a year or two later.

The reconciliation problem is the bigger one. A 1099-K reports gross payments, the total buyers paid before anything was netted out. That gross includes the marketplace referral fees the platform kept, payment processing fees, sales tax that was collected, and shipping charges you collected and paid to carriers, and it is stated before any refunds you issued. If you report only what landed in your bank account, your revenue will be far below the gross the IRS was handed, and that gap is a classic audit flag. The fix is not to report the inflated gross either, because you never kept it. The fix is to report true gross revenue and separately deduct every fee, refund, and pass-through so the return reconciles cleanly to both the 1099-K and your bank statements.

Here is the math on a real case. Your Amazon 1099-K shows $250,000 of gross payments. Of that, $45,000 was Amazon referral and fulfillment fees, $15,000 was refunds to customers, and $12,000 was sales tax Amazon collected and remitted for you. Your true product revenue is around $223,000 after backing out the sales tax that was never yours, and the $45,000 of fees and $15,000 of refunds are legitimate reductions a careless return would miss. Reported correctly, you are taxed on real profit rather than the $250,000 headline, and while there is no Texas income tax to worry about, the federal tax difference on that gap still runs into five figures.

We perform this reconciliation on every ecommerce return and tie it to the bookkeeping so the numbers already agree before filing, which also means that if the IRS questions the gap between your 1099-K and your reported revenue, the answer is documented line by line rather than rebuilt under pressure. The same clean revenue figure also feeds your Texas franchise report, so the reconciliation does double duty for an Austin seller by supporting both the federal return and the state filing. The IRS walks through the form on its Understanding Your Form 1099-K page, and the underlying income rules are in Publication 334.