Texas has both a state and a municipal sales tax. The state sales tax, called the Limited Sales and Use Tax, was first enacted in 1961 by the Fiftyseventh Texas Legislature, to be effective September 1, 1961. Although it was not the first sales tax in Texas-before that time there had been a sales tax on certain items such as motor vehicles, gasoline, cigarettes, etc.-the Limited Sales and Use Tax in 1961 was the first broadbased tax in the state, although it was limited in the sense that it provided for some exemptions, such as groceries, medicines, agricultural implements, services (as such), and others. The rate of tax initially set in 1961 was 2 percent of the retail sales price of all tangible personal property not specifically exempted. The legislature changed the rate to 3 percent in 1968, 3¼ percent in 1969, and 4 percent in 1971. The rate was further increased to 4.125 percent in 1984, 5.25 percent in 1986, 6 percent in 1987, and 6.25 percent in 1990. As of 1995 no further increases had been made. The general sales tax had become the foundation of the Texas tax system, accounting for almost 60 percent of all state tax revenue by 1992. Revenue had increased from $149 million in 1961 to $7.59 billion in 1990. The retailer collecting the tax could deduct 1 percent of the quarterly tax due as reimbursement for collection. An additional 2 percent discount was allowed the retailer who made prepayment of the tax based upon a reasonable estimate of the liability for the quarter in which prepayment was made.
The municipal sales tax began in 1967, when the Sixtieth Legislature authorized cities to levy a sales tax of 1 percent on a local option basis. Most of the state's voters in cities approved such a local sales tax, the collection of which became a major source of revenue for municipal governments. On January 1, 1968, there were only 14 municipalities levying such a tax; on January 1, 1971, there were 605. The state's comptroller of public accounts collects the municipal sales tax along with the state sales tax, then remits collections to each municipality quarterly after deducting a collection fee. As of 1992 city governments had an option of 0.5 to 1.0 percent city sales tax. It has become the second largest source of tax revenue for many cities. Some areas have seen their total sales tax rise to 8.25 percent where other special district (such as transit authority) and county governments levy sales taxes. At the end of fiscal 1990 five mass transit authorities and about fifty counties were levying a 1 to 1.5 percent sales tax. The maximum local rate is 2 percent.