taxes

Sales Tax Exemption or Franchise Tax Credit for Qualified Research

Overview

In 2014, a Texas law went into effect to encourage economic development in Texas related to research and development. A person engaged in qualified research can claim either:

  • a sales and use tax exemption on the purchase, lease, rental, storage or use of depreciable tangible personal property directly used in qualified research, or
  • a franchise tax credit based on qualified research expenses.

A person cannot claim both the sales tax exemption and the franchise tax credit for the same period. The election to claim the sales tax exemption or take the franchise tax credit is not permanent and can be changed.

Frequently Asked Questions

Who can claim the sales tax exemption?

The sale, storage or use of depreciable tangible personal property directly used in qualified research is exempt from Texas sales and use tax if the property is sold, leased or rented to, or stored by, a person who:

  • is engaged in qualified research;
  • will not, as a taxable entity or as a member of a combined group, claim a franchise tax research credit on a franchise tax report for the period during which the depreciable tangible personal property used in qualified research would first be subject to Texas sales or use tax; and
  • registers with the Comptroller's office.
What is meant by "directly" used?

For the purpose of this sales tax exemption, "directly" means having an immediate effect on an item or in an activity, without an intervening, ancillary or prior effect.

What is qualified research?

Qualified research is defined in Internal Revenue Code of 1986, Section 41(d) in effect on Dec. 31, 2011, and includes research for which expenditures can be treated as expenses under Internal Revenue Code Section 174.

The research must be undertaken for discovering information that is technological in nature, and the person undertaking the research must intend to develop a new or improved business component. Substantially all of the research activities must be part of an experimentation process relating to a new or improved function, performance, reliability or quality.

What is not qualified research?

Qualified research does not include the following activities:

  • research related to style, taste, cosmetic or seasonal design factors;
  • research conducted after the beginning of commercial production of the business component;
  • research adapting an existing product or process to a particular customer's need;
  • duplication of an existing product or process;
  • surveys or studies;
  • research relating to certain internal-use computer software;
  • research conducted outside the United States, Puerto Rico or a U.S. possession;
  • research in the social sciences, arts or humanities; or
  • research funded by another person or governmental entity.
What is depreciable tangible personal property?

Depreciable tangible personal property is tangible personal property that has a useful life of more than one year and is subject to depreciation under either generally accepted accounting principles (GAAP) or Internal Revenue Code Sections 167 or 168, in effect on Dec. 31, 2011. For federal income tax purposes, a depreciation deduction, generally, is a reasonable allowance for the exhaustion, wear and tear and, in some cases, for the obsolescence of certain business-related or income-producing property. For the purpose of the sales tax exemption, the depreciable item must be directly used in qualified research.

How do I register for the sales tax exemption for qualified research?

Register online with the Comptroller's office before claiming the exemption on qualifying purchases or by filing Form AP-234, Texas Registration for Qualified Research and Development Sales Tax Exemption (PDF).

Upon successful registration, the Comptroller's office will issue a Texas Qualified Research Registration Number: eight characters beginning with "RD" and followed by six numbers. Your Texas Qualified Research Registration Number will be available online after 7 a.m. CST on the next business day. You will use this number when completing Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate (PDF).

How do I claim the sales tax exemption?

Give a properly completed Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate (PDF), to the retailer when claiming an exemption on eligible items purchased for use directly in qualified research. The generic exemption certificate is not acceptable. You must include the registration number on the exemption certificate.

If you purchase an item under a valid qualified research exemption certificate and use that item in a taxable manner, you are liable for payment of sales tax and applicable penalty and interest based on the fair market rental value of the tangible personal property for the period of time used. If the exemption certificate was invalid at the time of its issuance, you will owe tax and applicable penalty and interest on the original purchase price.

How do I file an annual information report?

Registrants claiming the sales tax exemption must file an Annual Information Report (AIR) with the Comptroller's office on or before March 31 each calendar year in which they claimed the sales tax exemption to avoid cancellation of the registration.

The AIR allows registrants to renew their registration number and report required information about the amount of qualified research they performed in Texas; the number of employees engaged in research and development in Texas; and data regarding sales tax revenue.

Is the qualified research sales tax exemption permanent?

No. The Comptroller or the registrant may cancel the sales tax exemption. All persons registered for the sales tax exemption are required to file an Annual Information Report (AIR). Registrants are required to file this report electronically through WebFile. The Comptroller will cancel the registration number if the registrant does not file the AIR by March 31.

The AIR also allows a registrant to renew its registration number, so the registrant can claim the sales tax exemption on qualifying purchases for the next period.

What happens if the Comptroller cancels a registrant's registration number?

The Comptroller can cancel the registration number of a person who fails to file an AIR by sending notice of cancellation to the address in our records. You cannot claim the qualified research exemption during the period for which the registration number is cancelled. The intentional or knowing attempt of a former registrant to purchase an item under a cancelled registration number is considered a failure and refusal to pay tax and is a criminal offense.

Whether the Comptroller or the registrant cancels or otherwise terminates the registration number, the registrant will be required to pay the tax, penalty and interest due from the date of purchase on all ineligible tax-free purchases.

A former registrant with a cancelled registration number can request that it be reinstated.

I'm a retailer. How do I accept and record exemption certificates?

Beginning Jan. 1, 2014, a retailer can only sell an item exempted under Tax Code Section 151.3182 (certain property used in research and development activities) without collecting tax when a registrant has provided a signed and properly completed Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate (PDF). The generic exemption certificate is not acceptable.

The retailer is required to keep the exemption certificate and all other financial records relating to the exempt sale. The retailer must be able to match invoices of tax-free sales to the purchaser's exemption certificate. The retailer can do this by entering the registration number for the purchaser on each invoice.

A retailer is not required to accept an exemption certificate. The purchaser can request a refund of the tax directly from the Comptroller if the retailer gives the purchaser Form 00-985, Assignment of Right to Refund (PDF). Read more about refunds.

Retailers can verify a registration number through the Comptroller's online system.

A retailer is not required to verify a registration number before accepting a qualified research exemption certificate from a purchaser at the time of sale.

How do purchasers and retailers handle refunds?

A retailer is required to charge sales tax if the person claiming the sales tax exemption for qualified research does not give you a signed and properly completed qualified research exemption certificate, including the registration number, at the time of purchase.

A purchaser can request a refund of sales tax paid from the retailer. The purchaser must provide a properly completed Form 01-931, Qualified Research Sales and Use Tax Exemption Certificate (PDF), when making the refund request. The retailer can use the Comptroller's online verification system to determine if the purchaser had a valid registration number when the item was purchased.

If the purchaser had a valid registration number at the time the purchase was made, the retailer can refund the sales tax. Alternatively, the retailer may provide the purchaser Form 00-985, Assignment of Right to Refund (PDF). Learn more about refunds.

If the purchaser did not have a valid registration number when the purchase was made, the retailer should assign the right to refund to the purchaser to allow the purchaser to request the refund directly from the Comptroller.

Additional Resources