Sales Tax Exemption or Franchise Tax Credit for Qualified Research
Effective Jan. 1, 2014
A new law allows persons engaged in qualified research to claim either a sales tax exemption on certain property directly used in qualified research, or a franchise tax credit based on qualified research expenses.
Persons 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.
More About the Sales Tax Exemption for Qualified Research
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.
Qualified research is defined in Internal Revenue Code Section 41(d) 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 its application must be intended for use in developing a new or improved business component of the person undertaking the research. Substantially all of the activities of the research must be elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.
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.
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 Section 167 or 168 of the Internal Revenue Code. 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.
Persons must register with the Comptroller’s office before claiming the exemption on qualifying purchases.
Register using our online registration system or by filing the Texas Registration for Qualified Research and Development Sales Tax Exemption (Form AP-234).
Registrants must certify they will not take the franchise tax credit for the same period the sales tax exemption will be claimed.
After the registration is completed, the Comptroller’s office will issue a Texas Qualified Research Registration Number (Registration Number). The Registration Number is eight characters beginning with “RD” and followed by six numbers.
Registrants must give a signed and properly completed Texas Qualified Research Sales and Use Tax Exemption Certificate (Form 01-931) (Qualified Research Exemption Certificate) to the retailer when claiming an exemption on eligible items purchased for use directly in qualified research. The registrant must include the Registration Number on the exemption certificate.
If a registrant purchases an item under a valid Qualified Research Exemption Certificate and uses that item in a taxable manner, the registrant is 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, the registrant owes tax, penalty and interest on the original purchase price.
A registrant must not use the generic Texas Sales and Use Tax Exemption Certification (Form 01-339) to claim the qualified research exemption.
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 Texas Qualified Research Sales and Use Tax Exemption Certificate (Form 01-931).
The properly completed Qualified Research Exemption Certificate containing the Registration Number of the purchaser is the retailer’s documentation that a tax-exempt sale was made in good faith. 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 must not accept the generic Texas Sales and Use Tax Exemption Certification (Form 01-339) from a purchaser claiming the qualified research exemption.
A retailer is not required to accept an exemption certificate. If a retailer does not accept an exemption certificate, the purchaser can request a refund of the tax paid directly from the Comptroller if the retailer gives the purchaser an Assignment of Right to Refund. Refer to the section below regarding 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.
Persons claiming the sales tax exemption must file an Annual Information Report (AIR) with the Comptroller’s office on or before March 31 of the year immediately following the calendar year in which they claimed the sales tax exemption.
The AIR allows registrants to renew their Registration Number and to provide information required to be reported by the Comptroller to the Texas Legislature. Those claiming the sales tax exemption must report on the AIR the amount of qualified research performed in Texas; the number of employees engaged in research and development in Texas; and data regarding sales tax revenue.
The Comptroller can cancel the Registration Number of a person who fails to file an AIR. The Comptroller will send notice of cancellation to the address in our records. When a registration is cancelled, the former registrant 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 may request reinstatement of that number.
A retailer is required to charge sales tax if the person claiming the sales tax exemption for qualified research does not provide 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 retailer will need to know if the purchaser had a valid Registration Number at the time the item was purchased. To make this determination, retailers should use the Comptroller’s online verification system.
If the purchaser had a valid Registration Number at the time the purchase was made, the retailer can refund the sales tax or give the purchaser an Assignment of Right to Refund, as long as the purchaser provides the Registration Number on a properly completed Qualified Research Exemption Certificate (Form 01-931) to the retailer when making that request.
If the purchaser did not have a valid Registration Number at the time the purchase was made, the retailer should not refund the sales tax or assign the right to refund to the purchaser.