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Texas: Qualified Research Gets Sales Tax Exemption


 Texas to exempt certain expenses related to qualified research, January 2014.

When the clock strikes midnight tonight, a change will occur in the state of Texas. It’s not just that it will be a new year. It’s that a new law takes effect, allowing either a sales tax exemption or a franchise tax credit for certain expenses related to qualified research.

As explained by the Window on State Government, persons engaged in qualified research may claim one of the following:

  • 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 may not benefit from both the sales tax exemption and the franchise tax credit--a choice must be made. It’s kind of like having to choose between two New Year’s Eve parties.

Who qualifies?

The sales tax exemption may be claimed by a person who purchases, leases, rents or stores depreciable tangible personal property directly used in qualified research and who:

  • Registers with the Texas Comptroller;
  • Is engaged in qualified research; and
  • Will not, as a taxable entity or as a member of a combined group, also claim a franchise tax research credit on a franchise tax report for that period.

What qualifies?

Qualified research “includes research for which expenditures can be treated as expenses under the Internal Revenue Code Section 174.”

Qualified research does not qualify numerous activities, including but not limited to:

  • Research related to style, taste, cosmetic or seasonal design factors;
  • Duplication of an existing product or process;
  • Surveys or studies; or
  • Research in the social sciences, arts or humanities.

The exemption may not be claimed without a properly completed Texas Qualified Research Sales and Use Tax Exemption Certificate.

Additional information is available at the Window on State Government.

Texas is not the only state to allow a sales tax exemption for certain items related to qualified research; Wisconsin provides a similar exemption.

How does your business manage sales tax exemptions?

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Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.