Tech and R&D-driven businesses in Texas can qualify for a sales-tax exemption on certain equipment and software purchases used for research and development. Under the 20% discount rule, you don’t need to apply for full exemption status , you can claim an automatic 20% sales tax reduction at point of sale. Here’s how it works in 2025.
Legal Basis for the R&D Exemption
Texas Tax Code §151.3182 offers two options for tax relief on qualified research purchases:
- Full sales tax exemption (with an application)
- 20% reduced tax rate (automatic at the point of purchase)
Both options follow the federal definition of R&D under IRC §41(d) , meaning the activity must aim to develop or improve a product or process using a process of experimentation.
What Is the 20% Discount Rule?
If your business purchases qualified R&D equipment and does not want to file exemption paperwork, you can simply:
- Pay only 80% of the regular sales tax rate
- Keep records showing the items are used for qualified research
Example:
Regular Sales Tax: 8.25%
Applied Rate (with 20% rule): 6.6%
Savings: 1.65% on every R&D-related purchase
What Equipment Qualifies?
Eligible Items:
- Servers, workstations, and hardware
- Lab tools and instruments
- Prototype development materials
- Software used in experimentation
- Equipment used in testing or product development
Not Eligible:
- Office furniture
- Routine business software
- Marketing or sales-related tools
Example: Texas AI Startup Purchase
Company: NeuralShift AI
Purchase: $500,000 in server racks and GPUs for model training
Regular Tax (8.25%): $41,250
With 20% Rule (6.6%): $33,000
Total Tax Savings: $8,250
The business applies the 20% rule without applying for a full exemption.
Step-by-Step: Claiming the 20% Discount in 2025
- Confirm R&D Eligibility: Ensure the equipment is used for qualified research under IRC §41
- Inform the Vendor: Tell the vendor you are claiming the 20% reduced sales tax
- Keep Documentation: Maintain records showing use for qualified research
- Review Purchases: Confirm annual spend qualifies for R&D treatment if audited
- Consider Full Exemption: For high spenders, it may be better to apply for full sales tax exemption via the Texas Comptroller
Conclusion
The 20% sales tax discount rule under Texas Tax Code §151.3182 offers a simple way for startups and tech firms to save on R&D infrastructure. You don’t need prior approval , just proper documentation and eligible use. If you’re investing in innovation, take this discount seriously in 2025.
Call to Action
Book a call with Anshul Goyal, CPA, EA, FCA to determine whether your business qualifies for Texas R&D sales tax savings and how to document purchases correctly for audits or future IRS R&D credits.
Disclaimer:
This blog is for informational purposes only. Texas sales tax laws under §151.3182 must be applied carefully with documentation of qualified R&D usage. Always consult a tax advisor before claiming exemptions or reduced tax rates.
Top 5 High-Searched FAQs
1. What is the 20% R&D discount rule in Texas?
It allows businesses to pay only 80% of the normal sales tax on qualified R&D purchases without formal exemption.
2. What is considered qualified research?
Defined under IRC §41, it includes product and process improvements involving experimentation.
3. Do I need to apply to get the 20% discount?
No. It’s automatic , just inform the vendor and keep records.
4. Can I use both the 20% rule and federal R&D credit?
Yes, they are separate benefits and can be used together.
5. Should I go for full exemption instead?
If your spend is large and consistent, full exemption may provide bigger savings.
About Our CPA
Anshul Goyal, CPA, EA, FCA specializes in helping Texas-based AI, biotech, and software firms leverage state and federal R&D incentives. He advises on sales tax strategies, IRS Form 6765 claims, and audit-proof compliance for research-heavy businesses.