Introduction
Think Texas doesn’t audit tech startups? Think again. The Texas Comptroller is doubling down on Franchise Tax audits, especially for SaaS companies claiming aggressive cost of goods sold (COGS) or compensation deductions under the Margin Tax.
If your business is software-based and relies on recurring revenue, here’s what to know about top adjustments made during audits in 2025.
Texas Code References
- Texas Tax Code §171.1011 – Revenue definition
- Texas Tax Code §171.1012 – COGS deduction rules
- Texas Tax Code §171.1013 – Compensation deduction rules
- Texas Comptroller STAR Rulings 2024-2025 – Audit guidance
Common Margin Tax Errors by SaaS Startups
- Claiming COGS for Non-Qualified Costs
- SaaS isn’t selling tangible goods.
- Hosting, R&D, and support staff do not qualify as COGS.
- Double-Counting Contractor Payments
- Claiming payments to independent contractors under compensation, which is disallowed.
- Apportionment Missteps
- Sourcing revenue based on billing address, not user location.
- SaaS must use user-based sourcing per updated rules.
- Incomplete Revenue Reporting
- Understating total receipts from platforms like Stripe or PayPal.
Example: Margin Tax Audit in Austin
Example: CodeZen, a Texas-based SaaS company, reports $1.2M in revenue and deducts:
- $600K in claimed “COGS” (including hosting, engineering, design)
- $200K in contractor payments as compensation
Audit Findings:
- Comptroller reclassifies $500K as non-deductible
- Assesses additional margin tax and penalties: $15,000+
Step-by-Step: Avoiding 2025 Audit Adjustments
- Choose the Correct Deduction Method
Use compensation deduction if SaaS—COGS rarely qualifies. - Clean Up Revenue Sourcing
Use user location, not invoice address. - Reconcile All Payment Processors
Cross-check Stripe, Shopify, PayPal, etc. - Review Past Filings
Amend if you made incorrect COGS claims in prior years. - Get a Pre-Audit Review
CPA can simulate likely audit risks based on current filings.
Conclusion
SaaS companies in Texas are on the radar. Misclassifying deductions or misallocating revenue could trigger costly audits in 2025.
Play defense early—adjust your margin tax filings and build a clean paper trail now.
Call to Action
Worried about a Texas Franchise Tax audit?
Book a consultation with Anshul Goyal, CPA, EA, FCA to:
- Review past margin tax filings for SaaS-specific issues
- Correct apportionment and deduction strategy
- Represent you in case of Comptroller audit
The best audit defense is clean, compliant math.
https://calendly.com/anshulcpa/
About Our CPA
Anshul Goyal, CPA, EA, FCA
Anshul brings 15+ years of U.S. and international tax experience. He specializes in helping online sellers, foreign founders, and U.S. residents with IRS and multi-state compliance. Known for his deep knowledge in Shopify and Amazon seller tax strategy, Anshul has helped hundreds of entrepreneurs minimize taxes and scale legally.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified tax professional regarding your individual tax situation.
Top 5 High-Searched FAQs (2025)
1. Can SaaS claim COGS in Texas?
Generally no, unless the company also sells tangible products.
2. What revenue sourcing method applies to SaaS?
Revenue must be sourced to the location of user benefit, not billing.
3. Are contractor payments deductible?
No, only W-2 compensation qualifies under margin tax.
4. What triggers a Franchise Tax audit?
Large deductions, incorrect sourcing, or inconsistent year-over-year filings.
5. How do I fix past filings?
File amended Franchise Tax Reports with corrected numbers.