Introduction
Texas businesses offering AI model inference-as-a-service (IaaS), where users access pre-trained models for predictions via API, must determine sales tax applicability to avoid compliance risks and penalties. Inexperienced advisors may misclassify these services, leading to undercollection or overpayment, impacting profitability. Are you correctly applying Texas sales tax to your AI inference services in 2025?
At Kewal Krishan & Co, our expert tax advisors help Texas clients save an average of $50,000 annually, potentially totaling $775,000 over a decade through precise sales tax compliance and planning. This blog examines sales-tax on AI model inference-as-a-service in Texas for 2025, grounded in Texas Tax Code § 151 and Internal Revenue Code (IRC) considerations, with detailed examples and compliance steps.
With Texas’s no-state-income-tax environment and the One Big Beautiful Bill Act (OBBBA) enhancing federal incentives, proper classification ensures tax efficiency for AI providers. Begin refining your sales tax strategy today with insights from Our Tax Planning Services.
Understanding Sales Tax on AI Inference-as-a-Service in Texas
AI inference-as-a-service involves providing access to trained models for real-time predictions (e.g., image recognition, natural language processing) via cloud or API, classified as software-as-a-service (SaaS) or data processing under Texas Tax Code § 151.0035. Texas taxes SaaS as a data processing service, with 80% of the sale price subject to sales tax (20% exempt to support tech industry, per Comptroller Publication 96-259).
Key Rules for 2025
- Tax Rate: State 6.25%, plus local rates up to 2%, average combined 8.19% on 80% of price (Texas Tax Code § 151.051).
- Nexus: Physical presence or economic nexus ($500,000 in Texas sales, Texas Tax Code § 151.107).
- Sourcing: Taxed at customer’s location (Texas Tax Code § 151.1001); multi-state apportionment for cross-border users.
- Exemptions: Custom AI models may be nontaxable services; canned models taxable (Rule 3.330).
- Federal Impact: OBBBA does not alter sales tax but enhances R&D credits (IRC § 41), potentially offsetting development costs for AI models.
Report sales tax on Form 01-117 monthly/quarterly; federal income on Form 1120. For details, see Texas Comptroller’s Taxable Services Publication and IRS Publication 525.
Detailed Example: Calculating Sales Tax on AI Inference Services
Consider a Texas AI provider charging $100,000 annually for inference-as-a-service in 2025, with customers in Austin (local rate 2%, combined 8.25%).
- Classification: Taxable as data processing/SaaS (Texas Tax Code § 151.0035, Publication 96-259).
- Taxable Portion: 80% of $100,000 = $80,000.
- Sales Tax: 8.25% × $80,000 = $6,600.
- Federal Income: $100,000 revenue on Form 1120, deductible expenses reduce taxable income (IRC § 162).
- R&D Credit: If $20,000 in qualified AI development, claim $1,744 credit (8.722% Texas R&D, Texas Tax Code § 171.651), offsetting franchise tax.
- Net Cost: Customer pays $106,600; provider remits $6,600 sales tax, but R&D credit saves on franchise ($37,500 margin tax reduced).
If custom AI (nontaxable service): $0 sales tax, saving $6,600.
Alternative Scenario
For $50,000 service with multi-state users (50% Texas): Taxable $40,000 (80%), prorated $20,000 Texas, tax $1,650 (8.25%). Economic nexus triggers registration if over $500,000 Texas sales.
Step-by-Step Guide for Taxpayer Compliance
To apply sales tax to AI inference-as-a-service in Texas for 2025, follow these steps:
- Classify Service: Determine if data processing/SaaS (taxable) or custom service (nontaxable) per Publication 96-259.
- Register for Permit: If nexus, obtain sales tax permit from Texas Comptroller (Texas Tax Code § 151.201).
- Calculate Tax: Apply 80% exemption, then combined rate to taxable portion (Texas Tax Code § 151.051).
- Source Sales: Use customer location or billing address for tax rate (Texas Tax Code § 151.1001).
- Collect and Remit: Charge tax on invoices; file Form 01-117 monthly/quarterly by 20th (Texas Tax Code § 151.401).
- Claim R&D Credit: Document expenses, claim on franchise tax report (Texas Tax Code § 171.651).
- Report Federal Income: Include revenue on Form 1040/1120, deduct expenses (IRC § 162).
- Retain Records: Keep invoices, customer locations for four years (Texas Tax Code § 151.406, IRC § 6001).
For AI providers, explore Our Business Tax Services.
Common Pitfalls to Avoid
- Misclassification: Treating custom AI as taxable inflates liability (Rule 3.330).
- Nexus Oversight: Sales over $500,000 without permit triggers penalties (Texas Tax Code § 151.201, 5% penalty).
- Sourcing Errors: Incorrect customer location uses wrong rate (Texas Tax Code § 151.1001).
- R&D Miss: Failing to claim credit loses offsets (Texas Tax Code § 171.651).
Why Work with a Tax Expert?
Sales tax on AI inference-as-a-service in Texas requires navigating Texas Tax Code § 151 and IRC, where missteps like misclassification can lead to audits or overpayments. Generic advisors may miss the 80% exemption or nexus thresholds, costing thousands. Kewal Krishan & Co specializes in Texas tech tax strategies, ensuring accurate compliance and maximum savings. Our expertise mitigates risks, as demonstrated in Our Tax Litigation Services.
Conclusion
Sales tax on AI model inference-as-a-service in Texas for 2025 is 80% taxable as data processing under Texas Tax Code § 151, with combined rates averaging 8.19%. With no state income tax, proper compliance and R&D credits enhance profitability—act now to classify services and claim incentives for tax efficiency.
Call to Action
Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to handle your AI service sales tax.
About Our CPA
Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.
Disclaimer
This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.
FAQs
1. Is AI inference taxable in Texas?
Yes, as data processing, 80% of price taxable (Texas Tax Code § 151.0035).
2. What’s the Texas sales tax rate?
6.25% state + up to 2% local, average 8.19%.
3. How is tax sourced?
To customer’s location (Texas Tax Code § 151.1001).
4. Can custom AI be exempt?
Yes, if nontaxable service (Rule 3.330).
5. What form for sales tax?
Form 01-117 monthly/quarterly (Texas Tax Code § 151.401).