Sales and Use Tax Exemptions, Credits & Refunds
MANUFACTURING MACHINERY & EQUIPMENT
Leased or purchased machinery, equipment, replacement parts, and accessories that have a useful life of more than six months, and that are used or consumed in the manufacturing, processing, fabricating, or repairing of tangible personal property for ultimate sale, are exempt from state and local sales and use tax. Tangible personal property that becomes an ingredient or component of an item manufactured for sale, as well as taxable services performed on a manufactured product to make it marketable are exempt. The exemption also applies to tangible personal property that makes a chemical or physical change in the product being manufactured and is necessary and essential in the manufacturing process, as well as semiconductor fabrication and pharmaceutical biotechnology cleanrooms and equipment.
Natural Gas & Electricity
Texas companies are exempt from paying state and local sales and use tax on electricity and natural gas used in manufacturing, processing, or fabricating tangible personal property. The company must complete a “predominant use study” that shows that at least 50% of the electricity or natural gas consumed by the business directly causes a physical change to a product.
Gas and electricity are also exempted from sales and use taxes if used in the processing, storage, and distribution of data by a qualified data center (a facility certified by the Comptroller as a qualifying data center under Section 151.359).
Water & Wastewater
Section 151.315 of Texas Tax Code exempts sales of water from the sales tax. The disposal of wastewater is a nontaxable service.
Construction Labor
Construction labor is not taxable for new construction projects (building new structures and completing unfinished structures). In addition, the labor to increase the production capacity of a manufacturing or processing production unit in a petrochemical refinery or chemical plant is not taxable.
Food & Over-the-Counter Drugs and Medicines
Food products (such as flour, sugar, bread, milk, eggs, fruits, vegetables and similar groceries) and over-the-counter drugs and medicines that are required by the U.S. Food and Drug Administration to be labeled with a Drug Facts panel, as well as prescription drugs, are not taxable.
Data Centers
Tangible property necessary to operate a data center is exempt from state sales and use taxes provided the data center meets certain criteria. The single-occupant Texas data center must be at least 100,000 square feet, specifically built or refurbished to house servers and data processing and storage equipment, not be used primarily for delivery of telecommunications services, and have an uninterruptible power source, backup generator, and advanced security and safety technology.
The data center would have to create at least 20 permanent jobs, not including jobs transferred from within the state, with a salary 120% or higher than the average salary in the county in which the data center was built. The data center owner would have to make or agree to make a capital investment of at least $200 million in the data center over a 5-year period. The exemption would expire 10 years after the date of the first exemption for an operator that invested more than $200 million and less than $250 million, and 15 years if the operator invested more than $250 million.
Research & Development
Beginning January 2014, companies engaged in qualified research activities (as defined under federal tax law) in Texas may choose between accepting a sales tax exemption or a franchise tax credit for materials, software and equipment used for R&D purposes. The sales tax exemption can be applied to the sale, storage, or use of depreciable tangible personal property directly used in qualified research.
Chapter 380/381 Financing
Chapters 380 and 381 of the Local Government Code provide legislative authority for Texas municipalities and counties to provide a grant or a loan of city or county funds or services in order to promote economic development. Local governments have utilized the provisions under this law to provide a wide array of incentives that have drawn businesses and industries to locales throughout Texas. Whether a local government provides any such incentive is completely discretionary. A city or county may provide a Chapter 380 or 381 grant in the form of a sales or property tax rebate.
Telecom, Internet & Cable TV
Providers of telecommunications, internet access, and cable television services can obtain a refund of the state sales and use taxes paid on tangible personal property used or consumed in transmitting, routing, or distributing those services.
Film, Video & Audio Production Companies & Broadcasting Companies
A production company may claim a sales or use tax exemption on items or services necessary and essential and used or consumed during the production of a motion picture, commercial, television project, corporate film, infomercial, or video game. These rules apply only to projects intended for commercial distribution, broadcast, or some other exhibition.
Exempt items include tangible personal property that becomes a component part of the qualifying motion picture, video or audio recording, or broadcast; cameras; film; film developing chemicals; lights; props; sets; teleprompters; microphones; digital equipment; special effects equipment and supplies; audio or video routing switchers located in a studio; certain services; and certain other equipment and tangible personal property that are necessary and essential to and used directly in the production.
Non-exempt items include office equipment or supplies; maintenance or janitorial equipment or supplies; machinery, equipment, and supplies used in sales or transportation activities; machinery, equipment, or supplies used in distribution activities, unless otherwise exempted; taxable items used incidentally in a qualifying production or broadcast; telecommunications equipment and services; transmission equipment; security services; motor vehicle parking services; and food and beverages.
Production companies can also obtain hotel occupancy tax exemptions (state and local occupancy taxes can be waived after the 30th day for stays longer than 30 consecutive days) and tax refunds or exemptions for fuels used off road.
Enterprise Zones
The Texas Enterprise Zone Program also offers opportunities for sales and use tax refunds.
Franchise Tax Exemptions & Credits
Solar Energy Franchise Tax Exemption
A corporation in Texas engaged solely in the business of manufacturing, selling, or installing solar energy devices is exempted from the franchise tax. There is no ceiling on this exemption provided by Section 171.056 of Texas Tax Code, so it is a substantial incentive for solar manufacturers.
For the purposes of this exemption, a solar energy device means “a system or series of mechanisms designed primarily to provide heating or cooling or to produce electrical or mechanical power by collecting and transferring solar-generated energy. The term includes a mechanical or chemical device that has the ability to store solar-generated energy for use in heating or cooling or in the production of power.”
Research & Development Tax Credit
Companies engaged in qualified research activities (as defined under federal tax law) in Texas may choose between accepting a sales tax exemption or a franchise tax credit for materials, software and equipment used for R&D purposes.
The credit available is 5% of the difference between: (1) qualified research expenses incurred during the period on which the reporting period and (2) 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period on which the report is based. If the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 2.5% of the qualified research expenses incurred during that period.
An additional franchise tax credit would be available to companies that partnered on research projects with universities and private higher education institutions. In this case, the credit available is 6.25% of the difference between: (1) qualified research expenses incurred during the period on which the reporting period and (2) 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period on which the report is based. If the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 3.125% of the qualified research expenses incurred during that period. Unused credits may be carried forward.
Relocation Expenses Deduction
Companies may deduct from apportioned margin relocation costs incurred in relocating their main office or other principal place of business to Texas from another state provided the company (1) did not do business in Texas before the relocation and (2) is not a member of an affiliated group engaged in a unitary business, another member of which is already doing business in Texas.
Deductible relocation costs include (1) costs of relocating computers and peripherals, other business supplies, furniture, and inventory; and (2) any other costs related to the relocation that are allowable deductions for federal income tax purposes. The deduction must be taken on the company’s initial franchise tax filing.
Renewable Energy Device Deductions
A taxable entity may deduct from its apportioned margin 10% of the amortized cost of a solar energy device. Under the statute’s definition, wind energy is also included as an eligible technology. A similar deduction is available for equipment associated with a clean coal project.
Aerospace Companies’ Computation of Taxable Margin
House bill 1607, enacted in 2019, modifies Texas Tax Code Section 171.101 to allow taxable entities incurring certain federally contracted aerospace costs to subtract a percentage of these costs beyond what was included in cost of goods sold or compensation in computing their taxable margins under the franchise tax. Such costs could not already have been subtracted from the entity’s taxable margin, and they would have to have been allocated and incurred under the Federal Acquisition Regulations System and subject to the requirements of the Defense Acquisition Regulations System or the National Aeronautics and Space Administration for contracts or for supporting subcontracts for such goods and services. The tax cut is being phased in over five years, with the companies able to deduct 100% of their eligible aerospace costs starting in 2024.
Tax Credit for Rehabilitation of Historic Structures
A tax credit of 25% of the total eligible costs and expenses incurred in the certified rehabilitation of the certified historic structure can be applied to a taxpayer’s franchise tax due. The taxpayer must have an ownership interest in the certified historic structure in the year during which the structure is placed in service after the rehabilitation. Eligible structures are Recorded Texas Historic Landmarks, listed in the National Register of Historic Places, or located in specified historic districts. Eligible costs and expenses are defined by the Internal Revenue Code. Carryforward is available and credits can be sold or assigned.
Property Tax Abatements & Exemptions
Property Tax Abatement Agreements
A property tax abatement is a local agreement between a taxpayer and a taxing unit that exempts all or part of the increase in the value of the real property and/or tangible personal property from taxation for a period not to exceed 10 years. Tax abatements are an economic development tool available to cities, counties and special districts to attract new industries and to encourage the retention and development of existing businesses through property tax exemptions or reductions. School districts may not enter into abatement agreements. The statutes governing tax abatements are located in Texas Tax Code Chapter 312. Each taxing unit that wants to consider tax abatement proposals must designate a reinvestment zone or an enterprise zone.
Chapter 380/381 Financing
Chapters 380 and 381 of the Local Government Code provide legislative authority for Texas municipalities and counties to provide a a grant or a loan of city or county funds or services in order to promote economic development. Local governments have utilized the provisions under this law to provide a wide array of incentives that have drawn businesses and industries to locales throughout Texas. Whether a local government provides any such incentive is completely discretionary. A city or county may provide a Chapter 380 or 381 grant in the form of a sales or property tax rebate.
Chapter 403 Abatement Agreements
The Texas Jobs, Energy, Technology and Innovation Act, signed into law on June 7, 2023, amends Chapter 403 of the Texas Government Code. The Texas Comptroller of Public Accounts provides detailed information, including application forms, for prospective applicants.
This new program allows Texas school districts to cap the taxable value of property for 10 years. The cap applies only to the maintenance and operations (M&O) portion of school taxes (the cap does not apply to the portion of the school tax rate that goes toward debt).[1] Under Chapter 403, 50% of a property’s value can be capped. The cap can increase to 75% for projects in federally designated Opportunity Zones.
The required number of jobs and capital investment is determined by county population:
| Population | Min. Investment | Min. Jobs |
|---|---|---|
|
750,000+ |
$200 million + |
75 |
|
250,000-749,999 |
$100 million + |
50 |
|
100,000-249,999 |
$50 million + |
35 |
|
<100,000 |
$20 million + |
10 |
Eligible projects include those related to energy[2], technology, and innovation. All manufacturing projects and dispatchable electric generation facilities are eligible. Some water-related projects are eligible, as are research and development facilities.[3]
The average annual wage to all employees in connection with the project will exceed 110% of the average annual wage in the applicable industry sector. The employer is required to offer and contribute to a group health benefit plan for each employee in a full-time job. Companies that receive the incentives must create an apprenticeship program with the partnering school district.
To begin the application process, the company submits an application to the Texas Comptroller of Public Accounts. The Comptroller will review the application to ensure it meets the required criteria and make a recommendation for approval. The Comptroller must take action within 60 days of determining an application to be complete. No later than 30 days from receiving the comptroller’s recommendation, the governor approves an application by written notice to the comptroller, school district and oversight committee. The school district receives the comptroller’s recommendation at the same time as the governor. The school district must hold a public hearing and provide notice of the hearing. The governor, school district, and applicant may sign the agreement if the application is not denied within 30 days.
Reinvestment Zones
The designation of specified areas as “reinvestment zones” is a local economic development tool used by municipalities and counties throughout the state of Texas. Reinvestment zones have been used to stimulate local economies by attracting new companies and encouraging the growth of existing businesses. These zones can be created for the purpose of granting local businesses ad valorem property tax abatements on a portion of the value of real and/or tangible personal property located in the zone, for a period of up to 10 years.
Special taxation entities having jurisdiction over a reinvestment zone may participate in executed abatement agreements; however, the special taxing districts may not designate reinvestment zones or initiate tax abatement agreements. Reinvestment zones are designated by local ordinance or resolution. Incorporated cities, counties and special districts are allowed to enter into tax abatement agreements. However, school districts no longer possess this ability.
The Comptroller of Public Accounts has responsibility for the state’s central registry of reinvestment zones for tax abatements and tax increment financing. Comptroller reports indicate active reinvestment zones in 14 communities in four area counties (Austin, Buda, Cedar Park, Dripping Springs, Elgin, Georgetown, Hutto, Kyle, Leander, Liberty Hill, Manor, Pflugerville, Round Rock, and Taylor).
Freeport Exemption
A community may choose to offer the freeport exemption for various types of goods that are detained in Texas for a short period of time. Freeport property includes goods, wares, merchandise, ores, and certain aircraft and aircraft parts. Freeport property qualifies for an exemption from ad valorem taxation only if it has been detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing, or fabricating. For certain aircraft parts[4], a community, by official action, may extend the deadline to 730 days.
The law requires an annual application to the county appraisal district to claim a property tax exemption for freeport goods.
A freeport exemptions map details the jurisdictions providing the exemption.
Community college districts cannot adopt the freeport exemption.
Medical & Biomedical Property
Texas’ 88th Legislature established a property tax exemption for medical or biomedical property that became effective January 1, 2024. A company is entitled to an exemption from taxation of medical or biomedical property that is located in a medical or biomedical manufacturing facility that the company owns or leases. Qualified medical or biomedical property is tangible personal property that is:
- stored, used or consumed in the manufacturing or processing of medical or biomedical products by a medical or biomedical manufacturer;
- or intended for use in the diagnosis, cure, mitigation, treatment or prevention of a condition or disease or in medical or biomedical research, including the invention, development and dissemination of materials, tools, technologies, processes and similar means for translating and applying medical and scientific research for practical applications to advance public health.
A qualified medical or biomedical manufacturing facility is a facility at which a company conducts manufacturing or processing of medical or biomedical products for the purpose of development and commercialization of products to advance public health.
Pollution Control Equipment
A Texas constitutional amendment providing an exemption from property taxation for pollution control equipment was approved in 1993. The intent was to ensure that compliance with environmental mandates through capital investments did not result in an increase in a facility’s property taxes. A facility must first receive a determination from the Texas Commission on Environmental Quality (TCEQ) that property is for pollution control purposes. That positive use determination is then provided to the local appraisal district, which must accept the TCEQ’s decision and grant the property an exemption from property taxes.
To be eligible for a positive use determination, the property must have been purchased, acquired, constructed, installed, replaced, or reconstructed after January 1,1994 to meet or exceed federal, state, or local environmental laws, rules, or regulations.
Solar or Wind-Powered Energy Devices
The Texas property tax code allows an exemption of the amount of the appraised property value that arises from the installation or construction of a solar or wind-powered energy device that is primarily for the production and distribution of thermal, mechanical, or electrical energy for on-site use, or devices used to store that energy. The Texas Comptroller publishes guidelines for the solar and wind-powered energy device exemption.
FOOTNOTES:
- The M&O portion represents the majority of a school district’s rate.
- Dispatchable electric generation facilities. Renewable energy projects or energy storage facilities are not eligible. Dispatchable electric generation is not subject to job requirements.
- Eligible projects are in defined NAICS classifications.
- Aircraft or repair parts used by a certified air carrier.