Overview

In October 2021, the Comptroller enacted sweeping amendments to the agency’s R&D rules governing the Texas sales and use tax exemption and the Texas franchise tax credit. Most notably and much to taxpayer chagrin, the changes created a blanket disallowance of R&D expenditures related to internal use software. The franchise tax rule amendment also restricted a combined group’s ability to use the R&D credit carryforward, if there was a membership change within the group. There are several lawsuits pending that challenge the validity of these and other portions of the 2021 rule amendments.

However, on May 26, 2022, TTARA announced that the Comptroller intends to further revise these recently-amended rules. According to TTARA, the Comptroller intends to soften his position on internal use software, but does not intend to adopt the 2016 IRS regulation changes concerning such R&D efforts because that language applied only to October 4, 2016 and beyond, while the Texas R&D definition of the “Internal Revenue Code” is limited to regulations in existence as of or later-adopted but applicable to the tax code as it existed in 2011. Thus, it is likely that, even following these additional revisions, there will be a disconnect between federal and Texas policy concerning internal use software.

TTARA also reports that the Comptroller intends to ease current restrictions on the carryforward of accumulated credits when a combined group’s membership changes.The scope of other proposed changes is presently unknown, although there were many comments submitted in advance of the October 2021 rule amendments that may invite further changes.