Playing Ball in the Lone Star Stadium
Tax curveballs to watch for when conducting business in Texas

by Nikki Dobay and Catalina Baron
May 5, 2026
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Over the last few years, some top US companies have relocated their headquarters to Texas or committed to doing so (among them Tesla, Chevron, SpaceX, and Coinbase). Similarly, the New York Stock Exchange announced that it would relocate its Chicago branch to Dallas. This move, of course, is a natural result of the inception of “Y’all Street”—the Texas Stock Exchange.

Texas’ business-friendly regimes and practices have been instrumental in the state’s ability to attract such major enterprises. The state has created many tax incentives to promote and engage business development. Nevertheless, certain aspects of the state’s tax regime can throw (and have thrown, in our experience) unexpected curveballs at organizations in the business sector. This article summarizes recent incentives promoted in Texas and highlights major areas to which taxpayers should pay attention. Readers should note that this piece aims to caution, not dissuade; we authors consider Texas to be a great state for conducting business (and one of us even calls it home).

Recent Business-Friendly Tax Incentives

In 2025, Texas held its eighty-ninth legislative session, approving several tax incentive proposals meant to promote business development in the state. We summarize some of the major, non-property-tax-related1 advancements below.

R&D Credit Incentives

SB 2206, which became effective on January 1, 2026, allows for a significant expansion of the state’s research and development (R&D) credit.2 Specifically, the credit rate increased to 8.722 percent (up from five percent) for most industries.3 Moreover, the new regime follows the federal R&D credit more closely, allowing for greater efficiencies.4 Finally, and to facilitate administering the tax for taxpayers and the state comptroller, Texas repealed the sales and use credit portion, making the credit exclusively applicable to the franchise
tax regime.5

Data Center Incentives

Texas provides a temporary sales tax exemption for the sales and use tax regime for purchases made by qualifying data centers.6 The exemption period ends ten or fifteen years from the certification date, depending on the amount of capital investment made.⁷ This exemption is unique to data centers—no similar exemption exists for other industries.

Updates to the No-Tax-Due Threshold

For franchise tax purposes, the no-tax-due threshold was significantly increased for the 2024 tax year, climbing to $2,470,000 (from the $1,230,000 threshold in place for 2022–2023) as a result of SB 3, which passed in July 2023.8 In addition, the no-tax-due report is no longer required if an entity’s revenue is below the annual threshold (effective January 1, 2024).9

Proceed With Caution

Although these business-friendly changes are certainly helpful, certain not-so-great aspects
of the state’s tax regime emerge often, leading
to assessments and disagreements with the
Texas comptroller.

Curveball 1: Sales and Use Tax on Data Processing

One of the biggest curveballs has been the increase in audits and assessments related to the taxation of data processing. The state has long imposed sales and use tax on data processing. Most recently, in 2024, the comptroller proposed updates to its regulation, Texas Administrative Code Section 3.330, significantly expanding the reach of the tax.10

The definition of “data processing” is (and has always been, but now more than ever) comprehensive. The statute, Texas Tax Code Section 151.0035, broadly defines the term to include “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, . . . other computerized data and information storage or manipulation” and “the use of a computer or computer time for data processing.”11 Section 151.0035 provides for an exemption of twenty percent of the service charge from the tax.

The comptroller’s regulation, however, is much more extensive. Rule 3.330 provides a list of items that Texas considers data processing (for example, word processing, data entry, computer time sharing, information compilation, other computerized data, and information storage or manipulation) as well as a list of items that it does not consider data processing (for example, legal and accounting professional services, custom software programming, internet access service, trainings).12

Both the statute and regulation provide that twenty percent of the total amount charged for data processing services is exempted from tax.13 But, if the data processing service is also taxable as another type of taxable service other than an information service, the twenty percent exemption does not apply.14

Data processing issues have been a consistent subject of discussion—sometimes contentious—with the comptroller’s office. Two areas need clarity: first, guidance to determine what services constitute data processing, and second, additional guidance on how to treat bundled transactions.

In its most recent updates to Rule 3.330 (effective from April or October of 2025, depending on the relevant section), the comptroller spoke to the first issue by broadening the base of what constitutes “data processing.”15 The regulation now includes computerized entries, retrievals, searches, compilations, manipulation, and storage of data or information.16

The updates also made significant changes with respect to the second issue—the treatment of bundled transactions. Generally, if a transaction is bundled (meaning it includes a portion of data processing and a portion of a service that does not constitute data processing), the tax treatment is as follows: if the services are separately stated, the tax will apply only to the data processing portion.17 If the services are not separately stated (that is, there is only one charge), the entire charge is taxable if data processing is anything other than ancillary to the service provided.18

Note that the “ancillary” test is new and has replaced the “true object” test, which has been tested and backed by years of court guidance and application.19 Under the new rule, the ancillary test requires a determination as to whether data processing is secondary (or ancillary) to the main service.20

Specifically, the updated inquiry considers whether the service is ancillary to the service provider, not the customer. Pursuant to the updated rule, the comptroller “may consider the extent to which the service provider exercises discretion or judgment in individual applications of the processed data based on knowledge of the physical sciences, accounting principles, law, or other fields of study.”21 The routine or repetitive manipulation of data by the seller is a factor suggesting that the data processing activity is not ancillary to another service and should be taxable as a data processing service.22 Of course, the burden is on the taxpayer to demonstrate the ancillary nature of the data processing aspects within the service.23

Some members of the Texas comptroller’s office would likely argue that the updated language in Section 3.330 covers most actions involving data and a computer or a website. In contrast, some—including we authors—maintain that the breadth of the statute requires a much narrower application, and that this expansion of the tax base requires legislative action. And, finally, we have yet to see whether Texas courts decide to respect (and subsequently apply) the “ancillary” test after having upheld the “true object” test for such a long time. For the time being, however, taxpayers will be required to work to resolve the large assessments that we expect the comptroller to send their way.

Curveball 2: Limited Guidance on the Manufacturing Credit as It Relates to the Energy Sector

Another big curveball is the limited guidance that exists for the applicability of the sales and use tax regime as it relates to one of Texas’ largest business sectors: oil and gas. The state’s manufacturing exemption, found in Texas Tax Code Section 151.318, generally provides that property used in manufacturing will be exempt from tax.24

Much like the data processing regime, the application of the exemption is often unclear. The statute provides a list of the items included within the confines of the manufacturing exemption as well as a list of items that do not constitute manufacturing. But everything in between is up for grabs.

Although “processing” constitutes manufacturing,25 guidance as to what constitutes processing is not straightforward. Rule 3.300 of the Texas Administrative Code outlines the general eligibility criteria required under a typical manufacturing or processing scenario.26 Certain scenarios are included within the rule’s guidance. For example, only manufacturers (processors, fabricators, sub-manufacturers, and custom manufacturers) can invoke the exemption.27 Contractors building the facilities cannot claim it.28

Letter rulings issued by the comptroller’s office can be helpful (at times) but are not very comprehensive. As an example, in Private Letter Ruling No. 201907005L (issued in 2019)—which relates to the solar industry—the comptroller concluded that solar panels were exempt from sales tax.29 The same ruling, however, concluded that items such as fixed racking, tracker racking, support posts, and similar items did not constitute “components of manufacturing equipment.”30 The ruling provided that, to be exempt, items had to be “reasonably essential” to the production of the manufacturing equipment, and, because these items serviced multiple items of manufacturing equipment, they could not be essential to the manufacturing or enjoy the benefits of the exemption.31

Another example—involving the liquefied natural gas industry—appears in Texas Private Letter Ruling No. 201501032L, last updated in 2015.32 Here, the comptroller concluded that at least some activities within a particular liquefied natural gas facility were exempt as processing, but that “each piece of equipment used in the [f]acility’s operation” needed to “stand on its own and meet qualifications for exemption.”33

We have seen issues arise where companies claim a blanket exemption, whereby all materials and equipment purchased are subject to the manufacturing exemption. Here we advise caution, because guidance is clear that a separate analysis must be made for each material or piece of equipment, and the business must be prepared to defend its position on audit.

Considering all of this, it is easy to see why the rules create frustration. Ultimately, they are complex and not always easy to decipher and sometimes seem to conflict with the policy goal behind the exemption, to incentivize production and business in Texas. For the time being, however, businesses should keep these concerns front-of-mind until (it is hoped) they are rectified someday.

Curveball 3: Public Information Reports, Foreclosures, and Personal Liability

Finally, although we have seen improvements (as evidenced by the elimination of the no-tax-due report), the state’s reporting requirements have led to a fair share of not-so-friendly encounters with the comptroller’s office.

In Texas, all taxable entities (corporations, LLCs, limited partnerships, professional associations, and financial institutions) that are organized in or have nexus with the state of Texas must file Form 05-102, a Public Information Report (PIR).34 This form is separate from the state’s franchise tax forms and other required returns.

The specific concern is that when the PIR is not filed, the entity may be deemed forfeited, which precludes it from transacting business in Texas35—even when a franchise tax report is properly filed or when no franchise tax report is required because a business’ receipts are below the no-tax-due threshold.36

Here comes an even bigger concern: if the entity is forfeited, not only must the recertification process occur with the Texas secretary of state (rather than with the comptroller), but the business also risks losing its limited liability protections, and liability thus might be imposed on the entity’s officers.37 Texas Tax Code Section 171.255 provides that “[i]f the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived.”38 This rule is concerning by itself, and worsened by the fact that few people appear aware of it.

Avenues for Resolution

Although the Texas tax world includes certain danger zones, some of which appear to arise from left field, taxpayers do have avenues for resolving disputes with the comptroller’s office. The state has a fantastic voluntary disclosure program, whereby taxpayers can proactively (and anonymously, if preferred) enter into a contract with the state to pay owed taxes before the comptroller’s office contacts them. These agreements usually protect taxpayers from the imposition of penalties and interest.

Moreover, taxpayers may request private letter rulings, and the comptroller’s office will generally opine on taxability for certain industries or transactions. Finally, the state’s administrative remedy path allows for resolution before litigation in state district court. We note, however, that tax disputes cannot be heard by the new Texas Business Court, the reason being that a tax dispute is, for all intents and purposes, a case against the state and thus cannot be decided in that court.

Overall, we still consider Texas to be an incredibly business-friendly state. We are hopeful that the state continues to focus on tax incentives that will drive economic growth, while sustaining the relationship between the business sector and the comptroller.

Nikki Dobay is co-chair of Greenberg Traurig’s US state and local tax practice. Catalina Baron is an associate in Greenberg Traurig’s tax practice.

Endnotes

  1. We exclude property tax in this piece merely because of the number of proposals that would have to be summarized. We acknowledge that an efficient property tax scheme is one reason individuals move to the state (these individuals being important business employees). Nonetheless, our goal is to focus on entity-based incentives and shortcomings, not those related to personal taxation.
  2. Texas SB 2206, 89th Leg., RS (2025).
  3. Texas SB 2206 (2025).
  4. Texas SB 2206 (2025).
  5. Texas SB 2206 (2025).
  6. See Texas Tax Code Sections 151.359; 151.317; 34 Texas Admin. Code Sections 3.286; 3.295; 3.335.
  7. See 34 Texas Admin. Code Section 3.335(g)(2).
  8. See Texas Comptroller No Tax Due Reporting for 2024 and Later, https://comptroller.texas.gov/taxes/franchise/ntd-rpt-updates-2024.php.
  9. See Texas Comptroller No Tax Due Reporting for 2024 and Later.
  10. See 34 Texas Admin. Code Section 3.300.
  11. Texas Tax Code Section 151.0035.
  12. See 34 Texas Admin. Code Section 3.300.
  13. See Texas Tax Code Section 151.351; 34 Texas Admin. Code Section 3.330(c)(4).
  14. See Texas Tax Code Section 151.351; 34 Texas Admin. Code Section 3.330(c)(4).
  15. See 34 Texas Admin. Code Section 3.300.
  16. See 34 Texas Admin. Code Section 3.300.
  17. See 34 Texas Admin. Code Section 3.300.
  18. See 34 Texas Admin. Code Section 3.300.
  19. See 34 Texas Admin. Code Section 3.300.
  20. See 34 Texas Admin. Code Section 3.300.
  21. Texas Admin. Code 3.330(a)(C)(iv).
  22. Texas Admin. Code 3.330(a)(C)(iv).
  23. Texas Admin. Code 3.330(a)(C)(iv).
  24. See Texas Tax Code Section 151.318.
  25. See Texas Tax Code Section 151.318(a)(1)(2).
  26. See 34 Texas Admin Code Section 3.300.
  27. See 34 Texas Admin Code Section 3.300(a)(8).
  28. See 34 Texas Admin Code Section 3.300(a)(8).
  29. Texas Private Letter Ruling No. 201907005L (July 8, 2019).
  30. Texas Private Letter Ruling No. 201907005L (July 8, 2019).
  31. Texas Private Letter Ruling No. 201907005L (July 8, 2019).
  32. Texas Private Letter Ruling No. 201501032L (updated January 27, 2015).
  33. Texas Private Letter Ruling No. 201501032L (updated January 27, 2015).
  34. Note the existence of a similar Ownership Information Report. The Ownership Information Report, Form 05-167, must instead be filed by taxable entities other than corporations, LLCs, limited partnerships, professional associations, and financial institutions. See Texas Comptroller Public Information Report and Ownership Information Report Guide, https://comptroller.texas.gov/taxes/franchise/pir-oir-filing-req.php.
  35. See Texas Comptroller Public Information Report and Ownership Information Report Guide.
  36. See Texas Comptroller Public Information Report and Ownership Information Report Guide.
  37. Texas Tax Code Section 171.255.
  38. Texas Tax Code Section 171.255(a).