Can a property-holding subsidiary use its parent company's Texas R&D sales tax exemption registration when the subsidiary purchases items that the parent actually uses in research?

⚠️ Note on repealed exemption

STAR flags this ruling with a standing alert: Senate Bill 2206 (89th Texas Legislature) repealed Tax Code § 151.3182 — the entire research and development sales tax exemption this ruling interprets — effective January 1, 2026. That effective date has already passed as of this writing. The entity-structure holding below explains how the Comptroller read the now-repealed exemption while it existed, which remains useful historical context (e.g., for open audit periods predating the repeal), but no business can claim this exemption for purchases made on or after January 1, 2026.

Plain-English summary

The Texas Comptroller ruled that a property-holding subsidiary could not use its parent company's Texas research-and-development (R&D) sales tax exemption registration to buy equipment and materials tax-free, even though everything the subsidiary purchased was actually used by the parent in the parent's own qualified research.

The taxpayer was a shell subsidiary set up only to buy land and build facilities for its parent — it had no employees and generated no revenue of its own; the parent funded it and used its facilities and equipment. The parent had properly registered for the R&D exemption based on its own qualified research, but the subsidiary (which was the one actually making the taxable purchases) had not registered.

The Comptroller held that the R&D exemption under § 151.3182 requires the same entity to both purchase the item and be the one engaged in qualified research using it — a related entity's research activities or registration number cannot be borrowed. The Comptroller drew on a 2010 manufacturing-exemption case, Laredo Coca-Cola Bottling Co. v. Combs, which similarly held that a distributor couldn't claim a manufacturing exemption on equipment it gave to customers to use in manufacturing, because exemptions are read strictly and the purchaser itself must be the one doing the exempt activity.

The Comptroller also rejected a fallback argument that the subsidiary's transfer of the items to the parent was a tax-free "sale for resale": there was no written agreement, no clear consideration paid by the parent, and — for construction materials specifically — the materials weren't passed along in the same form they were purchased in (they'd been built into facilities), so the resale exemption didn't apply either.

What this means for you

Corporate groups using a property-holding or "NewCo" subsidiary structure

If you route R&D-related purchases through a separate holding entity that itself doesn't do the qualified research, that entity cannot rely on an affiliated company's exemption registration — each entity's own exempt-purchase eligibility depends on that entity's own qualifying activity. (This specific exemption is now repealed regardless — see the note above.)

Businesses that formerly claimed the R&D sales tax exemption

Confirm your purchase-and-registration structure lined up correctly for any purchases made before the January 1, 2026 repeal, since audit periods for pre-repeal purchases can still turn on this entity-matching requirement. No new purchases can claim this exemption going forward.

Accountants and tax professionals

This ruling is a clean statement of the general Texas principle — reinforced by Laredo Coca-Cola — that use-based sales tax exemptions (manufacturing, R&D, and similarly structured exemptions) require the purchaser and the qualifying-activity performer to be the same legal entity, absent a specific statutory exception. That principle likely still applies to Texas's remaining use-based exemptions even though § 151.3182 itself is gone.

Common questions

Q: Can a parent company's R&D exemption registration cover purchases made by its subsidiary?
A: No, per this ruling. The exemption required the purchasing entity itself to be the one engaged in qualified research; a subsidiary buying items for its parent's use couldn't borrow the parent's registration or research activity.

Q: Does this exemption still exist?
A: No. Senate Bill 2206 repealed Tax Code § 151.3182 effective January 1, 2026, which has already passed. No taxpayer can claim this exemption for current or future purchases.

Q: Was the transfer from the subsidiary to the parent treated as a tax-free resale?
A: No. There was no written agreement or clear consideration for the transfer, and the construction materials weren't passed to the parent in the same form purchased (having been built into facilities), so the sale-for-resale exemption didn't apply.

Q: Can I rely on this ruling for my own situation?
A: Only the taxpayer it was issued to could ever rely on it, and even then only for purchases made before the exemption's January 1, 2026 repeal. It's useful as an illustration of the "same entity must purchase and perform the exempt activity" principle, which may still apply to other Texas use-based exemptions.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.3182 (Certain Property Used in Research and Development Activities) — REPEALED effective 2026-01-01 by S.B. 2206, 89th Legislature
• Tex. Tax Code § 151.318 (Property Used in Manufacturing — comparable use-based exemption)
• Tex. Tax Code § 151.005 (Sale or Purchase — consideration requirement)
• Tex. Tax Code § 151.006 (Sale for Resale — same-form requirement)
• 34 Tex. Admin. Code Rule 3.340 (Qualified Research)
• Laredo Coca-Cola Bottling Co. v. Combs, 317 S.W.3d 735 (Tex. App.—Austin 2010, rev. denied)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202302017L

Original ruling text

ALERT: Senate Bill 2206, 89th Legislative Session, repeals Tax Code Section 151.3182 relating to the exemption for certain property used in research and development activities. Effective 01/01/2026.

Feb. 22, 2023

RE: Private Letter Ruling No. PLR20221109154351

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Oct. 25, 2022. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance concerning whether items purchased by one entity and used by a related entity in qualified research activities may be eligible for the research and development (R&D) tax exemption provided by Tax Code, Section 151.3182 (Certain Property Used in Research and Development Activities; Reporting of Estimates and Evaluation).

Facts Presented

** (Taxpayer) is a wholly owned subsidiary of ** (Parent). Taxpayer was set up to purchase vacant land and construct facilities in Texas for Parent. Parent’s Texas operation and its Texas employees are located at Taxpayer’s facility.

Taxpayer does not have any employees, nor does it generate, or plan to generate, any revenue. Parent funds all of Taxpayer's activities by transferring cash to Taxpayer.

Taxpayer purchases items that are used by Parent in Parent’s research and development activities. Parent applied for and received a Texas Qualified Research Registration Number that allows Parent to claim an exemption from Texas sales and use tax when purchasing qualifying tangible personal property to be used in qualified research. Taxpayer has not applied for a Texas Qualified Research Registration Number.

On February 21, 2023, Tax Policy met with Taxpayer to discuss this PLR request. During this meeting Taxpayer explained that the items purchased by Taxpayer and used by Parent included land, materials to build improvements to land, and other items. Taxpayer also verified that it has no employees, the property was used and possessed by employees of Parent, and there is no written agreement between Taxpayer and Parent for the use of the property.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: May Taxpayer use Parent's Texas Qualified Research Registration Number or Parent's research activities to qualify for the R&D sales tax exemption on Taxpayer’s purchases?

Ruling: No, Taxpayer may not use Parent's Texas Qualified Research Registration Number or its research activities to qualify for the R&D sales tax exemption to make its purchases tax-free. Only an entity engaging in qualified research is eligible for the sales tax R&D exemption.

Analysis: Section 151.051 (Sales Tax Imposed) imposes tax on each sale of a taxable item in this state. Section 151.010 (Taxable Item) defines “taxable item” as tangible personal property and taxable services. Section 151.3182 provides a sales tax exemption for the sale, storage, or use of depreciable tangible personal property directly used in qualified research. This exemption requires the property be sold, leased, or rented to, or stored or used by, a person who is engaged in qualified research.

In Taxpayer's case, the taxable transaction is the sale that occurs when Taxpayer purchases an item. The activities that would be necessary to support an exemption occur when Parent uses that item in its qualified research activities. Therefore, the question is whether the person performing the qualified research activities must also be the person on whom the sales tax is imposed for those activities to support a sales tax exemption.

Section 151.3182 and Rule 3.340 (Qualified Research) do not directly address this issue. However, the statutory language of Section 151.3182 is similar to the language of Section 151.318 (Property Used in Manufacturing). Both provide an exemption from sales tax for certain property that is sold, leased, rented, stored, or used in Texas. The only difference is that Section 151.3182 applies to a person who is engaged in qualified research while Section 151.318 applies to a person who is a manufacturer.

In a manufacturing exemption case, Laredo Coca-Cola Bottling Co. v. Combs, 317 S.W.3d 735 (2010) (Rev. denied), the Third Court of Appeals addressed an issue similar to the one presented by Taxpayer. Laredo Coca-Cola Bottling Co. (Laredo) was a distributer of soda, including syrups used in soda fountains. Laredo provided soda fountains to some of its customers free-of-charge. Laredo claimed that its customers' use of the soda fountains in manufacturing activities qualified Laredo's purchase of the soda fountains for the manufacturing exemption.

The court disagreed. Based, in part, on the requirement that exemptions from taxation be strictly construed, the court held that “…former section 151.318(g) of the tax code (the manufacturing exemption) does not exempt from taxation appellants' purchases of the fountain equipment at issue because the equipment is not used by appellants in manufacturing, processing, fabricating, or repairing tangible personal property."

While Laredo is not directly applicable to the R&D sales tax exemption, the principle that exemptions from taxation be strictly construed is applicable. Therefore, a similar result applies to the R&D sales tax exemption: the person claiming the benefit of the exemption must be the person who is using the property in qualified research activities.

Laredo also addressed the sale-for-resale exemption. The sale-for-resale exemption does not apply to Taxpayer and Parent's activities. Although Taxpayer does transfer possession of the items to Parent, there are no formal agreements relating to that transfer of possession. There is also no clear consideration from Parent to Taxpayer in exchange for that transfer, as is required under Section 151.005 ("Sale" or "Purchase") for there to be a sale. Even if there was consideration, the construction materials used to build the facilities are not provided to Parent in the same form or condition in which they were acquired, as is required under Section 151.006 ("Sale for Resale") for there to be a resale.

This ruling does not address whether Parent's activities meet the definition of qualified research because the question presented did not include that issue.

The Texas Tax Code and Texas Administrative Code are accessible at: www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. PLR20221109154351.

Sincerely,

Tax Policy Division – Direct Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1. Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.