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Texas resale exemption and the cost-of-goods deduction for manufacturers

⚡ TL;DR

Texas has three distinct exemption mechanisms: the resale certificate (Form 01-339, no expiration), the manufacturing equipment exemption (direct use in production), and the data processing/SaaS 20% exclusion (only 80% of a SaaS charge is taxable — no certificate needed). Each has different requirements and applies to different seller types.

Texas has three distinct exemption mechanisms that confuse sellers: the resale certificate (standard), the manufacturing exemption (equipment), and the data processing/SaaS 20% exclusion (automatic, no certificate needed).

Key takeaways

Resale certificate:

  • Form 01-339 (Texas Sales and Use Tax Resale Certificate) or MTC/SST equivalents
  • Used by buyers purchasing for resale in the normal course of business
  • Seller exempts the transaction and retains the certificate
  • No expiration date on Texas resale certificates, they remain valid until the information changes

Manufacturing exemption:

  • Texas exempts machinery and equipment used directly in manufacturing or processing tangible personal property for sale
  • “Direct use” test: the equipment must directly make or process the product being sold, not administrative equipment or indirect-use items
  • Form 01-339 with manufacturing exemption reason checked (or state-specific manufacturing exemption certificate)
  • Also covers certain materials used or consumed in manufacturing

Data processing / SaaS 20% exclusion:

  • Texas taxes SaaS and data processing services as taxable services
  • Texas provides a statutory 20% exemption, only 80% of the charge is subject to the 6.25% state rate
  • This is not a certificate situation; the 20% exclusion is applied automatically by the tax calculation engine
  • Sellers of SaaS or data processing services to Texas customers must ensure their tax engine applies the 80% taxable base, not 100%

Texas Franchise Tax cost-of-goods deduction (separate from sales tax):

  • Texas’s Franchise Tax (margin tax on gross revenue) allows a cost-of-goods-sold deduction for manufacturers
  • This is an income/franchise tax matter, not a sales tax exemption
  • Manufacturers can deduct COGS when calculating their Texas Franchise Tax liability, distinct from and in addition to any sales tax exemptions on equipment purchases

Common seller errors

  • Taxing 100% of a SaaS charge to Texas customers (missing the 20% exclusion)
  • Accepting a customer’s resale certificate without verifying it’s Texas-specific or an accepted multi-state form
  • Conflating the Franchise Tax COGS deduction with sales tax exemptions

Frequently asked questions

How does the Texas resale exemption work?
Texas allows buyers who purchase goods for resale to provide a Texas Sales and Use Tax Resale Certificate (Form 01-339) to the seller. The seller accepts the certificate, exempts the sale from Texas sales tax, and retains the certificate for audit purposes. The buyer must be purchasing the item to resell in the normal course of business. Texas accepts its own form, the MTC Uniform Certificate, and the SST Exemption Certificate.
What is the Texas 20% exemption for data processing and SaaS?
Texas taxes SaaS and data processing services but provides a 20% exemption, meaning only 80% of the charge for data processing or SaaS is subject to Texas sales tax. A $1,000/month SaaS subscription is taxed on $800, not $1,000. This exemption is built into the taxability rule and is not an exemption certificate situation: the reduced taxable base applies automatically.

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