Annual Information Report (AIR)

The Annual Information Report is a mandatory annual filing required by the Texas Comptroller for entities registered for the Research and Development Sales Tax Exemption to renew their status and report research expenditures. It serves as an administrative verification mechanism to ensure that businesses claiming exemptions on depreciable property continue to meet the statutory requirements of conducting qualified research within the state of Texas.

The implementation of the Annual Information Report (AIR) represents a critical intersection of tax policy and economic development strategy in Texas. Since the state introduced its dual-track research and development (R&D) incentive program in 2014, the AIR has functioned as the primary compliance instrument for the sales and use tax exemption pathway. While the franchise tax credit is managed through standard annual tax reporting cycles, the sales tax exemption requires a specialized registration and reporting structure to prevent the erosion of the state’s tax base while simultaneously fostering technological innovation. The report is not merely a collection of data; it is a legal prerequisite for the continued validity of a taxpayer’s Qualified Research Registration Number. Failure to submit the AIR by the statutory deadline of March 31 each year results in the immediate cancellation of the registration, potentially exposing the entity to significant back-tax liabilities, penalties, and interest on any tax-exempt purchases made during the period of non-compliance. This detailed analysis explores the statutory origins of the AIR, its relationship with federal standards, the administrative procedures mandated by the Texas Comptroller of Public Accounts, and the profound legislative shifts introduced by Senate Bill 2206, which will fundamentally alter this reporting landscape starting in 2026.

Statutory Foundations and the Dual-Track Incentive System

The Texas R&D incentive program was established to make the state a competitive destination for high-tech industries by offering a choice between two distinct tax benefits. A person or entity engaged in qualified research in Texas can claim either a sales and use tax exemption on the purchase of depreciable tangible personal property used directly in research or a credit against the state’s franchise tax based on qualified research expenses. The legislative intent, codified in Texas Tax Code Section 151.3182 and Chapter 171, Subchapter M, was to provide flexibility based on the capital and labor intensity of different research activities.

A fundamental constraint of this program is the prohibition against “double-dipping.” A taxable entity, including members of a combined group, cannot claim both the sales tax exemption and the franchise tax credit for the same period. This exclusivity forces taxpayers to perform a strategic cost-benefit analysis at the beginning of their research cycles. The Annual Information Report is the tool that anchors the sales tax side of this choice, requiring taxpayers to affirm annually that they have not crossed the boundary into the franchise credit territory.

Defining Qualified Research in a Texas Context

Texas law relies heavily on federal definitions to determine what activities merit tax incentives. Under the Texas Tax Code, “qualified research” is defined by cross-reference to Section 41(d) of the Internal Revenue Code (IRC). This alignment ensures that the state’s incentive program remains consistent with federal standards, which simplifies compliance for multi-state entities while maintaining a rigorous threshold for eligibility. To meet the “Four-Part Test” required for the Texas R&D incentive, the activity must satisfy the following criteria:

• Permitted Purpose: The research must be undertaken to develop a new or improved business component, focusing on function, performance, reliability, or quality.
• Elimination of Uncertainty: The taxpayer must intend to discover information that would eliminate uncertainty concerning the development or improvement of a product or process.
• Process of Experimentation: Substantially all activities (generally interpreted as 80% or more) must constitute a systematic process designed to evaluate alternatives and resolve technical uncertainties.
• Technological in Nature: The research must rely on principles of physical science, biological science, engineering, or computer science.

The AIR requires the taxpayer to certify that the activities for which they are claiming exemptions fall within these qualified categories. The exclusion of “style, taste, cosmetic or seasonal design factors” is a critical distinction that prevents the credit from being utilized for purely aesthetic product iterations.

Administrative Guidance and the Registration Process

The Texas Comptroller’s office provides extensive guidance on how to navigate the registration and reporting lifecycle. The process begins with Form AP-234, the Texas Registration for Qualified Research and Development Sales Tax Exemption. This registration is the prerequisite for obtaining the eight-character Qualified Research Registration Number, which typically begins with the letters “RD” followed by six digits.

Initial Registration and Retroactive Claims

Taxpayers may select an effective date for their registration that is retroactive, provided they did not claim the franchise tax credit during the retroactive period. However, the state imposes strict limits on retroactivity: the date cannot precede January 1, 2014, and it cannot be more than four years prior to the date the registration is received by the Comptroller’s office. When applying for retroactive registration, the taxpayer must complete an AIR for each prior year covered by the retroactive request. This ensures that the state captures the same historical data it would have received had the entity been registered contemporaneously.

The Role of Form 01-931

Once a registration number is issued, the taxpayer does not simply stop paying tax; they must actively claim the exemption at the point of sale. This is accomplished by providing the retailer with a properly completed Form 01-931, the Texas Qualified Research Sales and Use Tax Exemption Certificate. The Comptroller explicitly states that generic exemption certificates are not acceptable for R&D purposes. The certificate must include the registrant’s “RD” number, and retailers are required to maintain these certificates in their records to justify the tax-free transaction during an audit.

Detailed Mechanics of the Annual Information Report (AIR)

The AIR is a specific reporting requirement for those who have chosen the sales tax exemption path. It is distinct from the annual franchise tax reports and must be filed electronically through the Comptroller’s Webfile system. The report is due on or before March 31 of each calendar year and covers research activities conducted during the prior calendar year.

Core Reporting Data Fields

The AIR is designed to collect quantitative data that allows the state to measure the economic impact of the R&D incentives. Every field in the report is required; if a specific question does not apply to the business’s activities for that year, the registrant must enter a zero rather than leaving the field blank.

The requirement to report “Total Texas QREs” even when claiming a sales tax exemption is critical. It allows the Comptroller to verify that the entity is maintaining a level of research activity that justifies the use of the sales tax exemption, even though the exemption itself is based on property purchases rather than wage expenses.

The Meaning of “Directly Used” in Research

The most litigated and scrutinized aspect of the R&D sales tax exemption is the definition of “direct use.” Comptroller guidance defines “directly” as having an immediate effect on an activity without an intervening, ancillary, or prior effect. In the context of the AIR, the property must be depreciable tangible personal property with a useful life of more than one year.

Common examples of equipment that often meet the direct use test include:

• Laboratory computers used for high-fidelity simulations of new product designs.
• Testing apparatus and specialized sensors used during the process of experimentation.
• Prototypes and the machinery used to fabricate them, provided they are not for commercial production.

Conversely, items used for administrative purposes, such as office furniture, general-purpose software, or equipment used after the beginning of commercial production, do not qualify and should not be included in the AIR’s reported purchase totals.

Comparative Analysis: AIR vs. PIR vs. OIR

Taxpayers frequently confuse the Annual Information Report (AIR) with other mandatory annual filings required by the state of Texas. It is vital for compliance officers to distinguish between these reports, as they have different due dates, purposes, and consequences for non-filing.

The Public Information Report (PIR) – Form 05-102

The PIR is a requirement of the Texas franchise tax system, not the R&D incentive program specifically. Every corporation, LLC, limited partnership, and professional association organized in Texas or having nexus in the state must file Form 05-102 annually. The primary purpose of the PIR is to maintain a public record of the entity’s officers, directors, and principal place of business. Unlike the AIR, which is due on March 31, the PIR is due on the same date as the annual franchise tax report (typically May 15).

The Ownership Information Report (OIR) – Form 05-167

The OIR is the equivalent of the PIR for entities that are not corporations or LLCs, such as general partnerships or trusts. Ownership information on the OIR is considered confidential and is not displayed on the Comptroller’s public Taxable Entity Search, whereas PIR information is public.

Key Differences and Overlaps

A critical insight for combined groups is that while the franchise tax report is filed as a single unitary group, each individual member of the group organized in Texas or having nexus must file its own separate PIR or OIR. However, for the R&D credit, the combined group is treated as a single taxable entity.

The Franchise Tax Credit Alternative

For many businesses, the labor component of R&D (wages) far outweighs the cost of depreciable equipment. These entities typically choose the franchise tax credit rather than the sales tax exemption. While these entities do not file the AIR, they must submit a specific set of schedules with their Long Form Franchise Tax Report (Forms 05-158-A and 05-158-B). These schedules include:

• Credits Summary Schedule (05-160).
• Research and Development Activities Credits Schedule (05-178).

Calculation Methodology for the Franchise Credit (Subchapter M)

Under the current law (Subchapter M), the credit amount is generally 5% of the excess of qualified research expenses in the current period over a “base amount”. The base amount is defined as 50% of the average of the qualified research expenses incurred in Texas during the three tax periods immediately preceding the report year.

For newer businesses that do not have three years of history, the credit is calculated at a reduced rate of 2.5% of the current period’s qualified research expenses. If the research is performed through a contract with a public or private institution of higher education, the rates increase to 6.25% (for the standard method) or 3.125% (for the no-history method).

The total credit claimed, including any carryforwards, cannot exceed 50% of the franchise tax due for the report period before other credits are applied. However, unused credits can be carried forward for up to 20 consecutive franchise tax reports.

The 2025 Legislative Transformation: Senate Bill 2206

The landscape of Texas R&D incentives is currently in a state of major transition following the enactment of Senate Bill 2206 by the 89th Texas Legislature in June 2025. This legislation represents a strategic pivot designed to simplify administration and increase the competitive posture of Texas in the global market for high-technology investment.

The Repeal of the Sales Tax Exemption and the AIR

The most significant change for AIR filers is that the sales and use tax exemption for R&D (Section 151.3182) and its associated reporting requirements are repealed effective January 1, 2026. This means that after the 2025 reporting cycle, the Annual Information Report will be phased out as the state moves to a single-track, permanent franchise tax credit system.

The Legislature’s reasoning for this repeal was rooted in administrative efficiency. The bifurcated system required the Comptroller to manage a separate registration database for sales tax exemptions, which had proven “inefficient to administer” compared to a unified credit applied against the franchise tax. By consolidating the incentive into the franchise tax, the state can utilize existing tax reporting frameworks and align more closely with federal audit outcomes.

The New Permanent R&D Credit (Subchapter T)

In place of the old incentives, SB 2206 creates a new Subchapter T within Chapter 171 of the Tax Code. This new credit is permanent, removing the December 31, 2026 sunset date that previously existed.

The new law also introduces “rolling conformity” to the Internal Revenue Code. The definition of qualified research expenses will now be directly tied to line 48 of IRS Form 6765 for research conducted in Texas, and the credit will follow federal law as in effect for the tax year for which the federal credit is claimed.

Refundability and Small Business Impacts

Perhaps the most radical change in SB 2206 is the introduction of refundability for certain taxpayers who incur QREs but have no franchise tax liability. This applies to:

• New veteran-owned businesses.
• Taxpayers whose computed franchise tax is less than $1,000.
• Taxpayers with total revenue at or below the “no tax due” threshold (currently $2.47 million).

This provision is designed to support startups and early-stage companies that are often in a pre-revenue or pre-profit phase and previously could not benefit from the non-refundable credit.

Transition Rules and Carryforwards

For entities currently filing the AIR, the transition to the new Subchapter T regime involves several critical rules. The repeal of the old credit (Subchapter M) does not affect unused credits that a taxable entity was authorized to carry forward. These legacy credits can still be applied for the duration of their original 20-year carryforward period.

The new law establishes a specific “hierarchy of use” for R&D credits:

1. Carryforwards from the pre-2008 Strategic Investment Area credit (expiring by Dec 31, 2027).
2. Carryforwards from the Subchapter M credit (accrued before Jan 1, 2026).
3. Carryforwards from the new Subchapter T credit.
4. Current year Subchapter T credits.

Notably, an entity is not eligible for the new Subchapter T credit if they (or any member of their combined group) received a sales tax exemption for property used in research during the period on which the report is based. This maintains the exclusivity principle between the old sales tax regime and the new enhanced credit regime during the transition period.

Example Scenario: BioGrowth Texas Inc.

To illustrate the interplay of the AIR, the sales tax exemption, and the transition to the new law, consider the case of “BioGrowth Texas Inc.,” a biotechnology firm established in Austin in 2022.

Stage 1: Initial Registration (2022-2023)

In 2022, BioGrowth invested $2,000,000 in specialized gene-sequencing equipment. They realized they could benefit from the sales tax exemption rather than wait for a franchise tax credit they wouldn’t use for years.

• Action: BioGrowth files Form AP-234 in late 2022, requesting a retroactive effective date of January 1, 2022.
• Result: They receive Registration Number RD654321. Because they were retroactive, they must file a retroactive AIR for the 2022 year and then a standard AIR by March 31, 2023.
• Savings: Assuming an 8.25% sales tax rate, the exemption saved the firm $165,000 at the point of purchase.

Stage 2: Ongoing AIR Compliance (2024-2025)

By 2024, BioGrowth has 15 full-time research employees and $3,000,000 in Texas QREs.

• Action: On March 15, 2025, they file their AIR via Webfile for the 2024 calendar year.
• Data Reported:
  • Total Qualified Purchases: $500,000 (new lab supplies/depreciable equipment).
  • Total Texas QREs: $3,000,000.
  • Full-time Employees: 15.
  • Payroll Expenses: $1,800,000.
• Result: Their RD number is renewed for 2025, and they continue to make tax-exempt purchases of laboratory supplies.

Stage 3: Transition to SB 2206 (2026 and Beyond)

On January 1, 2026, the sales tax exemption is repealed.

• Action: BioGrowth can no longer use its RD654321 number for new purchases. However, they now qualify for the enhanced 8.722% franchise tax credit under Subchapter T.
• Calculation: If their 2026 QREs are $4,000,000 and their average QREs from the prior three years (2023-2025) was $3,000,000:
  • Base Amount = $3,000,000 * 50% = $1,500,000.
  • Incremental QREs = $4,000,000 – $1,500,000 = $2,500,000.
  • Credit = $2,500,000 * 8.722% = $218,050.
• Small Business Benefit: Since BioGrowth’s revenue is still under the “no tax due” threshold, they can apply for this $218,050 as a refundable credit, receiving a cash infusion from the state to continue their research.

Audit Risks and Documentation Best Practices

The Annual Information Report is a self-reported document, making it a primary target for Comptroller audits. Taxpayers must be prepared to substantiate every figure reported in the AIR with contemporaneous documentation.

Documentation Categories

The Comptroller and the IRS both emphasize that documents must be “contemporaneous,” meaning they must be created as the work is being performed.

Statistical Sampling

Under the new SB 2206 rules, taxpayers and the Comptroller may use statistical sampling procedures for determining the amount of QREs. This is a significant administrative relief for large enterprises with thousands of research-related transactions, as it allows them to project total qualified expenditures based on a rigorous analysis of a representative sample. This procedure must follow the standards set forth in IRS Revenue Procedure 2011-42.

Regulatory Compliance: Rule 3.599 and Rule 3.340

The administration of these credits is governed by the Texas Administrative Code (TAC). Specifically, Rule 3.599 implements the franchise tax credit, while Rule 3.340 (and its predecessor Rule 3.335) governs the sales tax exemption and the AIR.

Rule 3.599 provides critical guidance on “funded research.” Research is considered funded—and thus ineligible for the Texas credit—if the entity performing the research retains no substantial rights to the results or if the payments are not contingent on the success of the research. For example, if a company is hired to perform research and the contract guarantees payment regardless of the outcome, that research is “funded” and the credit belongs to the party paying for the research, not the researcher. The AIR requires entities to distinguish between their own internal research and any work performed under contract for others.

Final Thoughts

The Annual Information Report remains the linchpin of the Texas R&D sales tax incentive through the end of 2025. While the state is moving toward a more streamlined, credit-based system under SB 2206, the current regime demands high levels of precision and administrative diligence. For those leveraging the sales tax exemption, the AIR is more than a reporting obligation; it is the annual re-certification of their status as an innovator in the Texas economy.

By understanding the granular requirements of the AIR—from the “direct use” of depreciable property to the specific headcounts of research staff—businesses can maximize their tax savings while minimizing the risk of costly audit assessments. As the transition to the new permanent, refundable credit approaches in 2026, the data captured in historical AIR filings will serve as the “base period” for the enhanced credits of the future. Therefore, maintaining rigorous AIR compliance today is the foundation for securing the increased benefits of tomorrow’s Texas tax landscape.