Sales Tax Audit 2025

Lessons learned from the Sales Tax Audit 2025

We recently completed a Texas sales tax audit, and it was quite an ordeal for both sides. To maybe illustrate the challenges in this one for us, is that we are nearly celebrating 70 years, and I’m the third generation of the family business. Our only prior experience with an audit was nearly 30 years ago, I was becoming a senior in high school and our filing system was just graduated in a single file cabinet since the cigar box was too small. I’m told the focus was almost entirely on sales, and nothing more.

This time around, the audit included both sales and purchases, which was a major change. This development should have been one we noticed, as we had customers over the last several years calling us for copies of invoices they never filed. Our auditor also quickly realized how unique our operation is as a wholesale grower operating under agricultural exemptions, which added another layer of complexity.

Thirty years ago there were no computers — invoices were literally pulled at random from boxes. Imagine my parents’ surprise when the auditor asked us to export our entire general ledger into Excel and hand it over. That alone caused some concern, and I had to research whether this was even standard procedure. It turns out a lot has changed in three decades, and thankfully our software made this part manageable.

The customer side of the audit was fairly straightforward. We had advance notice of the appointment, so we proactively went through our entire drawer of Texas Sales and Use Tax Resale Certificates and Exemption Certificates. Using the Comptroller’s website, it was relatively easy to verify customer numbers and names. We didn’t even have but a dozen we had to request updated forms from – and all of them companies that changed owners or names over the years.

Because collecting and entering exemption data has long been part of our customer setup process, this portion of the audit went smoothly.

The real surprise came when the Comptroller handed us an Excel spreadsheet listing accounts payable invoices and general ledger items they wanted copies of, covering roughly December 2021 through spring 2025 — nearly three and a half years. In the middle of this was also a computer change over, and our old server was no longer accessible to pull more data from.

Understanding that this was going to be a thorough discovery process, I decided to take the approach of “you get more flies with honey than vinegar.” Rather than being defensive, we chose to work openly with the auditor.  To their credit, our auditor was excellent to work with. They openly acknowledged that it was clear we were trying to do things correctly, but that mistakes happen — largely because the tax code is anything but simple to follow. There is no single easy resource that explains everything clearly, and when you’re busy running a business, it’s not always realistic to stop and request formal rulings on the many things that come across the desk.

During the audit, researching answers on our own proved difficult. The Comptroller’s website had recently been updated, and many Google links — and even ChatGPT results — still pointed to outdated pages. ChatGPT at least could give me keywords and paragraph numbers to track down what was needed.  Even when we used the new site, the internal search function wasn’t always helpful. As a result, many questions had to go directly to the auditor, who often needed a few days to research and point us to the correct rulings.

The most eye opening part was talking with our customers and other vendors. While talking with customers in our parking lot, I was shocked by how many landscapers I’ve known for decades said their audits resulted in $40,000–$60,000 assessments. We had a vendor that admitted they got taken for roughly the same amount as they tracked their sales more than their own purchases as well.

Nearly all of them tripped over the same issue: the nuance between “new residential construction” vs landscaping a newly purchased or newly built home. There was also confusion between itemized invoices and lump-sum contracts.  Two of the customers I talked to admitted they simply paid tax on all their purchases, and then charged tax to customers to avoid risk — even though this sometimes caused them to lose bids to competitors who also misunderstood the law and weren’t charging tax at all – and admitted they knew they were losing money but didn’t want the headache in another audit.

Contractors that had lump sum invoices versus itemized invoices affected us greatly. We had vendors who painted buildings, repaired wells, worked on potting machines and tractors that billed differently for different jobs. Some preferred itemized invoices to clearly document labor and parts. Others preferred lump-sum contracts because the tax rules are simpler.

Unfortunately, some invoices fell into a gray area — not fully lump sum, not clearly separated — and no tax was collected. The Comptroller will not accept this as an excuse. Ultimately, the responsibility fell on us - There is no finger-pointing allowed.

What We Learned as a Grower

It became very clear that:

• what applies to a landscaper does not necessarily apply to a grower,
• what applies to retail does not apply to wholesale,
• and what applies to hardscape suppliers doesn’t apply to either.

However, one guiding rule stood out clearly:

Anything used exclusively in the production and sale of our agricultural product is tax exempt.

The word exclusive turned out to be far more important than we ever realized.

Additionally, the Comptroller ultimately wants the tax calculated based on who the end user is.
 This wasn’t always a question I thought to ask early on, but in hindsight it explains many of the issues we — and others in our industry — run into.

For landscapers and retailers especially, the question often needs to be:

Who is the end user of this product or service? That’s who the taxes get calculated on. 

The initial discovery phase uncovered enough to trigger a full audit. Fortunately, the second round — the actual audit — did not reveal anything severe. Our final assessment did not reach five digits, and we were told it was low enough that the state would not conduct a follow-up audit next year. Considering the time and resources involved, we can only assume we didn’t generate much revenue for the state — which we’ll gladly accept. The money spent probably was more than the time and effort on our part hunting down all the paperwork, but the time lost working on other projects can’t be calculated. I personally felt it exceeded the amount it paid.

Specific Lessons Learned for us :

• Lump-sum vs. itemized contractor invoices:
   Lump-sum contracts assume the contractor paid tax on materials. Once invoices are itemized, materials — and sometimes labor — may become taxable depending on the type of work.
• Non-greenhouse buildings:
   Repairs and parts for buildings used strictly for production but not classified as greenhouses were still considered non-residential repairs and therefore taxable.
• Shade cloth:
   Even though we sell shade cloth to protect plants during transport, it is not used exclusively in production. The customer is the end user — meaning we must charge sales tax, exempt or not. This one confused even our long-time exempt customers. Our computer programmer also had issues with selling a taxable item for customers marked exempt.
• Exclusive-use equipment:
   A printer used exclusively for printing plant tags qualifies for exemption — including ink, paper, and repairs. But once it’s used for anything else, nothing is exempt. The same logic applies to parts that could be used on both tractors and road vehicles (zip ties for example, a full case of nuts and bolts, and wire connectors for example). It applied so much to so many areas in the nursery, we changed our policy to include breaking up purchases in two so one can be taxed and one can be exempt.
• Software:
   General software versus custom software is taxed differently, which in our case actually worked in our favor. Anything that is listed as "custom programming" is exempt. 
• Out-of-state vendors:
   If they don’t charge Texas tax, the responsibility falls on you to determine whether tax should have been paid and remit it yourself.

While waiting on the second round results, I decided to self-audit the general ledger accounts that weren’t sampled. That process was extremely educational.

• Many :”Software as a Service”  (time clocks, repair tracking apps, cloud software, Microsoft Office, antivirus, website hosting, ChatGPT subscriptions, job-board listings, etc.) are taxable — though eligible for the 20% discount.
• Several out-of-state vendors were collecting tax, but not always at correct rates. 
• Gravel inside a greenhouse may be exempt during initial construction, but reapplying it years later becomes taxable — while most greenhouse repairs remain exempt. This also applied to rebuilding the base of our roads in between all the blocks.  
• We learned that in addition to the standard 0.5% timely payment discount, Texas allows a 1.75% total discount if tax is estimated and prepaid a month in advance.
• Perhaps most surprising: we discovered there were actually more exemptions we were missing than taxes we owed, at nearly a 2-to-1 ratio. Every month we adjust our payments for invoices, and we have yet to have to pay more than what we receive back.

With everything we learned, we were able to:

• rewrite internal tax guidelines,
• clarify which purchases are taxable or exempt,
• identify refund opportunities,
• and completely reorganize our filing system.

If there is one recommendation I would strongly make:

Build a clean, consistent filing system now — your future audited self and your staff will thank you.

Now that it’s over, it’s clear that the Texas sales tax code is a cumbersome beast. Not only do business owners struggle with it — even the auditor occasionally needed days to research answers.

What one grower learns may not apply to a landscaper. What a landscaper knows may not apply to retail. In our case, we have written a one page handout for new customers to explain how we handle tax exemption on purchases, and what they need to do at minimum to even be eligible to claim exemption.