Texas Sales Tax Audit Risk for Restaurant Franchisees

How Texas Sales Tax Audits Work

Texas is unique among many states in how it treats restaurant operations. It commonly audits restaurants using sample-based methodologies rather than full-detail reviews. While efficient for the state, this approach can significantly magnify small errors.

Here’s why:

• Restaurant transactions are typically low-dollar but extremely high-volume
• Texas auditors often limit the number of strata in a sample
• Errors in low-dollar strata are projected across massive populations
• A small per-transaction error can balloon into a six- or seven-figure assessment

In practice, what looks immaterial at the transaction level can quickly become significant.

Unlike most jurisdictions, Texas allows manufacturing-related exemptions to apply to certain restaurant activities. This creates meaningful opportunity, but only if those exemptions are properly identified, documented, and defended.

For franchisees, this means:

• There may be significant overpaid tax already embedded in historical data
• Audit exposure may be overstated due to sampling distortion
• Recovery opportunities are often missed entirely without audit-stage expertise

Understanding how Texas applies these rules, and how auditors project results, is critical for long-term financial success.

Why Restaurant Franchisees Are Especially Vulnerable

Large franchise groups often operate dozens (or hundreds) of locations under a single entity. That scale creates challenges that corporate-owned restaurant models don’t always face, including:

• Decentralized purchasing and vendor relationships
• Reliance on local service providers who may not understand Texas tax rules
• Internal review thresholds that exclude low-dollar transactions
• Limited in-house tax resources focused primarily on compliance deadlines

When an audit begins, these factors converge, and franchisees are often caught reacting rather than planning.

Timing Matters: Audit vs. Overpayment Reviews

Franchisees often ask whether they should pursue recovery proactively or wait until an audit occurs.

There are key differences between the two processes. Audit-related reviews often move faster because the state is already engaged. Resolution timelines can be significantly shorter when aligned to audit cycles. And projection methodology can work in the franchisee’s favor when addressed correctly. It’s important to note that overpayment reviews are considered a valuable option, but audit timing changes the economics and urgency of the work required.

What Franchisees Should Do Before (or During) an Audit

Large franchise groups operating in Texas should consider:

• Reviewing how low-dollar transactions are handled internally
• Evaluating exposure and recovery through the lens of Texas sampling practices
• Identifying whether manufacturing-related exemptions are being fully captured
• Engaging advisors who understand restaurant operations and Texas audit strategy, not just general sales tax rules

The goal isn’t just recovery—it’s preventing inflated assessments and improving audit outcomes.

Final Thoughts

Many franchisees don’t realize how exposed they are until an audit is already underway. By then, the projection math is already working for better or worse. With the right strategy, Texas’s audit environment doesn’t have to be a liability. For large restaurant franchisees, it can be an opportunity to recover overpaid tax, reduce risk, and strengthen compliance going forward.

DMA works with large, multi-location restaurant operators and franchise groups to navigate Texas sales and use tax audits, identify recovery opportunities, and manage risk where it matters most and at scale.