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NO.

11-0261

FILED IN THE SUPREME COURT OF TEXAS 11 September 19 P4:10 BLAKE. A. HAWTHORNE CLERK

In the Supreme Court of Texas


SUSAN COMBS, COMPTROLLER OF PUBLIC ACCOUNTS, OF THE STATE OF TEXAS, AND GREG ABBOTT, ATTORNEY GENERAL OF THE STATE OF TEXAS Petitioners, vs. ROARK AMUSEMENT AND VENDING, L.P., Respondents.
On Petition for Review from the Third Court of Appeals at Austin, Texas

BRIEF OF PETITIONERS SUSAN COMBS, COMPTROLLER OF PUBLIC ACCOUNTS AND GREG ABBOTT, ATTORNEY GENERAL OF THE STATE OF TEXAS
GREG ABBOTT Attorney General of Texas DANIEL T. HODGE First Assistant Attorney General BILL COBB Deputy Attorney General for Civil Litigation DAVID C. MATTAX Director of Defense Litigation JEFF M. GRAHAM Chief, Financial and Tax Litigation Division MARC A. BARENBLAT Assistant Attorney General State Bar No. 24038758 Financial and Tax Litigation Division P.O. Box 12548 Austin, Texas 78711-2548 Telephone: (512) 475-4255 Telecopier: (512) 477-2348 Attorneys for Petitioners

IDENTITY OF PARTIES AND COUNSEL Petitioners Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas Marc A. Barenblat Assistant Attorney General State Bar No. 24038758 Financial and Tax Litigation P. O. Box 12548 Austin, Texas 78711-2548 Phone: 512/ 475-4255 Fax: 512/ 477-2348 Roark Amusement & Vending, L.P. James F. Martens Martens, Seay & Todd State Bar No. 13050720 301 Congress Ave., Ste. 1950 Austin, Texas 78701 Amanda Taylor Hohmann, Taube & Summers, L.L.P. State Bar No. 24045921 100 Congress Ave., 18th Floor Austin, Texas 78701

Petitioners Counsel

Respondent Respondents Counsel

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TABLE OF CONTENTS IDENTITY OF PARTIES AND COUNSEL ...................................................................... ii INDEX OF AUTHORITIES ............................................................................................... v STATEMENT OF THE CASE ........................................................................................ viii STATEMENT OF JURISDICTION .................................................................................. ix ISSUES PRESENTED ....................................................................................................... ix STATEMENT OF FACTS .................................................................................................. 2 SUMMARY OF ARGUMENT ........................................................................................... 2 ARGUMENT A. The appellate decision is based on a misinterpretation of tax statutes ..................... 3 1. The transfer of the plush toys is not an integral part of Roarks service ........... 3 2. Tax exemptions must be strictly construed against the taxpayer ....................... 6 3. Roarks reliance on 7-Eleven is misguided ........................................................ 7 4. Roarks attempted analogies to tournament sponsors, janitorial service providers and bowling alley operators are readily distinguishable ...... 9 B. As it pertains to the tax treatment of merchandise used by operators of games in which each participant does not receive a prize, Comptroller Rule 3.301(b)(2) is valid, directly on point and entitled to deference. .................. 14 C. The decision of the court of appeals expands the scope of the sale-for-resale exemption beyond that which the legislature intended. ......................................... 18 1. There is no circumstance in which Roarks specific service would ever be subject to sales and use tax .......................................................................... 18 2. The Third Courts decision is based on a misapplication of this Courts precedent as well as its own prior decisions in Raytheon and 7-Eleven. ......... 21
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PRAYER ........................................................................................................................... 25 CERTIFICATE OF SERVICE .......................................................................................... 27 APPENDIX Order on Summary Judgment (February 22, 2010)..................................................... Tab A Opinion of the Third Court of Appeals (January 26, 2011) ........................................ Tab B Tex. Tax Code Ann. 151.006 (West 2009) .............................................................. Tab C Tex. Tax Code Ann. 151.302 (West 2009) .............................................................. Tab D Tex. Comp. Pub. Accts, Hearing Nos. 46,885, 2006 WL 4007577 (Aug. 31, 2006); 43,477, 2003 WL 22148970 (May 14, 2003); 39,909 & 39,110, 2001 WL 1821659 (Oct. 23, 2001); 33,665, 1997 WL 806986 (Dec. 21, 1997); 27,467, 1991 WL 157425 (July 22, 1991) and 26,058, 1990 WL 149561 (Sept. 17, 1990) .................... Tab E Beal Amicus Letter ....................................................................................................... Tab F 34 Tex. Admin. Code 3.301 (1988) (Promotional Plans, Coupons, Retailer Reimbursement) ............................................................................................. Tab G Tex. Tax Code Ann. 151.335 (West 2009) .............................................................. Tab H Comptroller Letter 9611765L ........................................................................................Tab I

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INDEX OF AUTHORITIES CASES 7-Eleven, Inc. v. Combs, 311 S.W.3d 676 (Tex. App.Austin 2010, pet. denied) ............................................. passim Bullock v. Natl Bancshares Corp., 584 S.W.2d 268 (Tex. 1979) ............................................................................................... 6 Combs v. City of Webster, 311 S.W.3d 85 (Tex. App.Austin 2009, pet. denied) ...................................................... 18 Day & Zimmerman, Inc. v. Calvert, 519 S.W.2d 106 (Tex. 1975) ............................................................................................. 21 DTWC v. Combs, et al., appeal docketed, No. 03-10-00801-CV......................................................................... 3, 24 First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627 (Tex. 2008) ............................................................................................. 23 McLane Co., Inc. v. Strayhorn, 148 S.W.3d 644 (Tex. App.Austin 2004, pet denied) ..................................................... 17 N. Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894 (Tex. 1991) ..................................................................................... 5, 6, 17 Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248 (Tex. 1999) ....................................................................................... 17, 18 Sharp v. Clearview Cable TV, Inc., 960 S.W.2d 424 (Tex. App.Austin 1998, pet. denied) .................................................... 20 Strayhorn v. Raytheon E-Systems, 101 S.W.3d 558 (Tex. App.Austin 2003, pet. denied) .................................................... 21 Sw. Bell Tel. Co. v. Combs, 270 S.W.3d 249 (Tex. App.Amarillo 2008, pet. denied) .................................................. 7 USAA v. Strayhorn, 124 S.W.3d 722 (Tex. App.Austin 2003, pet. denied) .................................................... 20
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STATUTES Tex. Tax Code Ann. 1.03 (West 2009) .......................................................................... 14 Tex. Tax Code Ann. 151.0028 (West 2009) .................................................................. 19 Tex. Tax Code Ann. 151.006 (West 2009) ............................................................. passim Tex. Tax Code Ann. 151.0101 (West 2009) ...................................................... 15, 18, 23 Tex. Tax Code Ann. 151.302 (West 2009) ............................................................. passim Tex. Tax Code Ann. 151.308 (West 2009) .................................................................... 20 Tex. Tax Code Ann. 151.335 (West 2009) ............................................................. passim Tex. Govt Code Ann. 311.023 (West 2009) ................................................................. 14 Tex. Occ. Code Ann. Chapter 2153 (West 2009).............................................................. 20 RULES 34 Tex. Admin. Code 3.298 (West 2009) (Amusement Services) ..................... 16, 17, 19 34 Tex. Admin. Code 3.301(b) (West 2009) (Promotional Plans, Coupons, Retailer Reimbursement) ............................................................................................ passim 34 Tex. Admin. Code 3.301(c) (West 2009) (Promotional Plans, Coupons, Retailer Reimbursement) ............................................................................................. 16, 17 OTHER AUTHORITIES Tex. Comp. Pub. Accts, Hearing No. 26,058, 1990 WL 149561 (Sept. 17, 1990) ..... 4, 15 Tex. Comp. Pub. Accts, Hearing No. 26,065, 1990 WL 283056 (Nov. 6, 1990) ............ 12 Tex. Comp. Pub. Accts, Hearing No. 27,467, 1991 WL 157425 (July 22, 1991) ............. 4 Tex. Comp. Pub. Accts, Hearing No. 33,665, 1997 WL 806986 (Dec. 21, 1997) ............ 4

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Tex. Comp. Pub. Accts, Hearing Nos. 39,909 & 39,110, 2001 WL 1821659 (Oct. 23, 2001) ..................................................................................................................... 4 Tex. Comp. Pub. Accts, Hearing No. 43,477, 2003 WL 22148970 (May 14, 2003) ........ 4 Tex. Comp. Pub. Accts, Hearing No. 46,885, 2006 WL 4007577 (Aug. 31, 2006) .......... 4 Tex. Comp. Pub. Accts, Tax Exemptions & Tax Incidence Report, February 2011 ... 18 Comptroller Letter No. 8411L0630C13 ............................................................................ 10 Comptroller Letter No. 9310136L ..................................................................................... 12 Comptroller Letter No. 9406413L ..................................................................................... 12 Comptroller Letter No. 9411681L ..................................................................................... 11 Comptroller Letter No. 9611765L ..................................................................................... 19 Comptroller Letter No. 9902484L ..................................................................................... 12

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STATEMENT OF THE CASE Nature of the Case: This is a sales tax case involving the sale-for-resale exemption. The Honorable Suzanne Covington, 98th District Court, Travis County. Granted the States motion for summary judgment and denied Roarks motion for partial summary judgment. Attached at Appendix, Tab A. Roark Amusement & Vending, Inc., Appellant; Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellees. Third Court of Appeals; Chief Justice J. Woodfin Jones joined by Justices David Puryear and Bob Pemberton. Roark Amusement & Vending, Inc. v. Combs, et al. No. 03-10-00105-CV, 2011 WL 255535 (Tex. App.Austin 2011, pet. filed). Opinion attached at Appendix, Tab B. Reversed the trial courts disposition on summary judgment, remanded for factual determination of the amount of the refund to which Roark would be entitled. Motion for rehearing denied.

Trial Court:

Trial Courts Disposition:

Parties in Court of Appeals:

Court of Appeals:

Court of Appeals Disposition:

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STATEMENT OF JURISDICTION The Texas Supreme Court has jurisdiction over this appeal because the case involves the construction of a statute necessary to a determination of this case, Tex. Govt Code Ann. 22.001(a)(3), and state revenue, id. 22.001(a)(4).

ISSUES PRESENTED 1. Does the transfer of care, custody and control of tangible personal property constitute an integral part of a coin-operated amusement service when the service is often completed without the property transferring? May the court of appeals ignore without invalidating a Comptroller rule directly on point on a given issue, finding instead that the Comptrollers interpretation of her adopted rule conflicts with the courts interpretation of a Texas Tax Code provision? For purposes of the sale-for-resale exemption, can a service retain a taxable status when there exists no circumstance in which the service would ever be subject to sales and use tax?

2.

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NO. 11-0261

In the Supreme Court of Texas


SUSAN COMBS, COMPTROLLER OF PUBLIC ACCOUNTS, OF THE STATE OF TEXAS, AND GREG ABBOTT, ATTORNEY GENERAL OF THE STATE OF TEXAS Petitioners, vs. ROARK AMUSEMENT AND VENDING, L.P., Respondents.
On Petition for Review from the Third Court of Appeals at Austin, Texas

BRIEF OF PETITIONERS SUSAN COMBS, COMPTROLLER OF PUBLIC ACCOUNTS AND GREG ABBOTT, ATTORNEY GENERAL OF THE STATE OF TEXAS
TO THE HONORABLE SUPREME COURT OF TEXAS: The Third Court of Appeals erred by rewriting the sale-for-resale exemption to allow the provider of a service that would never be subject to sales and use tax to purchase taxable items tax-free that, as contemplated and required under the relevant tax statutes, do not transfer as an integral part of that service. In so doing, the court expanded the scope of the exemption beyond that which the legislature intended through its enactment, misapplied the precedent of this Court as well as its own, and afforded no
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deference to the Comptrollers longstanding statutory construction and interpretation of her rules. STATEMENT OF FACTS From October 1, 2000 to February 29, 2004, Roark provided an amusement service through its coin-operated crane machines in which not every purchaser of the service received a plush toy as a prize. (CR: 161, 3; 163 16). Under the Texas Tax Code, Roarks service is never subject to sales and use tax. Roark placed in its machines plush toys that it purchased from vendors and on which it paid sales and use tax. (CR: 162, 10, 11). Roark sought a refund of sales and use tax paid on its purchases of plush toy prizes based on the Texas Tax Codes sale-for-resale exemption on the basis that it eventually transferred all of the toys it purchased to select customers. 1 SUMMARY OF THE ARGUMENT The sale-for-resale exemption based on an integral transfer requires a sale of tangible personal property to a purchaser who acquires the property for the purpose of transferring care, custody and control of the tangible personal property to the purchaser of a taxable service as an integral part of the service. Tex. Tax Code Ann. 151.006, .302 (West 2009), attached at Appendix, Tabs C, D. Because not every purchaser of Roarks service receives a plush toy, the transfer of the toys does not constitute an integral part of the service. In consistently denying the resale exemption for the purchase of prizes by operators of amusement services where each participant does not receive a prize, the

Except for toys lost, stolen or damaged. See Response to Petition for Review, p. 5.

Comptrollers application of her valid and longstanding administrative rule is entitled to deference. Moreover, because tax code section 151.335 precludes any circumstance in which Roarks service would ever be subject to sales and use tax, Roark does not provide a taxable service. Thus, the Comptroller properly denied Roark the sale-for-resale exemption for its plush toy purchases. The Third Courts opinion significantly expands the scope of the sale-for-resale exemption beyond that which the legislature intended through its enactment. If allowed to stand, the opinion could facilitate further expansion of the scope of the exemption in other contexts, including a case currently pending where the underlying taxable service is taxed not under Texas Tax Code Chapter 151 (sales and use tax), but under Chapter 156 (hotel occupancy tax), thus precluding the possibility of double taxation under Chapter 151, which the exemption was enacted to prevent. See DTWC Corp. v. Combs, et al., appeal docketed, No. 03-10-00801-CV. To avoid such a result, the court should grant the Petition for Review, reverse that portion of the judgment of the court of appeals holding that Roark qualifies for the sale-for-resale exemption and grant judgment in full to Petitioners. ARGUMENT A. The appellate decision is based on a misinterpretation of tax statutes. 1. The transfer of the plush toys is not an integral part of Roarks service. For the exemption to apply based on an integral transfer, the tangible personal property had to have been acquired for the purpose of transferring it as an integral
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part of a taxable service. See Tex. Tax Code Ann. 151.006(a)(3) (West 2009) (emphasis added). Thus, even if Roark is found to have provided a taxable service, which the State maintains it did not, it is the transfer of the toys that must be integral to the service not the toys themselves or the potential for such transfer. In the context of plush toys offered as potential prizes in coin-operated amusement machines, the Third Courts opinion undermines decades of Comptroller precedent construing what constitutes a transfer of care, custody and control of tangible personal property as an integral part of a taxable service as required under tax code sections 151.006 and 151.302. 2 In its opinion, the Third Court asserts that [o]n appeal, the State does not dispute that the plush toys are integral to the performance of Roarks amusement services, agreeing that the plush toys serve as the incentive to play the game. See Appendix, Tab B at page 9. While the physical presence of the toys or the chance or potential for a permanent transfer might serve as an incentive to play the game, these are moot hypotheticals. The State unequivocally disputes the Third Courts finding footnoted and without explanation that [w]e likewise conclude that the transfer of plush toys is integral to the amusement service. See id. n.5. If 1 in 20 customers successfully emerges with possession of a toy, it follows that 95% of the time, Roarks service can be completed without a transfer of tangible personal property. Even if 5 in 20 emerged with

See Tex. Comp. Pub. Accts, Hearing Nos. 46,885, 2006 WL 4007577 (Aug. 31, 2006); 43,477, 2003 WL 22148970 (May 14, 2003); 39,909 & 39,110, 2001 WL 1821659 (Oct. 23, 2001); 33,665, 1997 WL 806986 (Dec. 21, 1997); 27,467, 1991 WL 157425 (July 22, 1991) and 26,058, 1990 WL 149561 (Sept. 17, 1990), attached at Appendix, Tab E.

a toy, a transfer with a 25% chance cannot realistically be held to constitute an integral part of Roarks service. Conceding from the outset that not every paying customer receives a toy prize, Roark erroneously asserts entitlement to the resale exemption for its plush toy purchases on the basis that it eventually transfers all of the toys it purchases to select customers, except for toys lost, stolen or damaged. 3 However, under the express language of the sale-for-resale statute, [t]angible personal property used to perform a taxable service is not considered resold unless the care, custody and control of the tangible personal property is transferred to the purchaser of the service. Tex. Tax Code Ann. 151.302(b) (West 2009) (emphasis added). In administering the tax code, the Comptroller has reasonably and consistently held that such a sporadic transfer of tangible personal property to select purchasers of a given service does not constitute an integral part of a taxable service in the context of plush toys offered as potential prizes in coin-operated amusement machines. 4 The Third Court of Appeals failed to defer to the Comptrollers reasonable interpretation of the statute she is charged with administering, improperly allowing Roark the sale-for-resale exemption in direct contravention of a strict construction of the exemption statute. See N. Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991) (exemptions are disfavored and strictly construed against the taxpayer because they undermine equality and

3 4

See Response to Petition for Review, p. 5. See FN2, supra.

uniformity by placing a greater tax burden on some businesses and individuals, rather than distributing the burden equally on all taxpayers). 2. Tax exemptions must be strictly construed against the taxpayer. Where a tax refund is sought based on an exemption, a taxpayer must clearly show that it falls within the statutory exemption claimed. N. Alamo Water Supply, 804 S.W.2d at 899; Bullock v. Natl Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979). Thus, while a plaintiff in a tax refund case must prove entitlement by a preponderance of the evidence, if the refund sought is based on an exemption, the plaintiff faces a higher burden of proof. Roark contends that the plain language of the exemptions resale requirement under tax code section 151.302 that care, custody and control of the tangible personal property transfer to the purchaser of the service constitutes an integral part of its service even though the tangible personal property at issue does not transfer to every service purchaser. However, the Comptroller has reasonably, consistently and necessarily

construed sections 151.302 and 151.006 together with section 151.335 to require that each purchaser of the service receive a toy prize before the exemption would be applicable. As it pertains to the transfer of tangible personal property to the purchaser of the service, the plain language of section 151.302 actually cuts against Roark the taxpayer against whom this statute is to be strictly construed and the Third Courts decision. The statutory language does not contemplate a property transfer to some or certain
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purchasers of a given service.

Section 151.302(b) expressly provides that tangible

personal property is not resold unless it is transferred to the purchaser, clearly contemplating a transfer with each purchase. Thus, under the plain language of sections 151.006 and 151.302, given that Roark can provide its service in its entirety to many if not most of the purchasers of its service without a toy transferring, the sporadic transfer of a plush toy cannot reasonably be held to constitute an integral part of Roarks service. But cf. Sw. Bell Tel. Co. v. Combs, 270 S.W.3d 249, 260 (Tex. App. Amarillo 2008, pet. denied) (If a statute can be reasonably read as the agency has ruled, and that reading is in harmony with the rest of statute, then we are bound to accept the agencys interpretation even if other reasonable interpretations exist.) (emphasis added). 3. Roarks reliance on 7-Eleven is misguided. In ascribing as integral the transfer of toys to its service, Roarks contentions are self-defeating. Roark argues that the transfer of toys is integral to its service even though customers do not receive a toy every time they use Roarks machines. 5 Roark attempts to analogize its allegedly integral sporadic toy transfer to a recent appellate opinion wherein, according to Roark, the Third Court of Appeals concluded that tangible personal property is an integral part of a taxable service if its transfer is an important part of the performance. 6 In 7-Eleven, however, the Third Court looked to Websters Dictionary in an attempt to further clarify the meaning of the word integral in tax code section 151.006(a)(3). 7-Eleven, 311 S.W.3d at 687 (citing to
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See Response to Petition for Review, p. 5. See Response to Petition for Review, p. 4, n.5, citing to 7-Eleven v. Combs, 311 S.W.3d 676, 687 (Tex. App.Austin 2010, pet. denied).

Websters Third New Intl Dictionary at 1173 (1986)) (integral means of, relating to or serving to form a whole; essential to completeness; constituent; inherent). However, this clarification by the Third Court of Appeals was in response to the States argument against entitlement to the resale exemption in 7-Eleven that only a small portion of the [tangible personal property] can be characterized as an integral part of a taxable data processing service. Id. at 687. In stark contrast to the fact that Roark can provide its service in its entirety to many if not most of the purchasers of its service without a toy transferring, the integral component analyzed in 7-Eleven was not in relation to whether tangible personal property transferred with every performance of the taxable service. Rather, the conclusion that the phrase essential to completeness helped clarify the definition of integral was reached in the context of the Third Court of Appeals rejecting the States argument in 7-Eleven that the tangible personal property therein at issue had to be committed solely to the performance of the taxable service in order for the integral component in section 151.006(a)(3) to be satisfied. Id. As Roark concedes that not every paying customer receives a prize, the transfer of a toy cannot reasonably be held to be essential to [the] completeness of the provision of Roarks service. Not to be deterred, Roark further argues that the sporadic transfer of toys constitutes an integral part of its service because [t]he primary focus of this inquiry must

be on Roarks intent in purchasing the plush toys. 7 Yet again, Roarks reliance on 7Eleven is misplaced. In 7-Eleven, transferor intent was not analyzed in the context of whether tangible personal property transferred with every performance of a taxable service; rather, it was in the context of the Third Court of Appeals rejecting the States argument that the resale exemption required that the purchaser of tangible personal property who transfers it as an integral part of a taxable service not also obtain any benefit from the transaction. 7-Eleven, 311 S.W.3d at 685. Thus, the unavailing nature of the 7-Eleven decision to Roark is multi-layered. Roarks integral and intent arguments 8 presuppose that the precepts Roark paraphrases from 7-Eleven were in response to an analogous context wherein a resale exemption was sought for tangible personal property that did not transfer every time a service was provided. This was patently not the case in 7-Eleven. 4. Roarks attempted analogies to tournament sponsors, janitorial service providers and bowling alley operators are readily distinguishable. Notwithstanding Roarks contentions to the contrary, there is nothing novel in the Comptrollers position that each purchaser of a service like Roarks receive a toy prize before the resale exemption would be applicable to Roarks plush toy purchases. 9 Asserting that Comptroller policy exempts from sales tax items transferred to customers
See Response to Petition for Review, p. 5, citing to 7-Eleven, 311 S.W.3d at 686 (So long as the purchasers intent in acquiring the property was to transfer it as an integral part of a taxable service, the elements of the section 151.006(a)(3) definition would appear to be satisfied.). 8 Moreover, in the context of a service like Roarks, common sense dictates that Roark did not intend to transfer a toy with every service provision: as addressed, Roark concedes that not every paying customer receives a toy. As Roark is a service provider, not a seller of tangible personal property in the form of plush toys, such an intent would lend itself to a counterintuitive if not egregious business model for a service provider like Roark. 9 See FN2, supra.
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as an integral part of a taxable service, even when service providers do not transfer property every time they perform a service, Roark continues to advance its attempts at analogizing its situation to that of certain providers of taxable services and the tangible personal property that the Comptroller permits these entities to purchase tax-free. In this vein, Roark cites a Comptroller Letter as authority for the proposition that the Comptroller grants the exemption in contexts where not every participant wins a prize. 10 However, Roarks conclusory assertion that the trophies addressed in that letter (for which the exemption was granted) were not distributed to all participants essentially assumes facts not in evidence, particularly given that the list of exempt items also included food and drink for players. It is extraordinarily unlikely that food and drink would only be provided to select players. Roark also erroneously likens its situation to providers of taxable janitorial services as well as bowling alley operators and the tangible personal property that the Comptroller permits these respective entities to purchase tax-free. contexts are distinguishable: However, these

paying customers (presumably building management

companies) of the taxable janitorial services provided in Roarks example are guaranteed a property transfer if so desired, be it liquid hand soap, toilet paper or floor wax. While this principle also holds true for bowling alley patrons and bowling balls and shoes, the same cannot be said of Roarks customers and the plush toys, and this distinction justifies the denial of the exemption to Roark.

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See Response to Petition for Review, pp. 5-6, citing Comptroller Letter No. 8411L0630C13, publicly available at http://cpastar2.cpa.state.tx.us/index.html.

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Stated differently: bowling alley patrons who do not bring their own ball could not bowl and would never pay to bowl without the integral transfer of a bowling ball, because the taxable service (bowling) cannot be completed without it. 11 Conversely, at a high percentage rate, Roarks paying customers often emerge from the completed service without a toy. Similarly, paying customers of the taxable janitorial services would never willfully leave money on the table in the absence of a transfer of the tangible personal property. Even if lightbulbs or paper towels do not transfer every time janitorial services are performed for a given paying customer, these items will eventually transfer as needed to the same paying customer; otherwise, presumably, the customer will not pay for the service, or potentially has a breach of contract action available. This is a critical

distinction from Roarks situation, where Roarks service can be completed 20 times with potentially only 1 or even 5 out of 20 paying customers emerging with a toy prize having been transferred. Under the tax code, tangible personal property used to perform a taxable service is not considered resold unless the care, custody and control of the tangible personal property is transferred to the purchaser of the service. 151.302(b) (West 2009). Given that not every purchaser of Roarks service receives a toy, under

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Notably, the authority to which Roark cites in attempting to analogize itself to a bowling alley operator states that if a separate charge is made for the item, for example bowling shoes, the additional charge is taxable because it is considered a separate charge for renting tangible property. See Comptroller Letter No. 9411681L, publicly available at http://cpastar2.cpa.state.tx.us/index.html. Bowling alleys typically charge separately for shoe rental.

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sections 151.006 and 151.302 as necessarily read in tandem, the transfer of the plush toys cannot reasonably be held to constitute an integral part of Roarks service. 12 Moreover, although Roark cites multiple authorities for the proposition that taxable service providers are allowed the sale-for-resale exemption even when the tangible personal property does not transfer each time the services are performed, none of the authorities were decided based upon or even addressed the proposition Roark now advances. 13 Comptroller Letters 9310136L, 9406413L and 9902484L all distinguished janitorial supplies eligible for resale based on whether the items tangibly remained on the job site (e.g., floor wax vs. tile cleaners and detergents, both the latter of which are used up in performing the service and neither remain on the customers site nor qualify for the exemption). Roarks proposition is thus conclusory: although attempting to argue by analogy its entitlement to the sale-for-resale exemption even when a toy does not transfer every time a paying customer plays the game, none of Roarks cited letters expressly address whether a transfer occurred every time the services at issue were performed. 14

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Roark previously likened itself to a toy store [that eventually] transfers every toy it purchases to its customers, in that Roark completely and permanently transferred every toy it purchased to its customers. However, this analogy fails in presupposing, by extension, that most toy store customers willingly leave the store without the toys that they purchased. 13 See Comptroller Letter Nos. 9310136L, 9406413L and 9902484L, publicly available at http://cpastar2.cpa.state.tx.us/index.html, and Tex. Comp. Pub. Accts, Hearing No. 26,065, 1990 WL 283056 (Nov. 6, 1990). 14 Even less availing to Roarks cause is Tex. Comp. Pub. Accts, Hearing No. 26,065, 1990 WL 283056 (Nov. 6, 1990), which analyzed and ultimately found an exemption-qualifying transfer of all cleaning supplies therein because the items were shipped not to the service provider, but directly to the paying customers building, such that the customers perpetual access to the supplies also subjected the customer to risk of loss upon delivery, and none of the supplies could be removed from the building by the service providers for use elsewhere. On this basis, the Comptroller held that care, custody and control of the items transferred to the purchaser of the service at the time of delivery, with subsequent provisions of janitorial services having no bearing on that decision.

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Critically, therefore, no authority expressly supports Roarks proposition that the Comptroller exempts items transferred to paying customers as an integral part of a taxable service, even when service providers do not transfer property every time they perform a service. Moreover, while Roarks service can be performed for any of Roarks paying customers without a toy transferring, for those alley patrons who do not bring their own bowling ball, bowling cannot and does not happen unless the alley operator (integrally) transfers a bowling ball. Even if Roarks proposition was found to hold true in the context of janitorial services, Roarks situation is distinguishable: property associated with the janitorial services will eventually transfer to each paying customer/building management company, as opposed to the conservative estimate of 75 95% of paying customers often disappointed children who emerge from Roarks completed service provision down 50 cents and toyless. Moreover, a critical distinction exists that fully extinguishes Roarks erroneous attempts at analogizing its situation to that of janitorial service providers and bowling alley operators. 15 Roarks service provision is specifically governed by Comptroller rule addressing games in which each participant does not receive a prize. Neither janitorial service providers nor bowling alley operators are contemplated under the controlling rule: therefore, the exposed flaws in Roarks attempted analogy to these service providers
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Roarks response that a customer can bowl without a bowling alley operator transferring a ball to them, just as a customer can play Roarks machine without Roark transferring a toy to them completely misses the mark of the Comptrollers asserted distinction that, without their own bowling ball, alley patrons could not bowl and would never pay to bowl without the integral transfer of a bowling ball. See Response to Petition for Review, p. 7. By extension, Roarks more apt albeit absurd analogy would be to assert that, so long as Roarks customers bring their own toy prizes, they can play Roarks machine without Roark transferring a toy.

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notwithstanding, the fact that both service provider types fall outside the purview of the controlling Comptroller rule completely removes any remaining signs of life in Roarks attempted analogy. B. As it pertains to the tax treatment of merchandise used by operators of games in which each participant does not receive a prize, Comptroller Rule 3.301(b)(2) is valid, directly on point and entitled to deference. The Third Court ignored without invalidating Rule 3.301(b)(2), declining deference to a rule that conflicted with its interpretation of an unambiguous provision of the tax code. See Appendix, Tab B at page 10 n.6. However, in determining legislative intent, a court may also consider the object sought to be maintained, consequences of a particular construction and the administrative construction of the statute, without regard to whether a particular enactment is facially ambiguous. Tex. Govt Code Ann.

311.023 (West 2009); Tex. Tax Code Ann. 1.03 (West 2009). 16 Initially adopted in 1976 and never invalidated, Comptroller Rule 3.301(b)(2) applies to games where each participant does not receive a prize. 17 Under the rule, when each participant does not receive a prize, the game operator or concessionaire is not a retailer, but a consumer of the items it purchases to provide its service; such game operators are therefore not eligible to claim the resale exemption on purchases of toy prizes. 18 The Comptroller has consistently applied Rule 3.301(b)(2) to deny the resale

See also Beal Amicus Letter, Attached at Appendix, Tab F. See 34 Tex. Admin. Code 3.301 (eff. Oct. 1, 1988), attached at Appendix, Tab G. 18 Pursuant to the express terms of Rule 3.301(b)(2), retailers who sell taxable tangible personal property to game operators like Roark must collect and remit to the State the tax due on the sales made to the game operators.
17

16

14

exemption to operators of coin-operated amusement services like Roarks, where each participant does not receive a prize, rendering Roarks plush toy purchases taxable. 19 Under section 151.335, amusement services provided through coin-operated machines do not constitute a taxable service. Tex. Tax Code Ann. 151.335 (West 2009), attached at Appendix, Tab H. Thus, Roarks plush toys could never be subject to double taxation, eliminating any justifiable policy reason to allow the sale-for-resale exemption in the context of Roarks service provision. Moreover, Roark has asserted no arguments demonstrating as erroneous the Comptrollers construction that Roark is the user of the plush toys because each participant does not receive a prize. Rule 3.301 is a reasonable and harmonious implementation of tax code sections 151.006, 151.302 and 151.335, and its applicability to Roark is reasonable because Roark neither provides a service taxed under Chapter 151 nor transfers a toy to each participant. The rule is also a valid exercise of the Comptrollers exclusive authority to interpret what constitutes a taxable service under section 151.0101(b). 20 Thus, Rule 3.301(b)(2) applies, and Roark is liable for the sales and use taxes on its toy purchases as expressly provided thereunder.

19

See FN2, supra. In Tex. Comp. Pub. Accts, Hearing No. 26,058, 1990 WL 149561 (Sept. 17, 1990), the Administrative Law Judge concluded that Rule 3.301(b)(2) applied in a factual context similar to Roarks, and that the taxpayer there was not entitled to the resale exemption for its plush toys, opining that [t]he amusement service is provided in exactly the same manner and at exactly the same price regardless of whether or not the player wins a prize. The transfer of the plush [toys] is not therefore an integral part of the service. 20 On this point, Roark disagrees, asserting that this provision merely grants the Comptroller authority to interpret the list of statutorily defined taxable services the Legislature provided. See Response to Petition for Review, p. 8, n.15. However, finding that Roark does not provide a taxable service is precisely the type of interpretative authority exclusively afforded the Comptroller under section 151.0101(b): to assert otherwise renders the subsection meaningless.

15

Contrary to Roarks assertion, Comptroller Rule 3.301(b) has not been superseded. 21 In fact, taxpayers are directed to Rule 3.298(f), which Roark erroneously believes controlling, in a subsequent subsection of Rule 3.301, indicative of the Comptrollers intent to keep Rule 3.301(b) intact and valid. Specifically, these rules provide: Rule 3.301(c)(1): For an explanation of the taxability of an item purchased for use as a prize when the winning of the prizes depends upon chance or skill, see 3.298(f)(1) of this title (relating to Amusement Services). Rule 3.298(f)(1): Sellers of service may issue a resale certificate in lieu of tax to suppliers of tangible personal property only if care, custody, and control of the property is transferred to the client. 22 Although the Comptroller asserts that her never invalidated Rule 3.301(b)(2) applies, Roark would still be denied the resale exemption for its plush toy purchases even if this Court finds that Rule 3.298(f)(1) controls. While Rule 3.301(b) may read more cleanly in expressly differentiating in separate subsections between games in which each participant does or does not win a prize, Rule 3.298(f)(1) via Rule 3.301(c)(1) conceptually tracks the same principle, more efficiently differentiating the two scenarios in just the one subsection. Stemming from the reference to 3.298(f)(1) in 3.301(c)(1)

Although Roark labels the continued presence of Rule 3.301(b) an oversight, since it contradicts the more recent subpart (c)(1) and Rule 3.298(f)(1), the former applies to services that are not taxable, while the latter enactments apply to taxable amusement services. Moreover, although Roark cites to Rule 950.17 (1968) for the proposition that a similar rule has existed in Texas since at least 1968, presumably to bolster its assertion that the continued presence of Rule 3.301(b) appears to be an oversight, further evaluation reveals that the rule to which Roark cites was superceded by Rule 3.301. 22 See 34 Tex. Admin. Code 3.301(c)(1), 3.298(f)(1) (emphasis added). Rule 3.298 identifies games of skill at a circus, fair or carnival as taxable amusement services; provides that taxable items purchased and transferred as an integral part of these services may be purchased tax-free under a sale-for-resale exemption; and tracks tax code section 151.302(b) in requiring that care, custody and control of the taxable items be transferred to the customers of taxable amusement services.

21

16

when the winning of prizes depends upon chance or skill, it follows from the express language in Rule 3.298(f)(1) that the resale exemption is available only if care, custody, and control of the property is transferred to the client. As is the case under tax code section 151.302, Rule 3.298(f)(1) does not contemplate a property transfer to some or certain clients of a given service. See N. Alamo Water Supply, 804 S.W.2d at 899 (tax exemptions are disfavored and strictly construed against the taxpayer); see also Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999) (administrative rules, which have the same force as statutes, are construed in the same manner as statutes). Stated differently: Roarks read of the rule it believes applicable would allow for the resale exemption so long as all toy prizes eventually transfer to select clients, regardless of how many clients leave the completed service provision toyless. But such an interpretation blatantly disavows the language in Rule 3.301(c)(1) asserting an explanation of the taxability of prizes in the context of games when the winning of prizes depends upon chance or skill. Roarks read allowing for the exemption given that all toy prizes eventually transfer to select clients renders meaningless the language in Rule 3.298(f)(1) allowing for the issuance of resale certificates in lieu of tax to suppliers of tangible personal property only if care, custody, and control of the property is transferred to the client. However, to ascertain and give effect to the legislatures intent, a court must read every word in a statute as if it were deliberately chosen. McLane Co., Inc. v. Strayhorn, 148 S.W.3d 644, 650 (Tex. App.Austin 2004,
17

pet denied); see also Rodriguez, 997 S.W.2d at 254 (administrative rules, which have the same force as statutes, are construed in the same manner as statutes). Although the Comptroller contends that Rule 3.301(b)(2) applies, the resale exemption requirement that each purchaser of a service like Roarks receive a toy prize applies regardless of which Comptroller rule controls, and Roark is liable for the sales and use taxes on its toy purchases as expressly provided thereunder. C. The decision of the court of appeals expands the scope of the sale-for-resale exemption beyond that which the legislature intended. 1. There is no circumstance in which Roarks specific service would ever be subject to sales and use tax. Under section 151.335, [a]musement services provided through coin-operated machines that are operated by the consumer are exempt from [sales and use] taxes. Tex. Tax Code Ann. 151.335 (West 2009). Comptroller policy provides that [a]n

exemption protects items that would be taxable except for specific provisions in the law.23 From the plain language of this statement cited by both Roark and the Third Court, it follows that the existence of section 151.335 renders Roarks service not taxable as there exists no circumstance in which Roarks service would ever be subject to sales and use tax. Moreover, tax code section 151.0101(b) grants the Comptroller exclusive authority to interpret what constitutes a taxable service. Combs v. City of Webster, 311 S.W.3d 85, 103 n.1 (Tex. App. Austin 2009, pet. denied). The Comptroller has never
See Tex. Comp. Pub. Accts, Tax Exemptions & Tax Incidence Report, February 2011, available at http://window.state.tx.us/taxinfo/incidence/96-463TaxIncidence02-11.pdf (accessed April 7, 2011) (emphasis added).
23

18

treated services like Roarks as taxable services, having long recognized that the performance of an amusement service as defined in tax code section 151.0028 is not taxable unless there is the requisite sale of an admission to the amusement service. 24 In spite of the 1984 enactment of section 151.335 exempting its service from sales and use tax, Roark asserts a legislative intent that its service remain taxable because the same legislation raised the annual occupation tax Roark pays for each machine it owned in Texas. 25 However, Roarks attempts at analogizing its alleged taxable-exempt

service with other tax code exemptions conflate the status of the purchaser of goods or services or the context in which services are provided with the inherent taxability of the tangible personal property or services, i.e., every example depicts tangible personal property or a service exempt from sales and use tax in certain instances, but subject to sales and use tax in others. In contrast, section 151.335 completely removes Roarks service from the taxable amusement services purview, because there is no circumstance in which Roarks specific service an amusement service provided through coinoperated machines operated by the consumer would ever be subject to sales and use tax. Moreover, the purpose of the sale-for-resale exemption is to prevent double taxation in the context of sales and use tax: the exemption was enacted to prevent

24

See Comptroller Letter 9611765L, attached at Appendix, Tab I. Although the Third Court of Appeals noted that Comptroller Rule 3.298(a)(1)(E)(iv) includes games of skill within the definition of amusement services and that Roark characterizes its amusement crane machines as games of skill, 3.298(a)(1)(E) is entitled Fairs or Carnivals, depicting services provided in contexts clearly distinguishable from Roarks service provision. In the context contemplated under the rule, sales tax would have been collected on the admission price to the fair or carnival itself. Notably, the entirety of 3.298(a)(1)(E)(iv) reads games of skill, at a circus, carnival, etc. (emphasis added). 25 Assessing different types of state taxes for the same taxpayer would not arise to constitutionallyprohibited double taxation.

19

taxing both the taxable service provider and the taxable service purchaser for the same tangible personal property necessary to provide a taxable service. Sharp v. Clearview Cable TV, Inc., 960 S.W.2d 424, 426-27 (Tex. App. Austin 1998, pet. denied). The Third Court appeared to give credence to Roarks theory of the potential for double taxation, citing to a publication explaining the classifications of sales and use tax exemptions wherein the Comptroller notes that coin-operated amusement machines are taxed under a separate (occupation) tax levied on a per machine basis. 26 However, sales and use taxes and occupation taxes are mutually exclusive statutory schemes. See USAA v. Strayhorn, 124 S.W.3d 722 (Tex. App. Austin 2003, pet. denied). If payment of the occupation tax exempted a taxpayer from paying sales and use tax on tangible personal property used to conduct the occupation, the legislature would have so stated in Chapter 2153 of the Texas Occupations Code. 27 There is no such provision. In fact, Roark can point to no authority that the collection of the occupation tax prevents the State from imposing sales and use taxes on items purchased for use in conducting the occupation. For purposes of the sale-for-resale exemption, qualifying as taxable a service that, while never subject to sales and use tax, is taxed under a different statutory scheme would clearly expand the exemption beyond what the legislature intended. As section 151.335 precludes any circumstance in which Roarks service would ever be subject to sales and use tax, there is also no context in which the plush toys could ever fall prey to
26 27

See FN23, supra. Tax Code section 151.308, entitled Items Taxed by Other Law, provides an enumerated list of goods and services that are exempt from sales and use tax because they are taxed under different statutory provisions. Tex. Tax Code Ann. 151.308 (West 2009). Notably, tangible personal property used to conduct an occupation on which an occupation tax has been paid is not included in that list.

20

double taxation; therefore, the Comptroller properly denied the exemption for Roarks purchases of plush toy prizes. 2. The Third Courts decision is based on a misapplication of this Courts precedent as well as its own prior decisions in Raytheon and 7-Eleven. In support of its finding of a taxable service, the Third Court cited a 2003 decision in which it applied the analysis from Day & Zimmerman, Inc. v. Calvert, 519 S.W.2d 106, 110-11 (Tex. 1975), wherein this Court held that the sale-for-resale exemption applied to the purchase of items by a defense contractor used in performing a contract with the federal government, even though any ultimate resale could never in fact be taxed in light of the tax code exemption for governmental entities. Strayhorn v. Raytheon ESystems, 101 S.W.3d 558, 570 (Tex. App. Austin 2003, pet. denied). While Raytheon and Day & Zimmerman both held that the sale-for-resale exemption applied in contexts despite the exempt status of the end use purchasers, ensuring that the items purchased for resale in those cases were not, in fact, taxed, there is a clear and viable distinction between the goods at issue in those cases and Roarks service: the tangible personal property in both Raytheon and Day & Zimmerman would be subject to sales and use tax if resold to a non-exempt entity. In contrast, regardless of the status of Roarks paying customers, under tax code section 151.335, Roarks service would never be subject to sales and use tax. Roark cites a recent Third Court decision for the proposition that the sale-forresale statute simply requires that the service to which the transfer of tangible personal property is integral be a taxable service not that it actually be taxed in the particular
21

instance in question. 7-Eleven, 311 S.W.3d at 690 (emphasis added). Even the cited 7Eleven proposition contemplates that a taxable service is a service that can be taxed in certain contexts, i.e., that there exists a particular instance wherein a given service would, in fact, be subject to sales and use tax. In the case of Roarks specific service, there is no such particular instance. 7-Eleven is, however, relevant to this case for the proposition addressed in that decision in the context of analyzing the exemption: The more reasonable interpretation of the purpose requirement is that it exists to prevent parties from obtaining favorable tax treatment premised on a sham arrangement wherein little or no taxable services are actually rendered. This is consistent with the sale-for-resale exemptions purpose being to avoid double taxation, because if there were no performance of significant services subject to sales and use tax, taxing any tangible personal property integral to the performance of those services would not result in double taxation. 311 S.W.3d at 686. Because tax code section 151.335 renders Roarks specific service not subject to sales and use tax, not only is there no performance of significant services subject to sales and use tax, there is no performance of any services subject to sales and use tax. Thus, by extension of 7-Eleven, taxing any tangible personal property allegedly integral to the performance of Roarks service would not result in double taxation. Furthermore, the otherwise viable distinction between tax exemptions and exclusions should have no bearing on the outcome of this case. In finding to the contrary, the Third Court asserted an expectation that the legislature would exclude from taxability any services that it did not intend to be categorized as taxable, as for example, it has done in carving out the repair and restoration of certain vehicles and computer programs from the otherwise22

taxable repair and restoration services listed [in tax code section 151.0101]. See id. 151.0101(a)(5) (defining repair, remodeling, maintenance, and restoration services as taxable except those performed on aircraft, certain watercraft, motor vehicles, and computer programs). See Appendix, Tab B at page 7 (emphasis added). Even the Third Courts cited

exclusions presuppose contexts in which the exact same repair services would be subject to sales and use tax, casting further doubt on the misplaced emphasis and reliance on the distinction between exemptions and exclusions as bearing on the outcome of this case. If left intact, the Third Courts opinion allows Roarks service to retain a taxable status, even though there is no context in which the Comptroller could ever assess sales and use tax on Roarks service. Under the exclusive jurisdiction granted her through tax code section 151.0101, the Comptroller consistently interprets taxable services not to include coin-operated amusement machines operated by the consumer, and this longstanding interpretation is entitled to deference. 28 See First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627, 632 (Tex. 2008) (serious consideration given to agencys construction of a statute it is charged with enforcing, particularly when the statute involves complex subject matter within the agencys area of expertise, so long as that construction is reasonable and consistent with the statutory language). In addition, the decision of the Third Court of Appeals has implications beyond this case. The Third Court erroneously held that Roarks service remained a taxable service for purposes of the resale exemption regardless of the fact that Roarks service would never be subject to sales and use tax. In a footnote, the Third Court further opined
28

See FN2, supra.

23

that its interpretation of taxable services was consistent with the object and purpose of the resale exemption, which is designed to prevent double taxation, since Roarks machines were taxed under the occupations code. See Appendix, Tab B at page 9 n.4. Given the Third Courts willingness to qualify as taxable a service that, while never subject to sales and use tax, is taxed under the Texas Occupations Code, the Third Court could apply the same flawed logic in the aforementioned hotel case where the underlying service is subject not to sales and use tax but to hotel occupancy taxes, precluding any possibility of double taxation under Chapter 151. See DTWC Corp. v. Combs, et al., appeal docketed, No. 03-10-00801-CV (recent district court denial, in accord with Comptroller policy, of a taxpayers claimed entitlement to the resale exemption for the purchase of hotel consumables e.g., shampoo which are placed as complimentary amenities in hotel rooms for use by guests in connection with a service lodging taxed not under Texas Tax Code Chapter 151 (sales and use tax), but under Chapter 156 (hotel occupancy tax)). If allowed to stand, the Third Courts decision could facilitate this undesirable ripple effect in expanding even further the scope of the exemption well beyond the legislatures intent. To date, the Comptroller consistently achieves the objective of the sale-for-resale exemption in uniformly allowing the exemption in cases where the underlying good or service is taxable regardless of the status of the end use purchaser but not, as here, when the underlying good or service can never be taxed under Chapter 151, thereby precluding the possibility of double taxation. Thus, the Comptrollers interpretation is
24

reasonable and harmonizes with the relevant statutory language:

because Roarks

service, under section 151.335, would never be subject to sales and use tax, Roark does not provide a taxable service for purposes of the resale exemption. PRAYER Petitioners ask this Court to grant this Petition for Review, reverse that portion of the judgment of the court of appeals holding that Roark qualifies for the sale-for-resale exemption and grant judgment in full to Petitioners. Petitioners also request such further relief, general or special, to which they may show themselves justly entitled.

Respectfully submitted, Greg Abbott Attorney General of Texas Daniel T. Hodge First Assistant Attorney General Bill Cobb Deputy Attorney General for Civil Litigation David C. Mattax Director of Defense Litigation Jeff M. Graham Chief, Financial and Tax Litigation

25

/s/ Marc A. Barenblat MARC A. BARENBLAT Assistant Attorney General State Bar No. 24038758 Financial and Tax Litigation P. O. Box 12548 Austin, Texas 78711-2548 Phone: 512/ 475-4255 Fax: 512/ 477-2348 Attorneys for Petitioners

CERTIFICATE OF SERVICE On September 19, 2011, a copy of Petitioners Brief on the Merits was sent via hand delivery to Respondents counsel: Martens, Seay & Todd James F. Martens 301 Congress Ave., Ste. 1950 Austin, Texas 78701 Hohmann, Taube & Summers, L.L.P. Amanda Taylor 100 Congress Ave., 18th Floor Austin, Texas 78701

/s/ Marc A. Barenblat MARC A. BARENBLAT Assistant Attorney General

26

FE 2?-27 11r59

'

DISTRICT

COURT

5r? '854

2a6B

P'2293

NO. D-1.cN-06-00,4125

ROARK AMUSEMENT VENDING, L.P,

,I

$ $.

IN TT{E DISTRICT COURT

OF'

v.

$
$

TRAVIS COUNTY' TEXAS

CAROLE KEETON STRAyH'ON, COMPTROLLER OF PUBLIC ACCOUNTS OF TITE STATE O[' TEXAS, AND GREG B'3OTT, ATTORNEY GENERAL OF TIIE STT OF TXS

$,
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$
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JT'DICIAL DISTRICT

OnpEB oN'SqMM-nY JUDGMENT

On Fbruary 17, 2010, tho Motion for Summary Judgment

of

Susan Combs,

Comptroller of Public.llccounts, sucsgsor to Carole Keeton Strayhoro, and Greg Abbott ttorney Cerreral of th,State of as (r'efendanlst'), and the Motion for Partial Summary Ju{gment of Roark Atr'usemcnt & Vendng, L,P. ("Plintiffl'} were submitted to the Curt
for considEration pursuant to Rule l6.6a.of the Texas Rules of Civil Procedure. The Court,

having considsred the motions, cxlribits, all responses and objections, fltnds that thcre is no
genuine issue of,material fact, and rules as follows:

Dcfcndants' objections

PlaintifPs summary judgment evidence are SUSTAINED"

Defendants'Motion for Summary Judgment should be GRANTED'

Plaintiff s Motion for Partit Suinmrry Judgment should be DENIED.

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TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

JUDGMENT RENDERED JA}TIJAIIY 26, }OLI

NO, 03-10-00105-cv

Roark Arhusement & VendinB, L.P., A.ppellant


v.
Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott,.Attorncy General of the State of'Teras, Appellees

APPEAL FROM 98TH DISTRICT COURT OF TR.VIS COUNTY BEFORE CHIEF JUSTICE JONES, JUSTICES PURYEAR AND PEMBERTON REVERSED AND RENDERE"D IN PART; REVERSED AND REMANDED IN PART.OPII{ION BY CHIEF JUSTICE JONES

THIS CAUSE came on to be heard on the record of the court below,


considered, because

and the same being

it is the opinion of this Cou

thal there lwas crrer in the trial court's

judgmentr IT IS THEREFORE considered, adjudged arrd ordeted that the judgment of the trial
court is reversed, and judgment is rendered that Roark is entitled to the clainred sale-for-resale

exemption. We remand the cause to the trial coufi for further proceedings to determine the
amount of refund to which Roark is entitled. costs relating

Itis FURTHER

ordered that the appelleepay all

to this appeal, both in this Court and the cout below; and that this decision be

certified below for observance.

TEXAS COURT OF APPEALS, THIRD DISTRICT, T AUSTIN

NO. 03-10-00105-cv

Roark Amusemeu! & Veuding' L.P., Appellant


v. Susan af the Stte of Texaso Appellees

..,,,.||
T'ROM THE DISTRIC,.T COT.IRT OF'TRAYIS COUNTY, 9STIT,JUDICIAL DISTRICT NO. D- 1-G.0 6-004?25, TONORABLE SUZANNE C OVINGTON JUD G.E PRESIDING

ry.q l$ O,RlF{ D,rf t I. q

iN,f

PN

AppellantRorkA.nsernnt & Vending, L,P. ("Roarld') frled suit against appellees Susan Cor,rbs, Comptroller

,of Public Accots of the State of Texas, and Greg Abbott,

Attorner Gerreral of the State of Texas (collectively, "the State")n seeking a refunrl,of sales tax
assessed

on its purchase of the "plush toysl' used to stock its coin-operated amusement cfane

machines. Tho parties filed cross.motions for summaryjudgmenf; the trial oourt grated the State's

moon and denied Roark's; cletermining that Roark was not entitled to the claimed sale-for-resale

exemption. it

-5e

Tex. f'ax Code Arin, |j 151.006(aX3) ('trest 2008). On appeal, Roark argues that plush

is entitled to the exemption because the record conclusively establishes that it purchased the

toys for the purpose of permanently transferring them to its customets as an integral parr
taxable amusement services- See id. We

of its

will reverse the trial court's grant of summary judgment

in favor of the State, render judgment that Roark is entitle<I to the exemption, and remand the,cause

to the tral urt for a determination of the arnount of the tefund to which Roark is entitled.

FACTUAL AND PROCEDURIIL BACI(GROUND


Acoording to the stipulated facts, Roak owned and leased coin-opera[ed amusement
crane machines, which it paced at various glgcery stres; restflrrnts, and shoppng malls in Texas

and other states" Roark held a license issued by the Comptroller's office for amusement machines.
Lt

paid Texas, sales tax on its lease payme nts f,or the machines and an annuatr occupation tax for each

machine it owned in Texas"l


Each amusement crane.machine aonsists of a glass cabinet situated on top of
a

metal

bin thar holds the plush toys. Within the glass cabinet is a mechanical crane rm fitted with a claw
at one end" A handle on the outside of the rnachine cootrols'the orane arm and claw; the handls
operates as a joystick tO control the movenrent of the crane

arm. Patrons gain operational oontrol,

of the crane arm and oiaw for a short peiorl of time by inserting ooins, typically one or two quafers, into the machine. Pressing
to lower. Once the claw drops, moving the handle causes the claw to close and

button pn one cnd of lhe handle causes the mechanical arn and lw

lift, raising any

plush toy that it may have grasped. The amr then positions the claw ovef a chute, which leads to a

In a publication explaining the classifications of sales and use tax exemptions,

the

Comptroller notes hat coin-operated amusement- and personal-senices rnachines tvere exempted from sales tax in 1984 and are instead taxed "under a separale tax levied on a per machine basis." Se Texas Comptroller of Public Accounts, "Limited Sales and Use Tax," available at http://window.state.tx.us/taxinfo/incidence/limit.html (accessed Dec. I 5, 20 1 0)"
2

try.: If th clarv hs success:rlly grabbed and held a toy," the'claw relsases the toy,tfirough the chute and.,nlo ,the tray, wherc

it can bo letdeved by the ciistmet. It is undisputed that

if

the olaw

is positionccl conectly,
physical possession,

it will retrievc 'a ,to!; over which :the patrol gains permanerrt
it
pid

On the basis of these stipulated facts, Roark sought a rfund of,the sales tfix

on the plush toysused to stoclc the machinss, arguing that the toys are,sub,ect to the salE.for'iesale

exemption'because they.are traRs{red as,an inlegral pait ofRoarkts taxable musernent service.
^$ee

o'sale for rsalel ta:include sale of "tangible Tex; Tax Code 'Ann" 151.06(X3) (defining

personal propertyto a putcha.ser \vho acquires the:property u s,:puryose of transferring'it . . . as

anintegralpartofataxableservicel');rd.$ l5l.0l0l(a)(l)(including"amusemsntservices"within
definition-af "taxble,serviccs"). Ttre State counteretl that the integralitrarr$fer eNernption does not
apply arguingtht&orlds services arEot,"taxable" for purposes of'lhe sale-for.resale'exemption becausethe tax.eodeispecifically-exempts coin-operated amusement sorvicos:&or sale$ anduse tax"
See.irt.$ t 5l .33.5 ("Arnuseaent ndlpersonal services provided through coin-operated tnachines that are operated
Slatens view,

by the oilsumer exsmpt. fom the xs impo$ed by this chapter.")- Thus, in the
Roarkis the,ultimale consurRer ofany.tangiblopersonal property-including the plush

'Ihe parties urged their respective toys-used to perform ils.non'taxable amusernent sewices.
positions on cross-motions forsummarV judgment; the trial court gtanted the State's motion and
denied Roark's. This appeal followed.

STANDARDS OF R-VIEW
To be entitled to sumrnaryjudgrnont, the movant must eshblish that no genuine issue
of materil fact cxists and that it is entitled to judgment as a matter of

law. Tex. R. Civ. P. 'l 66a(c).

ln our de novo review of a sumnraryjudgmeut, we indulge everyrasonable inference and resolve


any doubts in the t-onmoynt's favon Ssulhwestern Elec. Pawer Co. v. Grant, 73 S,W.3d 211,215

(Tex. 2002). When, as here, both parties move fbr summary'judgment on overlapping iszues and e distrct court grants oncmotion and denics
the other,

weeview thesumrnary-judgment evidence

presented by both sides, determine all questions presented, and render the judgment that the district.

court shquld have rendesd. Texas l4/orkers' Comp; Comm'nv. Patient Advocles, 136.S.W.3d 643,
648 (Tex.2004).

To the xtent that the issues in this appeal turn on matters of statutory.construction,
we review rhose questions de novo,
S'ee

Btggv. Edwards Aqutfer Aath.,71 S.W,3d 725t734 (Tex,

2002). Our primary concarn in construin! stahtps is to give effect to the legislature 's intent. .rle
v. Shumake,lgg S.1V'.3d 279,284 (Tex. 2006), In so doing, we use definitions prescribed by the

Iegislahrre an<i consder any technicat or particular meaning that the words have acquired. Tex.

Gov't Code Ann.

3l

1.01 I (b) (Wesf 2005). Othenvise, we oonstrue the sttute's wor.ds according

to their plain and common meaning, Texat Dep't of Trnsp. v."City

af

Sunset

Vslley, 146 S.W.3d

637,642 (Tex. 2004), unless a contrary intentisn s apparent from the contex-t, Taylor v. Firemen's
& Policenten's Ci:vl Sertt. Gornm'n,616 S.W.zd 187, I 89 (Tex.

l98l ), or unless such a construction


Loutzenhiser,l40 S.W.3d35t, 356

would leadto absurdresults,(lniversity ofTex. Sw. Med. Clr.

v.

(Tex. 2004). We construe administrative rules, which have the same force and effect as statutes,

in the sa{ne mqnef a-s statutes.


(Tex. 1999)., Unless the ruie
is,

Rodrlguez

v.,

Servlce Llayds Ins. Co., 99? S'IV.2d 248,754

ambiguous,, we

follow ils alear language.

Irt.

So long as $e

adr-ninistrtivelinterpretation is not plainly efioneous or inconsistent rith tho regulation,we defer.


to,an goncy'sintepretation,ofs

swnde,whenthere is vagueness, arnbiguity, orroom for:polloy

deter,mintions in ths regulation. See id. at 2.54-55;.Gates


Servs., 252- S,11.3:d 90, 98 (Tex.

Tex,s

Dep't of Famly & Pratectiue

App.*Austin 2008, no pff,).

DISCUSSION

As the plaintiff in a tax-refund case, Roark had the burden of proving, by


preponderance

oithe evidence; thar it is entitled to a refind of the

sles tax it paid on itsurchase

oflplush,toys

r,rsed

to stock its amusement crane rnachines. 5,North Alamo lVater Suppy Car

'',t: ltttlacy County


v,

ppraisal r;r:t", 804 S.fl,2d 894"899 (Tex,

l99ll tTX Terrnnals

Corp.

Rylaner,?8',S,W.3d 63t, 634 (Tex. ,4.pp.-Austin 2002, no pet.). On appeal, Roark argues tht.

it is entitled to a.refund because the toys ars transferred to the, tustorner as an integral part,of the
musomenf service

it provides:*-a servie thal it says is "taxablel'under sectiorr 151,0101 gven


Being

though

its coit-operated nahre subjects it to an exomption under section 151,335.1

lrnon-taxahle." "la:rablexsmpt," Roark maintains, is not the sanre thing,as being

In so arguing, Roark analogizes to other scenarios in which courts have reeognized


that, for purposes

of eonstruing the sale-foruesale exemption, it is sufficient that the eervice

l4 Tex. Admin, Code g 3.298(gXa) (2008) (Tex. Comptroller of Pub. Accounts, Amusement Services) (amusementssrvices provided through coin-operated machines thatconsumer operates are exentpt from sale,s tax).
5

z See also

isr classiled as ta*a,ble, inespective

sf whether it is sctual taxetl.

F'or exaple,

in

D,ay

&Ztnmerntsn, Ine. v, Cal'vert,the Texas Supreme Court held that the sale.for-resale exeuiption
uppliedto the trnsfer'of items from
a

defcnsecontractor:to the federalgovement, even though fhe

uttimate resale could ncvt in fact be taxed in light of the tax code exemption fo gov.erlnrental

entities. 519 S.IV.2d 106,

ll0-ll

(Tex. 1975); see also Strayhorn v. Raytheon E-Systems,

ml

S.W.3.d 55:8,,5?0 {Tex.

App,-Austin 2003, pet. denied) (apply ngDa: &Zim;mermn analysis lb

t6 exemption elsimed under tax code seetion 151.309 for items sold to gnvernmental etitig,.

both of these cases, the sale-for-resale exemption was held to apply despite the applicabiliry of an

additicnal examption,ensuring. ht the esold:items wre nt taxed in fact" Consistent wilh

tbese:

,precedenls, this Courtrecentlyheld in7.lyen, Inc. v. Cambs that applicatiou.of-the'sals-f,o-resalo

exempion d.oes not tuln

o whethe the taxpayer cn show that the subjett iterls are aehrally resold

and taxed iR, Tcxas,, 311 S,f/.3d 676 690 (Tex.

Ap.-Austin

20,10 per. denied) ("The

,ale=forrfesale statute: simply, requires that the senjce to which lhc transfer propertyr is i*tegral be a taxable

sf tangible

p-ersonal

service*not that it actually he taxed in the particular insfanoe

in question.").

Roark's view also finrls support in th toxt and overall statutory scheme of the lax

code. S,ubehapter A of chapter


*f*xability"
as a'theshold

l5l
an

of the ,code, which govems sales and


item

use txo prssents

question:

is eithe taxable beoause it is tangible personal

properly

orataxableservice,oritisnottaxable.,feeTex.TaxCodeAnn"$151-010("'Taxableitem''means
tangibl.e personal property andtaxable

services."). s discussed above, "'ft]axable services' means,'"

rnong thff specificlly enumertd srvices, "amusement $erviees,'o

$ lSf .Oi0t{ax1).1 ft*,

in this se0tion of the coile that'we wouki

expect"the, legislafure to exctrude,from taxrtbility any

serviccs thatit,did notjnteod tobecategori?d:as,'rta(abl"t''as, forexainple,

it

has dne in cawing

out the repair and restoration of certain vehicles and computer progfams from the otherwise-taxable

repairandrestorationserviceslistedtherein. Seeid. $ l5l.0l0l(a)(5)(definingrepair,remodeling, mtintenance, and restoiation ,senices


as,

laxble except Those perbrmed,on ,iriaft; certain

watercraft, rnotor vehicles, and computer programs).


Once ,n itern is determined ,to be taxable under subohapter',, the nexl question is

whethsr,itissubj,ecttonexernptionundersubchapterH..Seetd $$ t51.3tl-.355. The.initial


pr-ovisi'on ofsubchapter H states that

"[i]f

a tatcable ffem isexempted foar the taxesirnposed

bylhis

ehaptor, th.e sale,tcrage, uss or,otherconstrmption'pf thc item is not subjec't to the,sales tax impoteti

by Section lsl.CIsl of this code or the use tc imposed by Section

l5l.l0l

of this code."

"/d.

$ 151,301 (emphasisadded). Thus,

a$ the pla.in language

of soction 151.301

:demRstratesn the

appticabi tity of,an,exemption:does not traitsforrn the charactsr of an item fror,n taXable to nontaxable; rather,

it

rerrains a taxahle fterr, bul is one that is subject to an exemption. Here, subc]rapter'tI

provides,,exernptions'.for rmuseaentservices that are provided through coin-operated machinesrsee

t g

I5

,33,5, as,wll as,those provided by certain

nonrofit organizations,, educatisnal institutions,

See also id. $ 3.29S(aXl)(E)(iv) (inctuding "games of skill" withn <tefinition of "amusement services"). Based on the stipulated facts attached to the palties" summary judgment motions, which state that a paton's success in securing a plush toy depends on rvhether he correctly positions the mechanical arm and claw, Roark characterizes ts amusement crane machines as games of skill,

andgoyernmentalentitiesandpoliticalsubdivisionsoftheState,seeid" $ 151.3101(a). Nothingiu


the starute indicates, howevgr, that such amuseme4t services cease to be n'taxabl. services"o'

The distnetion between nontxable sales and totahle sales thaf are subject to

an

exemption has been recognized in a number of other irnportant contcxts- With respect to burdens of proof n tax cases. for examplc, Texas co-urts have lortgheld that

rrhere a question of exemption from taxation is involved, the stahrte rust be csnstrued liberally in f,avor ef the taxing authorty, and strict against the one
clairnirrg the exernption To the contraqy, weie the question involved.is whether the

persotronwhom thet*x.is,sougttobeirrp.Qed comeswithin the stantorvprvision imposing the tax, the statute must be construed strictly against the taxing authority an liberally in favor of the person sought to be held:

Texas(JnemploymentComp, Camm'nv. Bds.s, l5f S.Vf;2d 567,570 (Tex. 1941);seealso Strayham


v. Lexittgton Ins, Co,, 128 S"W.3d 772,7&5-86

(Tex. App;-Austin 2004) (holding sarne), af'd,

Z0g S,W.3d 83 (Tex.

2006). Similarly,

the' Comptrolle. has consistently emphasized that "an

js an item that is simply not exemption carves out an otherwisE taxable item, whereas an exeluson taxed

by the cocle." Comptroller Hearing No. 30287 (1993); see a:lso'Comptroller Hearing
are

No,44,389 (2001) ("Claimant's argumentthat the services purchased frorn [seller]


suggests that

non-taxable

it is claiming

an exchnion from tax, but th is a mischaracterization. Claimant's

argulnent is rn exemptian clam pursuant to [subchapter H of the tax codeJ,' (emphases added)),
Because r,ve must read the statute as a whole and give effect to every part, see City v, City of

of

San

Antono

Boerne,lLl S,W.3d22,25 (Tex. 2003), we cannot adopt

an interpretation that improperly

conflates these tu'o concepts when the legislature has clearly indicated that they are distinct.

Based on the foregoing, we hold that the amusement servces Roark provides are "taxab le ssrvices" for purposes ofthe sale*for-resale slatute. Accordingly, the
S

tate was not entitled

to summary judgment on the glound that section I5 1 .335 of the tax code renders Roark's services

"nontxable"

as a mtter

of lalv.
rryas required to prove

To be entitled to sumrnary judg.ment itself, however, Roark

conclusively that it acquired the plush toys for lhe purpose of transferrjng them as an integral part
of its amusement sewices. ,9es Tex. Tax Code

An. $ 151.006(a)(3). On appeat, the

Statc does not

dispute that the plush toys are integral to the pertbrmance of Rork's amsemsnt serviceso agreeing th! rhe plush toys serve s the incentive lo play the game,s lnslead, the State argues bhat Roark o'resold" by demonstrating that care, custody, and control failed to "qhow that the plush toys were
thp items was transfened to the purchasers of the amusement service,

of

particularlyto those who were

unsuccessful at retrievirrg a
,a taxable service

toy"

See

id. $ l5 1.302(b) ("Tangible personal propely used to perform

is not considered resold unless the care, custod and control of the tangible

personal property is transferred to the purchaser of tire sewice-").

We note that our interpretation of "taxable services" here is consistent with the object and purpose of the sale-for-resale exemption, which is desgned to prevent double txation. See Shrp -v.

Clearview Cable TV, \nc.,960 S.W.2d 424,426 (Tex. App.-Austin 1998, pet. denied)' Ths parties acknowletlge that the coin-operated nature of the amusement seryices does not permit them io ,*..pu axation, because they are irl fact taxed under the occupations code and, zis the Cbmptroller has explained, "impracticality" in collecting a tax is a recognized bsis for a tax exemplion, see ,,Limited Sales and IJse Tax," ,ruprr note I, A coin-operated service whee no human attendant is present to collect tax or provide change arguably poses such an impractical circumstance.

s We likewise conclude that the transfer of ptush toys is integral to the amusement service.
See 7-Eleven,

Inc, v. Comhs,3ll S.V/.3d 676, 687 ('Iex, App.-Austin 2010, pet. dcnied)
9

(construing "integfal" to mean "important to the performance" of taxable scrvice).

In response, Roark points to the parties' stipulations that a patron gains operational

control over the mechanical arm and claw by inserting coins into thb machine; that

if

the claw is

positionedcorrectly, itretrieves aplush toy; and thatwhen apatronsucccssfullyobtains aplushtoy,

hc gains permzurent physical possession of

it.

The summary-judgment recod also contains an

afhdavit from Roark's president, who averred that "Roark transferred all ofthc toys it purchased to
its customers, excep[

for toys lost, stolen, or damaged." Thus, the vidence stablishes that

care,

custody, and control of evcryplush toy is eventually transferred to lrk'.s customers in satisfaction

ofsection 151.302(b), even if everycustomerdoesnotnecessarilyobtain toyeverytimehe plays thegame. Basedontherecordinthiscase,weagreewithRoarkthatthecare,custody,andcontrol


element s satisfiecl here"6 We therefore sustain Roark's issue on appeal.

CONCLUSION
Because Roark was entitled to the sale-for-resale exemption for the plush toys that

it trnsferrcd
juclgment

as an integral

partof its amusementservicesr wereverse the trial court's summary


rende judgment that Roark is entitled to the sale-for-resale

in favor of the State and

The State further argues that he Comptroller has by rule determined that a game operator such s Roark is the "consumer of hc items it purchases to provide its sewices that are not taxable." See34 Tex. Admin, Code $ 3.301(bX2) (2008) (Tex. Comptroller of Pub. Accounts; Promotional plans, Coupons, Ietaler Reimbwsement) (providing that operators of games in which each participant does not receive some merchandise or prize become consumers of merchandise so used nd are liable for tax assesse<l thereon), Having determined that the amusement seruices in question are taxable services, howcver, we do not defer to the Comptroller's interpretation of this rule, as it

conflicts with our interpretaton of anunambiguous provision of the tax code. ,See Public UtL. Comm'nv Gu[f StatesUtil- Co,,809 S.W.2d201,207 (Tex. 1991); VistaHealthcare, [nc:.v.Texas tuut. Itt,g. Co.,324 S.V/.3d 264,272 (Tex. App'-Austin 2010, no pet.)'
10

M:1

.s,ler.r,rpfi,on'underthcsecitqrp!np,c W-:,rmand the,csuse to thctrigl*orr,t for Srtligr

prg.s*dir$

,J,

&nv*selind. &endarel

ia

pastt

F'led: Jn$Arryi6, 201

Itr

I IC
'lr

Westlaw
Y,T.C,A., Ta.r Cole $ 151.006
Fage I

c
Effective: September lr 200?

Vernon's Texas Statutes and Codes Annotated Cunentr.r-ess Tax Code pf's &-Annps) Title 2, State Taxation (Be_& Annqs) Subtitle E, Sales, Excise, and Use Taxes op]]hplg.t_l!_. Limited Sales, Excise, and Use Tsx fRefs & Annos) ^@Sgbghplgr A. General Provisions +$ 151,006, "Sale for Resaldn

(a) "Sale fo resale"' means a sale of:

(l)

langible personal propefty or a a<able serviee ,to apurchaser who aequires the property or serviee for the purpose of reselling lt in the Untod Srates of America or apossession or tenitCIry of the United States of Arneica sr in the United Mexican States in the normal eourse ,of btminess in the form or candition in which it is acquired or, as.anattaahpent to, f intsgral part Of other tangible personal propetty or taxable servi.ce;

(2) tangible personal properfy to a purchaser for the sole purpose of the purchaser's leasing or renting it in the United States of Amerca or a possession,or tenitory of the United States of America or in the United Mexican States in the normal cource of business to another peson, but not if incidental to the leasing or renting of real estate;

(3) tangible personal property to a purchaser who acquires the properfy for the pupose of transfening it in the United Stales of America or a possession sr terrtory of the United States of America ot in the United Mexican States as an integral part of a'taxable service; or

taxable service performed on tangible personal property that is held for sale by the purchaser oi the taxable service.
(4)
a

(b) Subsection (a)(3) applies to a transfer of a wireless voice communication device as an integral part of a taxable service, regardless of whetlter there is a separate charge lor the wireless voice

A2010 Thomson Reuters. No Claim

to Orig. US Gov. Works.

V.TC.A,, Tax Code $

15,1.,006

Fage',2

sommunicationdevice or whetherthe pwchaser'is fhe provider of the taxable:se*ice, fpayment for the,ser,vice,js a conditlon for receiving the wireless voice communicatian device,,

cREDIT{S}

Acts 198, 67th Leg,, p. 1 546, gh. 389, $ 1, eff. Jan.


C.S.,o

eh.3l, art.7,7,efl

Oct.2,1984;

i,

1982. Amended'by

Acts 1984, 68th Leg., 2nd ;Acts

HISTO'RIC.AL .ND STATUTORY'NOTSE

2008 Main Volume

Aets 2007i, 80th Leg., ch. 1266 inserted subsec" (a):designation, in subsec. (a)(2) inserted "in the normal course ofbusiness"; added subsec. (b).

Secthn l6 of Aets 200?, 80th Leg,, eh. 1266 provides;


'*The ehangs in la$r.,made by this Ac[ does not affect tax liability'accruing before thseffuetive date [Sept. l" 200?] of this Act. That liability continues in effect as if this Acthaci not been enacted, and

the fbnnr law is continued in effect for the collection of taxes due, and fur clvil ,and eriminal enforement of the liabiliry lor thase taxes"'

Prior Laws;

Acts 194I, 47thLeg., p.269" oh. 184, art. X, $.1.

Acts I950, 5 I st Leg., I st C,S., p. 10, ch. 2. art.

X, $ t.

vBmon's Ann.civ.st. arrs, 7047/" qd _1a.

I l12;7a47L\, $ |

O 2010 Thornson Reuters. No Claim to Orig, US Gov, Works.

Exhibit D

Westtaw
V.T.C,A., Tax Code $ 151.302
Page,1

Effective: [8ee Text rn ertdmentsl

Vemon's Texas Statutes and eodes,nnolated Currentness, Tax Code (Refs & Angos) Title Z" StateTxation (Rgfs & Annos)

$ubtltle E. Sales, Excise, and Use Taxes ^s Chapter 151 . Limited.sales, Excise, and Use Tax (Refs & Annos) v*SubcheplgIll' Exemptions fRe & Annos)
"+,$ 15,1.302. Snlos,

for

Resal.

(a) The sale lor resle of a'txable iternib exernpted

fion

the ta".(es imposed by this chapter.

(b) Trgible:persohal prop{y'used to perforr*a taxable service is not considered resskl u$leSs t'he' eare, p,ustod), ad eontid:o.f thg tangible personal property is transfemed to,the purchaser of the serrice"

(e) Internal or external wrapping, packing, and packaging supplies used by a person in urrapping" packing, or,paekaging tangible personal propeityorn the perforrnance of a servjse for thepurpose of fu*herng the sale of the tangible personal propeftt or the service may not be purchased by the person for resale.

(d) In this seetion, "wiapping,' r*packing,"

and "packaging supplies" include:

wrapping paper, wrapping Wvine, bags, oartons, rates, crating material, tape, rope, rubber bands,labels, staples, glue; and mailing tubes; and

(l)

(2) excelsior, strawo cardboard fillers, separators, shredded paper, ice, dry ice, cotton batting, shirt boards, hay laths, and property used inside a package to shape, form, s(abilize, preservs, or protect
the contents.

cREDIT(S)
O 2010 Thornson Reuters, No Claim to Orig. US Ciov, Works

Exhibit E

Texas Comptrollbr of Publo


.?,0060&,864H

Acount$,

STA.R System

'-l*r-.*nj-t-rbht.i.,iri*-ira*;-!3*;i.-lt.i,-,nta*'ajiiFfll.filL'{i--,.a.+itl+r--nt-q*i+-r'.!.q-i--;;.e

HEARING N. '46,39'5

TX-p.lfER N,9; * * rt **,*:f,r$*, *. A'UDIT CIFFCnl *'lr**ol''***'***+ UlT' PERI.O'I JAN'U'ARY' 1.,

2$E:4

$tE$

rftt$E

B EFORE TH COMPTKO'ILER OF FIIBLTC ACCOTIN.T$ OF THE STATE OF TtsT(AS

T$ANOR H. TIIM Chief AdmrltFative taw Judge

V[0f0R t6,!{N. Sih{$:N*


Representing, Tax, DVsion

t*,***r**{':t*.$ fl Repres-enting,.CffmaRt,

OMFTR
At Claimant's
par,ties..
requestn

DECT$TN

PRELtrII{INARY DISCIJSSION; this Decision is based on the written submissions of the.

of th'e Comptrollar's,offtc.e that p,erfi t'o elajmant and tho,esUes lnvolvpd irt the ease, [Inles-s pthenvise irndicatod, allspation refr.enCes,e,to.Ttle,? ilf lexas: Tax Code andll refrences fo R.los,'are to ssctions.of Title 34, Texas Administative Gode:
Of..,ficai notlae has'b'eea talsen of-al{ rEcords

CLAIMANT'S CONTENTION:
Claimant contends that a refund is due for tax paid on prizes and merchandises used in its coin-operated amusement machines because they were purchased for
resale.

FINDINGS OF'FACT: I,
C la im an

op erates

RESTAUI{ANT restaurants.

2.
3.

Claimant has various coin-operated games and amusement machines at its restaurants.

On February 8, 2005, Claimant fled a claim for refund of sales and use tax paid during the periocl olJanuary t,2002 through September 30, 2004. Claimant's refund claim seeks
as

the recovery of tax paid on prizes and merchandise (hereafter referred collectively "'prizes"') used in coin-operated games and amusement machines.

4.

On Augu.st 3, 2005, the Comptroller's office denied the.refund claim on the basis that Claimant cannot purehase prizes tax flree because Claimant "'is not providing an amusement service."' Clairnant's request lor a hearing resulted in ttre docketing of the above-captioned hearing,

pays an annual license

Claimant holds a license issued by the Comptroler's of fice lor amusement machines and fee. Claimant is also required to pay annually an occuption tax on eaeh coin-operated machine that it exhibits or displays. For payment of the tax, Claimant receives an occupatisn tax permit decal which rnust be affixed to each coin-operated machine.

5.

Clairrrant's subrnssion of evidentiary materials consists solely of rend schedtles pertaining to the refund claim period. No verification of the claim has been accomplished.
Claimant presented no evidence to show that it has non-coin operated amusement games at its restauranls.
7

6. .

8. Claimant was audited for sales and use tax complianee lor the period January l, 1999
through Ivlay
3

1,2002. The audit was a managed audit,

9.

Prior to the February I 8, 2005 relund claim, Claimant had filed fve (5) sales tax refund

claims involving tax pad on prizes. Agency Work Manager reflects the following history: (a) Claimed filed a claim on fune 21,2004 for May 2000 reporting period, (b) Claimant filed
2

a claim on

July 19,2004lorJune 2000 reporting period, (c) Claimant filed a claim on August 16,2004 for July 2000 reporting period; (d) Claimant I'iled a claim on September 21, 2004 tbr August 2000 reporting period; and (e) Claimant fled a claim on October 20, 2004 for September 2000 reporting period.

The refund claims lor May 2000 and June 2000 reporting periods were handled together, and on September l, 2004, the auditor dsnied both claims, but erroneously noted in the clenial lettgrthat the.refund being denied was for the period ofJanuary l, 1999 through May 31, 200?" Claimant requested a refund hearing, which resulted in the docketing of l{earing No. 45,577. Though the claims for May 2000 and June 2000 were denied on September 1,2004, the auditor denied the claims again in separate denial letters, both dated November 22,2A04. Cl.aimant requested a refund hearing, r.vhich resulted in the docketing of Hearihg Nos. 45,825. Both HearingNos.45.577 and 45,825 were dismissed and became final in September 2005.
I L The three remaining refund claims lor the periocl July 2000 through September 2000 were handled together and the claims were denied on March 16, 2005. Claimant requested a refund hearing, which resr-r.lted in the docketing of I{earing No. 46,374. The hearing was disnrissed on September 8,2005,

10.

CONCLUSIONS OF LAW AND DISCUSSION:


Claimantls contention should be denied. During the, refund period, Claimant purchased prizes that were used in its coin.operated amusement machines. Claimant now seeks the recovery of sales tax paid or aecrued on those prizes. In its Statement of Grounds, Claimant also suggests that it is seeking a refund of tax paid or accrued on prizes tha[ were used in non-coin operated amusement games, but in subsequent pleadings, both parties fooused their arguments on coin-operated machines only. Because there is no evidence in the record to establish non-coin operated amusement games at Claimant's restaurants, this deoision will address Claimant's contention as itpertains to co in-operated amusement mach ines. Claimant's basis for the refind clairn is that it resold the prizes to its customers. The Tax Code defines "'Sale lor Resale"' in part, as a sale of "'tangible personal property to a purchaser who acquires the propefry for the purpose of transferring it ..- as an integral part ola taxable service."' SECTION 151.006(3). The Tax Code exempts fron sales tax "'[tJangible personal properly used to perform a taxable service s not considered resold unless the care, custody, and control of the tangible personal property is transfened to the
3

purchaser of the servce."' SECTION 151.302(b)- Claimant contends that it provides amusement services and had transferred the care, custody, and control of the prizes to its customers. Claimant argues that the audtor's disallowance of its refund claim based on Rule 3.301(bX2) was in enor because the rule's requirement that prizes rnust be transferred to each customer is inconsistent with the statute. C laimant raises other arguments that questions the validity ol Rule 3.301(bX2). However, the audtor's denial was not based on Rule 3.30i(bx2), but on the auditor's determination that Claimant did not provide taxable anusement services. See; Finding of Fact No. 4. The Tax Division's position. in this proceeding has been consistent with the auditor's, so Claimant's primary focus on Rule 3.301{bX2) is misplaced. Claimant must demonstrate that it provides taxable amusemsnt services, and only after such showing has been made would the applicability or invalidiry of Rule 3.301(bX2) be considered ripe for adjudication.

The initial determination to be made is whether Claimant provides taxable amusement services. The Tax Division's position is straightforwad. Beeause ilnusement services provided through coin-operated machines are exmpt from sales and use taxes under Section 151.335, the Tax Division contends that Claimant does not provide taxable amusement
services.

Claimant contends that even if amusement services proVided through its coin-operated machines are exempt rom sales tax, the services nonetheless fall within the definition of amusement services under Sections l5l.0l0t(aXl) and 15l',0028. Claimant argues that amusement services that it provides are "'taxed as taxable services under the Coin-Operated Machines chapter of the Occupation Code."' According to Claimant, the Legislature intended to include the operators of coin-operated'amusement machines wthin the scope of Section l5 1.302(b) because the operators provide amusement services and pay an occupation tax on each machine. Claimant believes the "'taxable seryi.ce"' element of the exemption is
met.

The Tax Division responds that Ctaimant's argument is without.merit because occupation taxes and sales tax are different fypes of taxes and cites to USAA v. Strayhorn, 124 S,W-3d 722 (Tex. App,- Austin 2003, pet. denied). That signi.fcant distinction, according to the Tax Division, precludes Claimant from qualiffing forthe sale forresale exemption, TheTax Division further argues that legislativ intentwouldbe contravened if Claimant's contention were acoepted. Citing Sharp v. Clearvew Cable TV, |nc.,960 S.V/.2d 424 (Tex, App. Austin 1998, pet. dened,), the Tax Division argues that thc purpose of the resale exemption is to prevent double taxation of sales tax, yet under Claimant's reading oflthe statute, no sales tax would be collected on the prizes from any one.

Claimantls construction of Section i 5 1.302(b) requires the acceptanee that the Legislature intended to include providers of non-taxable services who pay occupation taxes within the scope oflthe sale lor resale exemption. Claimant's aclvocated construction is not supported by the language of the statute,

statute should be construed within its sttutory scheme and context. See, USAA v. Strayhorn, supra. When presented with an issue as to whether an exemption found in the occupation tax statutory scheme extends to sales tax, the court of appealsin USAA concluded that occupation taxes and sales and use taxes serve different pulposes and that the occupation tax exernption should be construed within the occupation regulatory context. The converse is also true. Section 151.302(b) is a specific exemption created by the Legislature for sales and use tax; thus, the exemption must be construed within the statutory framework of sales and use tax. And, reading the sale lor resale exemption in its proper frarnework and context makes clear that the requisite transfer must be done as an integral prt of performing a service that is taxed under Chapter l5l of the Tax Code, That requirernent is not met here.

Amusement services flrrst became subject to sales tax, effective October 2, 1984 " SECTION 151"0101(aXl), Effective that same day, the Legislature exempted lrorn tax "'amusement and personat services provided through coin.operated machines that are operated by the consumer."' SECTION 151.335, The contemporaneous enactment of both statutes establishes an unequivocal intent of the Legislature to not tax amusement services provided

throughcoin-operatedamusementmachines. Consistentwiththatintent,theComptrollerhas determined tha[ coin-operated machine operators provide non-taxble seryices and are the ultimate consumers of tangible pcrsonal properqy used to perform thosenon-taxable ssrvices. See e.g,, Comptroller's Decision No, 27,467 (1991) and,43,477 (2003)' The agency's construction of Section 15 1.302(b) is reasonable and does not contradict the plan language

of the statute,
[n administering tax statutes, the Comptroller must effectuate the Legislature's intent. It is settledthatthe Legislature enacted Section 151.302(b) to prevent taxing both the taxable servce provider and the taxable service purchaser lor the same tangible personal property necessary to provide the taxable service. Clearview Cable, suprq. Under Claimant's construction, tangible personal properfywould escape sales tax because a non-taxable service provider could claim the resale exemption by paying n occupation tax and the purchaser would not be liable for sales tax on the purchased service. The Legislature could not have intended such a result when it enacted Section 151.302(b). Had the Legislature intended to exempt tangible personal property based on payment of an occupation tax, it would have done so explicitly, and not through the sale for resale exemption provision, as asserted by
Clamant,
5

Claimant does not provide taxable amusement services throgh con-operated machines. Beeause Claimant has not established the applicability of Rule 3.301(bX2) to the facts of its case, there is no need to address Claimant's arguments on the validity of the rule.
The Tax Division raises another ground for denying a portion of Claimantls refund claim, Specifically, the Tax Division rgues that the refrjnd clairn relating to transactions covered by the refund.perod ofJanuary 1,2002 through May 3 |,2002 is barred because it constitutes a prohibited second refund claim.
The burden is on the Tax Division to demonstrate that the claim is a prohibited second refund claim. See, Comptroller's Decision No. 42,657 (2006). The Tax Divjsion relies on the refund period noted in Flearing No. 45u577 as the basis of its defense, but agency records does not indicate that the refund claims precipitating Hearing No. 45,577 included the period of January 1,2Q02 through May 3 1,2002. Actually, all of the prior refund claims involving prizes were for tax paid or accrued during various reporting periods in 2000, indicating that rhe auditor had erroneously included periods 2001 and 2ftO2inthe refund denial letter. Se, The Tax Division's contention that a portion of the Finding of Fact Nos. 9, 10, and refund claim is barred as a prohibited second reftrnd claim is unfounded.

ll.

Claimant's refund elaim, however, was properly denied besause Claimant provides
non-taxable servies and must pay or accrue sales tax as the cdnsumer of the prizes.

RECOMMND,{TION:
,Based upon

the foregoing hndings of fact, conclusions, and discussion, the denial of the refund claim should be upheld.
Signed August 3 l, 2006

ELEANOR FI. KIM Chief Administrative Law Judge

HEARING NO. 46,885 ORDER OF THE COMPTROLLER


The above decision of the Administrative Law Judge is approved and adopted in all respcts This decision becomes final twenty-three (23) days from the date olthis Order.

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S,AI.ES A.iI USE TAXI'RFD

EgFORg. THE C OMPTROL L gR OF.PUBLXE ACCO.TTNTS OF THE STATE OF TEXAS

TIMOTHY MAST.{BURN
Administrative [.aw Judge
DEANNE: Z, CUMMINGS-SCOTT Represertting Administrative l-learings Section
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resenting C lairnant

COMPTROLLER'S DECTSION

P'RELIMINARY COMMENTS

AtClaimant's request, this Comptroller's Decision is based,on the wrtten subrnissions ofthe parties and is issued pursuant to Expedited Hearing Rule I .13., Claimant has waived the issuanoe of a proposed Comptroller's Decision.

The Administratve Law Judge (ALJ) has taken official notice of all records ol the
Comptroller's sffic.e that pertain to the Claimant and the issues involved in the case. Unless otherwise indicated, all Section references are to Tex. Tax Code Ann. (Vernon 2002) and all references to Rules are to Title 34, Texas Administrative Code (2002),

CLAIMANT'

CONTENTIONS:

Clairnant contends that purchases of prizes awarded patrons at Claimant's theme park are exempt under Seclion t 5 I .302 and sales tax paid thereon for the involved period should be refunded,

l.

2. Claimanl contends that the allocation of credits for the involved period was elroneous, or requires explanation, and that if erroneous, a refund is due flor any overpayrnent.
FINDINGS OF FACT:

I.
2.

Claimant, *******{'*'1"*i'*r operates an amusement park

lt*+*+tt++*+l')t*, Texas,

Claimant wa5 audited for Texas sales and use tax compliance for the period March l, 1998, through December 3 l, 2001, as a result of which a Texas Notitcation of Audit Results dated December 12, 2A02,was issued, reflecting a deltciency, penalty and statutory interest. Claimant has paid the assessment.

3. A portion of the deficiency

assessed relatedto prizes purchased by Claimant (known in

the industry as "plush") lo be awarded to patrons of Claimant's amusement park. Exam 12 of the Audit Report ref'lected the portion of the deficiency related to game prizes.

4. By claim frrled March 20,2003,Claimant seeks refund of the tax, penalty and interestpaid particularly relating to Exam l2 of the audit, Claimant has requested an expedited hearing

under Rule Lll, and all prerequisites to the issuance of this Comptroller's Decsion under the rule have been fulftlled.

In Hearing No. 33,665, the Comptroller considered the redetermination olClaimant's predecessor's Texas sales and use tax compliance audit for the period October 1, 1990, through April 30, 1993, in which Claimant's first contention lrere was presented. Comptroller's Decision 33,665 (1997) denied such contcntion.

5.

No. 39,110, the Comptroller considered the redetermination of Claimant's predecessor's Texas sales and use tax compliance audit for the period May l, 1993, through March 3 l, 1996, and in Hearng 39,909, the Comptroller considered the redetermination of Claimant's Texas sales and use tax compliance audit for the period March l, 1996, through February 28, 1998, in both of which Claimant's Ftrst contention here was also presented. Comptroller's Decision 39,1 l0 and 39,909 (2001) denied such contenton.

6. In Hearing

7. Caimant
amusement

operates coirr-operated and non coin-operated games

of skill and chance

at its

park. Only successful contestents are awarded prizes.

8. No evidence was presented of any change or dillerence in the lacts presented in Hearing Nos.33,665,39,1l0 and 39,909 and considered by the Comptroller in denying Claimant's first contention in those prior cases.
DISCUSSION AND CONCLUSIONS OF' LW:
Claimant's eontenton must be denied. Claimant's subrnisSion in supporl of its first contention is as follows:
Taxpayer contends that the purchase oflthe prizes was exempt under the sales for,resale exemplion in Texas Tax Code section l51.302. The Taxpayer contends that the prizes were either resold to the Taxpayer's customers in the regular course of business in the form or condition in which they were acquired, or the prices were resold as an attachment to or integral part of a taxable service.
o'The

The Taxpayer contends that Rule 3,301(bX2), which states fhat the 'operators of games, or other concessions, in which each participant does not receive some merchandise or prize, become the consumers of merchandise used.by them and are liable to the State of Texas for tax based on the sales price or use of the taxable items purchased for use by them' is inapplcable, In the alteratve, the rue is invalid because it violates the Texas Tax Code or is unconstitutional.
The Taxpayer contends that the Comptroller failed to

follsw its own Rule 3.298(0( I ), which provides: 'sollers of service may issue a resale certificate in lieu of tax to supplers of tangible personal property only if care custody and control of the prope(y is translened to

the client.'

The Taxpayer contends that taxing its purchases of prizes would result in illegal double taxation because the Taxpayer already remits tax on the fees it charges to game participants for non coin-operated games and Taxpayer remits occupation tax on its coin-operated
machines.

The Taxpayer contends that the taxation of the purchase of the prizes is unconstitutional beeause there is no legitimate state interest in the distnction made by the Comptroller and the means chosen by the Comptroller to implement the tax bear [sic] no rcasonabls or substantial relationship to the objective of the legislature in enacting the taxstatutes. For
3

example, ilprizes were awarded to every game participant, the Comptrollcr would permit the velrdor to purchase the prizes tax-free."

The taxabilify of game prizes awarded to suceessful, but not all, game participants, is the subject of Rule 3.301(bX2), which provides: The operators of games, or other concessions, in which each participant does not receive some merchandise or prize, become the consumers of merchandise so used by them and are liable to the State of Texas for tax based on the sales price or use of the taxable items purchased for use by them. Retailers selling taxable tangible personal property to such operators or concessionaires shall collect and remit to the state the tax due on the sales to them. The Texas use tax is due on out-ostate purchases of taxable tangible personal property based on the purchase price ofthe rnerchandise. Clairnant afracks Rule 3.301(bxz) as inapplicable or unonstitutionai. lts applicabilitt to Claimant's game prizes for past audit periods was affirrned in Cornptroller's Decisions 39,110and39,909(2001)and33,665(1997), Theapplicabili$oflRule3,301(bxz)inother virtually identical factual circumstances was decided before then in Comptroller's Decisions

26,058 (1990), 27,467 (1991) and 31,8394,31,7094 and 3l,7llA (1996). The Comptroller's interpretation is established and has not been showrr by Claimant to be
erToneous,

Norhas Rule 3.301, or its application in the circumstances presentecl, been shown to be constitutionally invalid or prohibited. Claimant's identical constitutional argumen was rejec.ted in Comptroller's Decisions 39,1 l0 and 39,909 (2001) for prior audit periods and is rejected again here, Likewise, Claimant's argument that the game prizes are govemed by Rule 3,298 and are transferred as an integral part of a servise has already been rejected. Comptroller's Decision 33,665 ( I 997).

Te foregoing cases expressly determine Claimant's first contention adversely to Claimant for the preceding audit periods. Because there are no lactual differcnces that have been
established for the instant period, the ALJ concludes, based on these prior holdings and the prior Comptroller Decisions therein cited, that Claimant's first contention must be denied.

Claimant's second contention should also be denied.

In responding to ths contention, the Administrative Hearings Section (AHS) explains the application of the credits that are the subject of this contention:

"Claimant reported its sales to the Comptroller's Office on a monthly basis during the audit period. And when the Comptroller's Office audited Claimant for Texas sales and use tax compliance, the auditor observed that Claimant had underpaid the tax during some months and accrued tax credits during other months. The Comptroller's auditor therefore took each tax credit and applied them to Claimant's earliest tax shortfalls, penalties,and interest until the credit amounts were exhausted. After all credits were exhausted, Claimant still owed the
State [tax, penalties and interest]."

Sectibn l5l,50sauthorizestheComptrollertooffsetanoverpaymentforonormoreperiods against an underpayment, pena and accrued interest for thc same period or one or more qther periods, Rule 3,2 provdes that non-designated payments shall be appled in the order of the oldest liability frst, until the payment is exhausted. The procedure is to apply the credit to the o[dest period liability and its penalties and.interest, thence to the succeeding periods until the creclit is exhausted, as explained by the AHS, The procedure has been xistent for many years and is fi.rther explainecl, and expressly approved, in Comptroller's Decisisns 12,025 (1995) and 36,708 (1998).

Rule 1.40(2XB) to establish error in the credit allocation. No erroihas been specif,rcally atleged and none is apparcnt to the ALJ. To the extent Claimant:s secon contention seeks an explanation of the credit application procedure, Claimant is referred lo Comptroller's Decisions 32,025 (1995) and 36,708 (1998).

It

is Claimant's burden under

RECOMMf,ND,dTION:
Based upon the findngs of fact, oonclusions of law and discussion set forth herein the refund

claim under review should be denied, SIGNED May 14, 2003,

TIMOTHY MASHBURN
Administrative L aw Judge

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BEFORE THE COMPTROLLER

OF PU.B.LIC ACCOT.INTS OF THE STA.TE OF TEXAS


JO, GRECO

A.dministrative Law Judge

DeANNE Z. CLI\4MINGS-SCOTT Reprerenti n g Ad ministrative Flearings Section


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Representing Petitioner

COMPTRO LLERO S DECISION

PREIIMINARY DISCUSSION:
At Petitionersu reqest, this case
parties,
T,,he try'as

decided on the basis of written submissions, by the

,Fetitioners and the issues involvd in the case, Unless otherwise' i:ndiented, all Seetion, references are to Title 2, Texas Tax Code Ann. (Vernon:s 1992). References to Rules are ,to sections of Title 34, Texas Administrative Code.

ALi tsrk offieial noticE of alt rocord of the ,Comptoller's office that pertain fo the

PETITIONERS' CONTENTTONSI
Contention Applicable To Both Petitioners:
assessed on purchapes coin-operated and non coin-operated gamesTaxes were

l)

wrongfully

of prizes awarded in conjunction with

Conterttions Applicable Only To Petitioner

AMUSEMENT PARK

2) ,,Petitioner AMUSEMENT PARK disputes the assessments during the time periods under the certain Agreements because a valid agreement to extend the p:eriod of limitation was not executed between the taxpayer and the Comptroller as required by Section 111,203(a). ... Petitioner disputes the assessments made during the time periods covered by the following Agreements : April 30, 1997 ;November 3, 1997 ;Apri I 3, I 99 8; October 22, I 998; December 7,1998; and February 17,1999."
2

3) "The extrapolation used to calculate IAMUSEMENT PARK's] tax liabiliry


is
not, accurate."

on Exam 9

4) Record No. ***+, on Exam +*, should be deleted bec.-ause'0...

the auditor made

no

showing that the entry represents the acquisition Of tangible personal properly

by

AMUSEMENT PAI{K on which sales and/or use tax had not been paid."

FINDII\GS OF FACT:
The Comptroller audited AMUSEMENT PARK, and ts successor, CITY THEME pARK, LP, for sales and us tax compliance for the above-referenced audlt periods. As a result, each Petitioner lvas issued a Texas Notifioation of Audit Results (audit assessment) assessing an amount of tax, penalty, and interest. Each Petitioner timely requested a redetermination hearing, resulting in the docketing of the instant hearings;

l)

2)

Durng ther audited periods, Petitioners operated, an amusement theme park.

First Contention
Petitioners operated a number of eoin-operated and non coin-operated games of skill or chance at their amusement parks. Prizes were awarded only to successful oontestants of the games, On Exam 6 of AMUSEMENT PARK's audit, and on Exam 4 of CITY THEME pARK's audit, the auditor scheduled prizes purchased by Petitioners which were awarded to successful contestants of coin-operated and non coin-operated garnes of skill or chance

3)

operated by Petitioners. Second Contention

issued AMUSEMENT PARKS's audit assessment on July 16, 1999. AMUSEMENT PARK is a monthly fliler. Therefore, unless an exception to the general four-year statute of limitations for assessment or a tolling provision is applicable, or the limitation periocl for assessment was extended by agreement, any monthly report period ending on or before June 30, 1995, would be barred by limitations" Sections lll.20l, 111.203, 111.204, 111.205, I11.206, 111.207, l5l'40l,and 151.402.

4) The Comptroller

April 4, I997, AMUSEMENT PARK returned, via fax, a partially completed "Audit euestonnaire" to the auditor, at the CITY Audit Office. However, the name of AMUSEMIiNT PARK's designee for entering into an Agreement to Extend Period of Limitation (Agreement) for assessment was not included on the "Audit Questionnaire." IFOOTNO'I"E: BMX, Petitioner's Controller/Manager of Accounting, signed the "Audit

5)

On

'fhe form Questionnaire," and was listed thereon as the person to contact to begin the audit. contains a section that.requests the name) title, address, and telephone number of the taxpayer's representative "[w]ho, on behalf of [its] business, is authorized to enter into a written agreement extending the period of limitation during which the tax may be assessed, accept a notification of the 60-day requirement io obtain resale or oxemption certificates, and accept a notification of sampling procedures." The section also specifies that "[t]his [representative] would normally be an officer of a coqporation, a partner, or owner."] Prior to the beginning of the audit, the ",A.udit Questionnaire" was returned to AMUSEMENT PARK's ofhces, and marked with an asterisk to indicate where it was incomplete. When AMUSEMENT PARK returned the fullycompleted form to the Audit Office, it named GML as the person authorized to execute statutewaivers on AMUSEMEN'| PARK's behalf. GML title was listed as "Director of Finance (prior)" on the Audit Questionnaire.

6) The first Agreement./vas signed on April 3A, 1997, by GML as AMUSEMENT PARK's Director of Finance, and showed the assessment limitations or the periods ending May 31, t993 through October 31, 1993, being extended to December 20, 1997. The second Agreement was signe<l on November 3, 1997, by GML as AMUSEMENT PARK's prior Director of Finance (prior), and showed the assessment limitations for the periods ending
being extended to July 20, 1998. The third Agreement wassigned on April 3, 1998, by GML as AMUSEMENTPARK's Directo of Finance (prior), and showed the assessment limitations for thc periods ending May 3 l, 1993 through Oetober 3l,lgg{,being extendedto December20, 1998. The fourth Agreementwassigned on October 22,1998,by GML as AMUSMENT PARK's Director of Finance, and showed the assessment limitations for the periods ending lvlay 3 1, I 993 through December 3 I , I 994, being extendecl to February 20, 1999. The fifth Agreement was signed on Decemb er 7 ,1998, by GMI, as AMUSEMENT PARK'S (former) Director of Finance, and showed the assessment limitations flor the periods ended May 3 I , 1993 through February 28, 1995, being extended to April 20,1999. The sixtrrL Agreementwas signed on February 17, 1999, by GML as AMUSEMENT PARK's Director of Finance (prior), and showed the assessment Iimitations lor the periods ended May 3 1, 1993 through May 3 l, I 995, being extended to July 2A,1999.
May
3
1

, 1993 through May

l,

I 994,

I
1

The third, flourth, fifth, and sixth Agreernents, referenced above, are the subjeet of the second contention,

7)
: :

After preparing the Agreements referenced earlier, the auditor delivered them to her contact person within Petitioner's employ (i,e., BMX, Petitioner's Manager of Accounting, and later, his successors), who lvould then transmit the Agreements to GML for signature, and (thereafter) return the signed Agneements to the auditor. (Source: Audit Plan.)

The Agreements at issu were necessary, in large part, because Pettioner needed additional time to provide the auditor with required records. (Source: Audit Plan.)

8)

Third Contention
9) No evidence was submitted by AI,4IJSEMENT PARK in support of contention three"
Fourth Contention
Record No. 't>l'*t* is described, on Exm **, S "Unlocated F/A Variance" with a ***x was taxable amount of St{"1'**{'. Exam ** also shows that the vendor for Record 6. COMPANY A, and that the record number rvas identified as Asset *t on a Property List maintained by Petitioner and provided to the auditor.

10)

DTSCUSSION AND CONCLUSIONS OF LAW:

First Contention
Petitioners first argue that the assessmsnt of taxes on purchases of prizes awarded to successful contestants in its coin-operated and noncoin-operated games of skill or chance is a "yiolation of the equal and unifrrrm clause of the Texas Constitution and the Equal Protection Clause of the United Sates Constitution"" Fowever, Petitioners failed to bring forth evidence demonstrating that they have been treated <tifferently than similarly situated taxpayers. Therefore, Petitiones have lailed to show they are entitled to relief. Southern ClayProclucts, Inc. vs. Bullock,753 S.W.2d 781 (Tex. App"- Austin, 1988, no writ) and Rule 1.40(2XB),
Petitioners' second argument in support of the first contention is that assessment of tx on the purchasss awarded as prizes results in double taxation. In that regard, Petitioners assert that they are entitled ro purchase the prizes tax-free under Section I 51 ,302, because they are sold/resold to successful contestants of games. Petitioners further explainlhat since they pay an occupational tax on each coin-operated game, and collect a sales tax on the sales price of non oin-operated games, that taxing an item that is paid for and part of the cost of playing the game (i.e., the prize) subjects Petitioners to double taxation. As pointed out by [he raised, unsuccessfully, by Administrative Hearings Section (AHS), a similar argument "vas Petitioner AMUSEMEN'I PARK in Hearing No. 33,665. In Decision No. 33,665 (1997) (citing Decision No" 26,058 (1990)), the Comptroller denied the taxpayer's contention finding that the game/amusernent service was conducted in the same manner and at the same price, regardless olwhether or not the player won a prize (i,e., not all contestants received
5

prizes), Therefore, the transfer of the prize was not an integral part of the service. As such, under Rule 3.301(bX2), the operators of the games are considered the eonsumers of the prizes, and liable for the taxes due thereon,
There being no material distinction between the relevant facts in Decision No, 33,665, and thosrelating to the first contention in the instant hearingsr l conclude, based on the holding in Decision No. 33,665, that the first contention should b denied. Second Contentiou

The second contention is a claim by AMUSEMENT PARK that the third through sixth Agreements to extend the assessment limitation periods are invalid because GML lacked the authority to bind AMUSEMENT PARK, As such, that portion of the audit assessment applicable to the period May l, 1993 - May 3 l, 1995 is brred by limitations,

"Audit Questi onrraire" l isted G4L' S title as Director of Firance (prior), but did not indicate for what entity she was a director. Further, AMUSEM,NT PARK asserts that since it is a limited partnership, the Comptroller should have known that only a general partner could bind AMUSEMENT PARK. AMUSEMENT PARK's RepJy also includes the following supporfing argument:
In its Reply, AMUS EMENT PARK pointed out that the

The IAHSJ contends in its Position Lefter that the audit questionnaire names GML as the named representative authorized to execute alimitations period extension, Flowever, simply being narned on a form to which the taxpayers never csnsented should not be sufl-rcient to bind the Petitioner in this casc, given the obvious indications that GML may not have been authorized by the Petitioner.
Petitioner retumed the audit questionnaire to the Comptrollsr signed, but with no person authorized to execute a limitations period extension. The Comptroller returned t to Petitioner and the form was returned to the Comptroller with GML's information. There is no indication that Petitioner consented to naming GML as the named individual authorized

toexecutealimitationswaiveragreement, Theauditquestionnairewasnotresigned,norwas the additional information initialed by the Petitioner,


Moreover, GML allegedly signed several Agreements with the title "Director of Finance (lormer)" and "Director of Finance (prior)," The words'i(former)" and "(prior)" should have alerted the Comptroller to lack olauthority for GML in executing these Agreements. At a minimum, these words should have prompted the Comptroller to confirm GML's authority to execute limitation rvaiver agreements on behalf of the Pelitioner. No evdence has been

produced to indicate that the Comptroller did anything to confltrm GMI-'s authority with the Petitioner, despite the obvious signals.

Finally, GML more than once signed with the title "Director of Finance (Former)," which clid not mention the title appearing on the questionnaire, so that any authority granted by the
questionnaire was inappl icable.
The AHS's basis for opposing the second contention is surnmarized in the following excer'pts from its Response:

ln Comptroller's Decision No. 33,038 (1995), a taxpayer did not provide the name olthe individual who woulcl have been authorized to execute statute waivers on its behalf' However, the taxpayer had named an init:al contact (SSX), and that individual had execuled several statute waivers on the taxpayer's behalf, Notwithstanding SSX' display of apparent
authority in requesting and executing the statute waivers, the taxpayer subsequently asserted that some of the Comptroller's assessments were barred by limitations because SSX was not authorized to execute the waivers that he had signed" The Cornptroller rejected the taxpayer's arguments based on the rationale that, by signing the extension agreements, SSX had securerl the Comptroller on those agreements. Consequently, the taxpayer was estopped from repudiating SSX' actions when he signed the agreements, and the taxpayer was bound accordingly.

In this instance, Petitioners named an authorizcd representative, and the auditor reasonably reliedupontheinformationthatwasprovidedtoher(i.e.thatitwasconctandcurrent), The auditor had the forms de livered to Petitioner, whenever she agreed to extend the waivers, and potitioner was responsible for forwarding the forms to the appointed authority. The onus was on Petitioner - not on the auditor - to ensure that the individual who signed the agreements was indeed authorized to do so" And their present denial of the authority apparently given to GML raises a spectre of poor flaith, at minimum.
Finally, Petitioner would have benefrted from the extensions because they would have had additional time to locate the documentation needed to reduce their audit liability assessment. The absence of such documents could have resulted in the auditor rendering estimated audit assessments - as opposed to actual assessments. The auditor often did n'ot get the infbrmation that she requested in a timely tshion because Petitioners were beleaguered by persistent staff shortages and a contnual stream of employee turnover. For example, thc auditor worked with at least three different Controllers during the time l.hat she spent conductirtg her audts (i.e. BMS, PPP, and TTT), and it was not uncorunon lor any of those Controllers to deprive her olpersonnel assistance on the grounds that Petitioners' office stat had other priorities.
7

The Audit Plan speaks volumes with regard to the trials that the auditor endured as she tried to perform her duties.

The second contention shoutd be denied. The fcts show that, at t-rrst, AMUSE,MENT PARK's Manager of Accounting, BMX, signed the "Audit Questionnare" complete in all
respects, except for the designation of the person authorized to execute Agreements fo extend

incomplete "Audit Questionnaire" lvas then retumed for completon, and the completed form, signed by AMUSEMENT PARK's Manager of Accounting and the auditor's liaison or contact person, BMX, now included GML, Director of Finance rior), as the person authorized to execute Agreements for Petitioner. The facts also show that the Agreements,'including the four at issue, were delivered by te auditor to BMX, AMI-}SEMENT PARK's Manager ol Aecounting/auditor liaison, and later, to his sucessorso and each tirne the Agreements wer returned with GM'L's signature thereon, always including the title "I)irector of Finance," n'former" adjacent [o "Director of Finance." but, at times, inclucling the modifiers "prior" or that BMX, and his successors, had the authorily Clearly the audtor was correct in assuming to rnanage AMUSEMENT PARK's involvement in the audit. And, since, as a matter of practice, the Agreements (made necessary due,to AMUSEMENT PARK's difficulty with providing required audit records) were delivered to either BMX or hi"s successors, and then later returned to the auditor after being signed by GML, these facts establish, on their face, that AMUSEMENT PARK's designated audit managers/liaisons wcre awaro of, and participated in the holding out of GML as the person authorized to excute Agreements for AMUSEMENT PARK. Given the, above:ref'erenced fhcts, including the conduct of AMUSEMENT PARK's staff over a.considerable period of time, I conclude that the auditor,
acting on behalf of the Comptroller, had ample reason believe that a person authorized to act

assessment periods

in behalf of AMUSEMENT PARK. The

for AMUSEMENT PARK for the specified purposs was signing the Agreements. And, GML's on again, off again use of "prior" or "formr" Director of Finance, as in the second, third, fifth, and sixth Agreements seems of no moment, since AMUSEMENT PARK's Managers of Accounting were apparently aware of the variance, and more importantly, the '*Audit Questionnaire" identifred GML as the Director of Finance (prior). (For a similar resulr, see Decision No.33,038 (1995).) Based on the foregoing, I conolude that the Agreements at issue are valid and binding.

Third Contention
AMTJSEMENT PARK argues that various (unidentihed) items should be removed frorn Exam 9 either because tax was paid on the items or they were not subject to tax, and that the sample and resulting projection factor should be adjusted accordingly. However, Petitoner has failed to identifi the items at issue or produce any supporting evidence, Therefore, the third oontention should be denied. Rule 1.40(2XA) and (2XB).
8

Fou,rth Contention

The fourth contention should also be denied. AtvtiJSEMENT PARK contends that the auditor has failed to show hat Record ]fs'. r } {r', on,.Exarn + * , represents the acquisiton ofl tangible personal.properg n,which tax was not paid. Contrary to AMUSEMENT PARK's asser{ion, the facts related in FastN, ** are suf,fie-ient tonable the AHS to establish, on its face, that Record No {tc'*tr pertains to the acquisition of'a txable ilem, Once the AIdS establishes a prima face case, it becomes Ah{JSEMENT PARK's burden to establish that **i'* in the audit assessment) the AHS"s proposed action (i.e., the inclusion of Record |rfo. 'is incprrert. Rule 1"40{2X. Becuse-, AMU,SMENT P K has nst submitted any, evidenee .t0 spprt the fourth ccnfenti'On" no'telief shculd be granted.

RECOMMENDATION:
Petirioners' contntions should be denjed' T..he audits shoutd be r.narle final as originally
issued.

ST{iNEE October 23', 2001.

JE GRECO

Administrative Law Judge

I{EARING NOS. 39,1l0

8 39,909

ORI}ER OF TI{E COMPTR.OLLER


The above decision of the AdministrativeLawJudge is approved and adopted in all respects. This decisio becomes fnal twenty'three (23) days from the date of this Order.

If a rehearing is desired, a Motion forRehearing must be hled with the Administrative [,aw
Judge no later than twenty-three (23) days after the date of this Order, and must state the grounds upon which the motion is based"

RENDERED and ISSLIED October 23,2Ai01. CAROLE KEETON RYLANDER Comptroller of Public Accounts of the State of 'l'exas

ACCESSION N[II\4BER: 2001 l073BH SI.IPERSEDED: N DOCUMENT TYPE: H DATE: 10/23/2001 TAX TYPE:

t0

Texas Comp.trollor of Public Accounts


97 r299t1

STAR System

HEARTNC N. 3},665 Ilrl RB: ***:r*'*

TAXPAYSR NO": * *'s,*,* * AUDIT OFFICE: 114#rr* AUDIT PERIOD: l0/01/90 THROUG,H 0413/93 SATES AND USE TAX/RDT
T}.IE COMFTROLLBR OF PUBLIC ACCOUNTS OF THE STATE OF TEXAS
B FORE.

ELIZABETH \M]L SON DAVIS Administratve Law Judge


ERNS.T FORTENBER"RY

Representing Tax Dvision


* *+*)t+

Representing TaxPaYer

COMFTROLTER'S DECISION PRELIMINARY DISCUSSION


:

The Administrative Law Judge (:'ALJ") heard' this case at an oral hearing' on Janua{ 3I, 1996. REP,RESENTATIVE represented Petitioner and presented as wihesses WITNESS, an accountant with an affrliated company, and MANAGER., the merchandise manager forPetitioner. Hearings Attorney EleanorH, Kim representsd the Tax Division and presented thetestimonyofWitrlis Moore("\lfM"), the examining auditor. ErnestFortenberry cunently represents the Tax Division.

The ALJ took official notice of all records of the Comptroller's of,fice that pertain to the Petitioner and the issues involved in the case. Unless otherwse indicated, all Section references are to Title 2, Texas Tax Code Ann. (Vernon 1992). References to Rules are to sections of Title J4, J'exas Administrative Cods. The ALJ has referred to all agreements between the parties in the Recommendation at the end of this Decision. The Decision below'uvill discuss only the remaining contested
issues.

FINDINGS OF FACT. GENER,AL:


Petitioner fled proposed Findings of Fact. The Findings of, Fact in this Decision constitute lhe ALJ's ruling on each of the proposed Findings of Fact filed.

1. :2.

Petitioner operates an amusement theme park'

The Comptroller audited Petitioner for sales and use tax compliance for the perod October I, 1990, through April 30, 1993. On March 10, 1994, the Comptroller issued +* *+ including state and local the Petitioner a Texas Noticc of Tax Due in the amount of $* ' laxes, penalty, and interest through the date of the Noice. The Petitioner timely requested a redetermination hearing.

PETITIONER'S CONTEN'IION NO.

Fetitioner contends that installation labor relating to certain games and otheritems that are improvements to realty should be deletecl from the audit assessment,

FINDINGS OF FAC'| REGARDING PETI'TTONER'S CONTENTION NO. I:


Theauditorassessedtaxes in auditexam l500onacharge of${'**+*t forlabor and services related to the purchase of games and other items IFOOTNO1'E: The items purchassd included specialty games, coin operated games, ABC and XYZ race games, cash control, 20 custom garnes fixtures, various storage & display ftxtures, and redemption games.]from XYZ ("ABC"). Of these items, the 20 custom games fitxtures, various storage and display fixtures, and cash control items arc at issue,

3.

Petitioner's Proposed Findings of Fact and Conclusions of Latv filed 27,1996, and the Tax Division's Post-Ilearing Response filed June 13, 1996, September agree thatthe amount of $*{'++'k'r shoud be deletcd from audit exam 1500 as the cost of' installation of the games at issue.
2

4"

CONCLUSTONS OF LAW AND DISCUSSION REGAR.DING PETITIONER'S CONTENTION NO. 1:


Petitioner's first contention should be granted as agreed by the parties.

PETITIONER'S CONTENTION NO. 2:


Pettioner contends that no sales or use tax is due on prizes arvarcled in connection with eoin-operated and noncoin-operated games (exams 20 and2l).

FINDINGS OF FACT R-EGARDING PETITIONER'S CONTENTION NO. 2r


The auditor made adjustments in audit exam 20 and 2l relating to purchases of prizes that were given to customers who successfully wn coin-operated or noncoin-operated games at the theme park, Petitioner operates a variety of coin-operated and noncoin-operated games at its amusement theme park in CITY A, Texas, Prizes are awarded to some contestants of both coin-operated and noncoin-operated games.

5,

6.
7. 8.

WM testiFred that getting a prize for participating in coin-operated and/or

noncoin-operated games at [Petitioner's] Park was dependent upon some element of skill,

WM testified that he guessed that the attraction to playing coin*operated and noncoin-operated games was the hope of winning a prize.
WM testified that he did not recall seeing a game at P'etitioner's park that was so impossible that a realistic person would never win a prize. He agreed that while the games might be challenging, they were not impossible.

9,

WM testified that he guessed a good number r:f people would play the gmes in the hope of getting a prize. He further testified that he guessed that the availabiliry of a prize was important to the marketability of the games.
During the Audit Period, [Petitioner] treated the cost of prizes as purchases for resale. For noncoin-operated games, fPotitioner] collects sales tax on the total admission prce to participate in the games. For the coin-operated machines, [Petitioner] pays an annual occupational tax on each machine, which is imposed by Texas in lieu of sales lax on the price to play the game.
I

10.
l.

-)

CONCLUSIONS OF LAW AND DISCUSSION REGARDING PETITIONER'S CONTENTION NO, 2:


Petitioner's second contention should be denied. Petitioner contends that it should not be subject to Texas sales and use tax on prizes purchasecl by Petitioner awarded in connection wth coin-operated and noncoin-operated
games.

Petitioner makes the following argument September 27,1996:

in its Conclusions of Law filed

Rule 3.298((l) governs Pr.izes awarded by [Petitioner]. Rule 3.301 is inapplicable to [Petitioner'sl purchase of Prizes. [Petitioner] does not owe Texas sales and use tax on the purchase of PrizesThe Auditor in assessing sales and use tax on Prizes awarded in coin-operated and non-coin games erroneously relied on Rule 3,301 an'd Comptroller's Dccision Nos, 26,508 [26,058] (1990) and27,467 (1991).

[Petitioner] argues Rule 3.298 applies exclusively to the taxability of the Prizes while the Tax Division argues that Rule 3,301 applies exclusively to the taxability of the Prizes, The taxation of Prizes awardecl by [PetitionerJ to F?rticipants in coin-operated and non-coin games depends on whether the Prizes are governed by Rule 3.298 or Rule 3,301.
Rule 3.298 is defined as "Amusement Serrices." Rule 3.298 was promulgafed to be l9S5 under the authority of Tax Code Sections 151.0028 and eflective July

8,

l5[.0101(aXl), Rule 3.298 has been amended several times since its adoption, including amendments up until 1992. Rule3.298 was adopted after Rule 3.301 evidencing that both
Rules apply to different transactions. (footnotes deleted.)

Rule 3.301 entitled "Promotional Plans, Coupons, Retailer Reimbursemert," was adopted to be effective January l,1976 and was amended October l, 1988. (footnote
deleted.)

Rule 3.298 applies, and Rule 3,301 does not apply, lo the Prizes awarded in coin-operated and non-coin games at [Petitioner]'s Park for the following reasons. lPetitioner] is in the business of providing amusement services at an amusement park. [Petitoner] is not providing promotional plans, coupons, or retailer reimbursements. The titles to Rules 3 .298 and 3,3 0 I provide that Rule 3 "298 applies to amusement services, which
4

'

is rvhat is at issue, while Rule 3.301 applies to promotional plans, coupons and retailer reimbursements, which are not at issue,

Rule3.30l(c)(l)infacttellsusthatRule3.29S(applies. Itstatesr"Salesof
taxable tangible personal property to persons who make gifts of property or use the property lor samples or advertising puqposes re taxable. For an explanation of the taxability of an item purchased for use as a prize when the winning of the prizes depends upon chance or skill, se 3.298((l) of this title (relating to Amusement Serviees)." It is very clear that Rule 3.301 applies to retailers providngpromotional plans forexample, the first certain number of customers win a prize, all customers who come in the store or try a produce win a.prize etc., while Rule 3.298 applies to Prizes awarded in an amusement service which involve an elemsnt of fPetitioner] is a provider oi amusement services at an park, and as testited by the Attditor, the Prizes are awarded in games involving amusement skill, T. tape l, side B, pp. I and 9. Based on all of the lacts and the Rules themselves, Rule 3,298 governs PARK B'purchase of Pizes. (lootnotes deleted.).

skill.

IPetitioner]'spurchaseofFrizesclearlyarenotsubjecttotax. [Petitioner]remits'['exassales and use tax on the sale of arnusement services in which the Prizes are a',varded and clearly
does not owe tax on the Frizes themselves.

The Tax Division relies on ComptrollerDecision Nos.26,058 (1990) and 27,467 (1991) forthepositionthat R.ule3.30l applies. ComptrollerDecisionNo.26,05S (1990)not only was decidecl on distinguishing facts, but it also held that "[t]he transfer of the plush is not an integral part of the service" Pelitioner's second contention shoulcl be denied." The Auditor in this case testi.ed that the Prizes awarded in the games at issue were dependent on skill and that most people play the games and shell out an extra dollar to play the games in the hope of getting a prize. T, tape 1, side B, pp. 8, 9 and 11. The Auditor guessed that the availability of a prize or the possibilify of winning a prize was importart to thc ability to market the games, T, tape l, side B, p. 11, Based on ali the lacts it is clear the awarding of the Prizes at issue in this hearng was an integral part of the garnes and as such, the Prizes are govemed by Rule 1.298 and not Rule 3,301. (footnotes deleted.)
,467 (1991), for the proposition that Rule 3.301 and not Rule 3.298 governs the taxation of the Prizes awarded by PARK B in non-coin and coin-operated games. Comptroller's Decision No. 27,467 is distinguishable on the facts because: (l) the taxpayer in Comptroller's Decision No' 27,467 was providing games at a third party's commercial location and not at its own amusement f'acility; and more importantly (2) the Petitioners in Comptroller's Decision No. 27,461 were f-ound to "have a non-taxable service." As set forth below, if Comptroller's Decision Nos. 26,058
5

The Tax

Division

also erroneously relies on Comptroller Decision

No.

27

and 27,467 apply to PARK B, fPetitioner.] must be found to be providing a non-taxable service and should be immediately refunded all Texas sales and use tax remitted based on the chargo fbr participants playing coin.operated and non-coin games, (Petitioner's emphasis.)
The Tax Division in applying Rule 3.101 to [Petitioner] r,iolates the tax policy against double taxation and the tax theory behind lhe issuing resale certificates. Tax policy demands that Rule 3.298 applies to prizes which are awarded in taxable transactions while

Rule3.30l appliestoprizeswhichareawardedinnon-t<ablepromotionaltransactions. The reasoning being that it is against tax policy to tax the same item twice, (ttre prize) however, flrom a hscal policy standpoint the rules assure that no taxable item goes untaxed. This is the exact tax theory and/or tax policy that is the basis for resale certiFrcates. Resale certificates may be ssued when a taxable item is purchased and it is going to be resold in another transaction. This is to prevent the item from being subject to tax fwice. This tax theory is the basis ftlr having two distinct rules (Rules 3.298 and 3"301) which treat prizes as non-taxable in one rule and taxable in another rule" This is so that where a taxpayer awards prizes a.s part of a taxable amusemnt service, the purehase of the prize, the awarding oI which is an integral part of the amusernent services, is non-taxable under Rule 3.298 and the taxpayer can issue'a rssale certificate for the purchase of tho prize under Tax Code Section I 5 1,15 l. The prze is ultimately taxed as part of the taxable amusment service charge. On the other hand, retailers who give "prizes" to customers aS a form of advertisement and not as pa of a taxable lransastion would be subject to tax an the purchase of the prize under Rule 3.301 . This assures that the prize is taxed, however, only taxed once, Tax theory and tax policy demand that Rule 3.298 arrd not Rule 3.301, applies to PARK B'purchase of Prizes, exempting them lrom taxation. The Pizes are being taxed when [Petitioner] remits tax on the amusement service. (Footnote deleted.)

If Rule 3.301 were to govern, as the Tax Division contends, PARK B would be considered to be a retailer providing promotional plans, coupons and retailer
reimbursements and would not be providing amusement services. In the event the Tax Division's contention is upheld, PARK B respectfully requests an immediate refund of all Texas sales and use tax remitted on services pertaining to the con operatcd and non-coin games, Based on the Tax Division[']s assertions that Rule 3.301 governs, PARK B was not pr<lviding amusement services but was providing non-taxable promotional plans, coupons an<l/or retailer reimbursements, none of which are taxable items. (Petitioner's emphasis.) (Footnote deleted')

'fhe Tax Division's position, as set out in its Response dated SeptemberlS, 1995, is as lollows:

Petitioner contends that the purchases of the prizes should not be taxed because they were purchased for resale. Petitioner argues that the Tax Division's reliance on Comptroller's Rule 3,301(bX2) is incorrect because it does not address the application of Comptroller's Rule 3.298(fXl). Petitioner stresses that Comp.troller's Rule 3.298((l ).controls lvhere prizes are purchased and are used as a prize when the winning depends upon chance or skill- Comptroller's Rule 3.298((l) provides:
Sellers of service may issue a resale certifrcate in lieu of tax to suppliers of tangible personal property only if oare, eustody, and control of the propsrty is transferred to the clint. ... Since Petitioner's games are based upon chance and skill, then Petitioner argues that it lalls within Rule 3 .298(( I ) so it should be able to issue a resale certifrcatc and not have to pay

tax on the purchases of prizes, The Tax Division maintains its position that Petitioner's purchases were taxable" Petitioner cannot ignore Comptroller's Rule 3.301 and rely solely on Comptroller',s Rule 3.298. In Comptroller's Decision Nos. 3.1,839; 31,709; and 31,71I ( 1995), Administrative Law Judge BetW Marks stated the following: ... even though Rule 3,.298 generally governs the circumstances under which a provider of amusement serviees may purchase merchandise ax-free, the language of Rule 3.301. requiring that each participant receive a prize as a prerequisite to tax-free sales of prizes should apply equally to tax-lree purchases. fitalics added] This holding was based on the prior Comptroller's decisions cited by the Tax Division in its Position Letter. [t is undisputed that only some of Petitioneros customers recaived a prize so the Tax Division submits that Petitioner was not entitled to purchase the prizes tax-free. No adjustments are warranted.

ti

;i

Section 151,0028(a) defines "amusement services" to mean the provision of amusement, entertainment, or recreation, but does not include the provision of educational or health services if prescribed by a licensed practitioner of the healing arts for the primary
purpose of education or health maintenance or improvement.
I

Rule 3,298, effective September 29,1992 IFOO'I-NOTE:The same language appears in the ay 26,1988 version of Rule 3.298.1, provides, in applicable part, as follows:

(a)

Definitions.
7

Entertainmert, recreation, sport, pastirne, diversion, or enjoyment that is a pleasurable occupation of the senses. Amusernent services and places offering amusement services include, but are not lir-ited to, the following: Amusement services

(l)

(E) (i) (ii) (iii)


{i) (v) (vi)

Fairs or carivals:

amuse:ment parks;

carnivals;
fairs;
garnes of

skill; at eireus, carlrtval, etc;;'

shooting galler,ies (ranges); and


side shows;
r.

(e)
(

Impositon of tax.

S*les tax is due on the sale of, an, adrnission .to. an amusement serv.ice location,of the service is within the State of Texas. - ..

l)

if the event or

$ )

T*xable itm sold or transf,erred with amus.ement service.

(I Sellers of service may issue a resae,certificate in lieu of [ax to suppliers of tangible personal propey only if care, custody, and.control of the properly is fansferred to the client. For example, a taxpayerpurchases padlocks to transfer to eustomers when lockers are rented. The padlock is trarrsfened to customers, and the customers use th padlock when renting the locker. Taxpayer may purchase the padlock tax free by issuing a resale certificate. Tax is due on the tofal amount charged the custorner, including amounts lor the padlock and lor the

services. IFOOTNOTE: Vrsions of Rule 3.298 in effect prior to May 26, 1988, provided in

(f)(l)

as

followsr
Taxable items sold or transferred with amusement service.

Sales tax is notdue on a taxable item purchased to be sold or transfered as an integral part of an amusement service. See 3.285 of this title (rolating to Sales and Resale; Resale Certifcate). Examples of such items include, but are not limited to, tickets, printed programs that are provided as part of the admission price, bowling balls provided
8

(l)

with the'purchase of bowling:gam admissions andprizes given with games at carnivals and fairs. The selle of sueh iErns must secure a valid resale certifeate from the purc!.raser. (Emphasis added.)l

Exernptions,

(4) operated by the consumer are exrnpt frorn sales tax, The coin rsod to operate the maehine may'be,',a tokon as well as a United Stares:ooin.
Exarnpies are ooin-operated:

(A) {B)
{C) {} (E)

pino'll rnachines;,

video garnes and mofiqn poturas;


pool tabtes;

televisions; shuffleboard;
juke, boxes; and

(F) (G}

batting ges. (Emphasis added')

Rule,3.30.l" effective CI.etober 1,. 1.988, relating $o Promstional Plans, Coupons, Retailer Reimburelr:erlt, provides, in per{inenf part' as f'llg'ws:

(b)

Garnes and conce.ssions dispensing rnerchandise.

The operators of games, grab-bag concessions, or other operations similar in nature, in whioh each customer receives some merchandise or prize are regarded as rerailers and must collect and remit. to the Statd of Texas the sales tax; sales to thEse opertors are sales for resale. Tax on the sales of such merchandise or prizes is due on the

(l)

gross receipts from suoh opertions, and a reimbursement tax shall be collected from their customers. If an operator disposes of both taxable nd nontaxable items, his tax to the Stat of Texas willbe measured by the percentage of his taxable sales to his totalsales, but not less than the reimbursement taxes collected from his custorners. Such operators my give their suppliers resale certificates fior taxable items purchased. The operators of games, or other onsessions, in which each participant does not receive some merchandise or prize, become the consumers qf merchandise so used by them and are liable to the State olTexas for tax based on the sales price or use of the taxable items,purchased for use by them, Retailers selling taxable tangible personal property to such operators or concessionares shall collect and remit to the state the tax due on the sales to them. The'Iexas use tax s due on out-of-state purchases oftaxable tangible personal property bascd on the purchase price of the merchandise,

(2)

(c)

Gifts, samples, prizes, premiums.

Sales of taxable tangible personal property to persons rvho make gifts of the property or use the property for samples or advertising purposes are taxable. For an explanation ol the taxabilify of an itern purchased for use as a prize when the winning of the prizes depends upon chanee or skill, see Rule 3.298((l) concerning Amusement Servces. (Emphasis added.)

(l)

As discussed as the parties, in Comptroller's Decision Nos. 3 1,8394, 31,7094, and 31,?l lA (1995), the ALJ reviews the taxabilify of prizes related to coin-operated maehines in the lollowing discussion:

The Tax Division agrees that, pursuarrt to Section 151,335 IFOOTNOTE: This hearing, involved amusement services provided through coin-operated machines.l, the amusemnt services provided are non-taxable services, but argues that the taxability of such services is not the issue. I agree. The issue is whether the prizes are resold to the customer for a consideration as claimed by Petitioners or are consumed by Petitioners as claimed by the Tax Divsion. The Tax Division rnaintains that pursuant to Rule 3.301(bX2) and Comptroller's Decision Nos. 26,058 (1990) and 27,647 (1991), it is clear that ths Petitioners, not the customers, are the consumers of the prizes. Rule 3.3 0 I (bX2) states, in pertinent part: The operators of games? or other concessions, in which eaeh participant does not receive some merchandise or prize become the consumers of merchandise so used by them and are liable to the State of Texas for tax based on the sales price or use of the taxable items purchased lor use by them. . . ." (Emphasis added).

l0

Further, the Tax Division cites Comptroller's Decision Nos.2,05S'(1990) and 27,467 (1991) as support for its ptoposition that Petitioners are the consumers of the prizes and therefore use tax is clue. Petitioners ontend that these Decisions are not in point. agree with Petitioners that the issues were different lrom the facts of this case. That is, in each of those f)ecisions, the issue was not whether the prizes purchased were sold to the taxpayer's customers as part of the sales price of other products (food and beverages), but whether a taxpayer who provides arnusement services sould purchase merohandise tax-free. It was found by the Comptroller that, even though Rule 3,29I general governs the circumstances under which a provider of amusement servises may purchase merchandise tax-free, the language of Rule 3.301 requiring that each participant receive aprize as a prerequisite to tax-free sales of prizes should apply equally to tax-free purchases. Further, in Comptroller's Decision No. 27,647, the lollowing statement by the Admnistrative Law Judge provides sorne insight as to the rationale:
,.,Rule 3.298 allows a provider of arusement services to buy goods tax-free, if care, custody and control of the goods are translerred to the customer as an integral part of the service. The Comptroller concluded that the provisions of Rule 3.30 I , quoted abov, govern these facts, since the [prize] is not always transferred co the customer, but is transferred quite unpredictabty to random custemers. That is to say,'(eaih participant does not receive some i'become the consumers of rrrerchandise merchandise or prize", and, therefore, the Petitoners so used by thern and are liable to the State of Texas for tax based on the sales price or use of

the taxable iterns purchased for use by them [FOOINOTE: The Petitoners in the Decision provided amusement services through coin-operated machines. These machines had asprizes sertain small toys known as.'lush". A typical machine was operated by a consumer/player who is sometimes successful in winning a prize, by operating a crane or similar device]"

AIso, in Comptroller's Decis:ion, No. 26,058 (1990), the Comptroller made the following holding:
Petitioner next eontends that the "plush" is transfened to the customer as an integral pert of providing the amusement service, The Comptroller, by adopting Rule 3.301(bXZ), has rejected this argurnent, The amusement service is provided in exactly the same manner and at exactly the same price regardless of whether or not the player wins a prize. The transfer of the plush is not therefore an integral part of the service. 'the ALJ concludes in the cunent hearing that the prizes purchased by Petitioner for use in coin-operated games should remain in the audit based on Rule 3.301(bX2) and Comptroller's Decision Nos. 31,839,A., 31,7094, and 31,71lA (1995); No. 26,058 (1990); and N,r. 27 ,467 ( 199 1), All these cases involve prizes given to some customers based on

l1

use of coin-operated games, The holdings in those cases control lor prizes purchased related

to coin-operated games, which are amusement services that are exernpt frorn sales tax,

Additionally, the ALJ concludes that Rule 3.301(bXZ) and Comptroller's Decision Nos,31,8394,31,7094,and31,7114(1995);No.26,058(1990);andNo,2'7,467 (1991)
should also control for prizes given to participants of noncoin-operated amusement services since each participant does not receive a prize.

PETITIONER'S CONTENTION NO, 3:


Petitioner contends that part of the charges from ABC CO.RPORATION ("ABC CORPORATION") included in audit exatn 00008 were charges for non-taxable programming services.

FINDINGS OF F'ACT REGARDING PETITIONIR'S CONTENTION NO, 3:


Petitioner purchased services flrom ABC CORPORATION, arelated company' Based on nvoices reviewed during the audit, the auditor scheduled these purchases as taxable purchasos of data processing services.

12.

Petitioner's Proposed Findings of Fact and Conclusions of Law filed Sep[ember 27,1996, and the Tax Division's Post-Hearing Response Ftled June 13, 1996, agree that the amount of $'r'>h**** should be deleted from audit exam 00008 * Adjustments

13.

to Data Processing Charges.

CONCLUSIONS OF LAW AND DISCUSSION R-EGARDING PETITIONER'S CONTENTION NO. 3:


Petitioner's third contention should be granted as agreed by the parties.

PETITTONER'S CONTENTION NO. 4:


Petitioner contends ihat it purchased non-taxable sewing services from LMN ("LMN"), and those services should be deleted lrom audit exam 3.

FINING OF FACT REGARDING PETITIONER'S CONTENTION NO, 4:


LMN, one ofPetitioner's affiliated companies, seled costumes andbuiltstage props for Petitioner. Petitioner provided the materials to LMN.

14.

l2

CONCLUSIONS OT' LAW AND DISCUSSION REGAzu)ING PETITIONER.'S CONTENTION NO. 4:


Petitioner's f'ourth contention should denied, Petitioner contends that it purchased non-taxable sewing services fiom LMN, and those services should be deleted from exam 3. Petitionerstats that itpurchased costume rnaterials 'from a party unrelated to LMN, then it separately hired LMN to provide non-taxable sewing services, which involved the sewing of costumes. Potitioner argues that the Tax Division is overlooking the fact that there are tlvo separate and distinct transactions; one forthe p-urchase of tangible personal property and the second for non-taxable sewing
services.

The'lax Division's position, as set out in its Position Letler, is as follows:


ILMN], one of Fetitioner's affliated companies, sewed costumes and br-tilt stage props for Petitioner. Since Petitioner furnishcd the materials to [[,MN], [LMN] only billed Petitioner 0or the direct labor costs and employment taxes of [LMN]'s employees who produced the work, The auditor scheduled these labor chatges as taxable.
Petitioner contends that these purchases are services not subject to tax. The Tax Division clisagrees because Comptroller's Rule 3.300 provdes that this type of charge is actually part of the cost of making tangible personal property. person engaged in the business of fabricating, manufacturing, processing or custom manufacturing must collect sales tax on the total sales price of the manufactured items' Comptroller's Rule 3.100(bX I ).

The rule provides for the following definition lor custom manulacturing

as:

(aX2) Custom manufacturing -Producing tangible personal property to the spectrl order of the customer, e.g., tailor-made clothing, custom-made draperies or slip-covers, or furniturs mae-to-order. Custom manulachrrers are manufacturers f'or the purpose ofthis rule. [italics
addedl,

(aX5) Fabrication - To make, build, create, produr:e, or assemble components of tangible personal property.... Iitalics added].

l3

Obviously, the work performed by [LMN] lor Petitioner lalls within these two def,rnitions so tax is owed on the manufactured or fabricated tangible personal property items. Since Petitioner paid no tax, the auditor conectly scheduled these purchases in the audit.
The ALJ agrees with the Tax Division's position on this issue. The charges lrom LMN to Petitioner were charges for custom manufacturing and should remain in audit exam 3, See Rule 3,300.

?ETITIONERIS CONTENTION NO. 5:


Petitioner contends that no tax is due on Exam 6 relating to adjustments for purchases

tiom COMMUNICATIONS ("COMMUNICATIONS

")'

FINDINGS OF"FACT REGARDING PETITIONER'S CONTENTION NO. 5:


The auditor nracle adjustments in audit exam 6 tbr purchases of brochures and other tangible personal property purchased fiom COMMUNICATIONS.
I

5.

Petitioner submitted no documentation to support its contention excepf for a copy of an exelption certifrrcate dated June 8, 1994, that it provided to its vendor.

16.

CONCLUSIONS OF LAW AND DISCUSSION REGARDING PETITIONER'S CONTENTION NO. 5:


Petitioner's fifth contention should also be denied.
Petitioner contends that no tax is due on Exam 6 relating to adjustments lorpurehases frorn COMMUNICATIONS. Petitioner rgues that the charges from COMMLINICATIONS included non-taxable marketing services. Also, Petitioner contends that, if purchases of tangible personal property are assessed, then a portion of the charges attributable to items usecl outside of Texas was not subject to Texas sales tax. The Tax Division's position, as set out in its Response dated September 18, 199, is as flollows:
Petitioner reiterates its contention thatthe auditorscheduled non-taxable charges in the audit. The Tax Division maintains its position that Petitioner has not met its burden to disprove the

audit so the Tax Division cannot recommencl any adjustment to this exun.

l4

The invoices lrom ICOMI4IJNICATIONS] showed a lump-sum charge so the auditor requested additional information and documentation from Petitioner. During the audit,

Petitioner arranged

for the auditor to meet with Mr"

EMPLOYEE of

tangible personal properly and the auditor only scheduled that tangible personal propefy in the audit, Tangible personal property is a taxable item so it is subject to the sales and use tax. Seo Texas Tax Code Ann. I 51 .010,

ICOMMUNiCA'iONS]. Mr, EMPLOYEE identified certain items as being the sale of

Although Petitioner oontinues to contend that the auditor picked up non-taxable charges ln the audit, Petitioner has not offered any evidence to substantiate its claim, [n its Statement

of

elements of the marketing charges, but a copy of the contrct has not be submifted to the auditor nor to the Tax Division. Thus, the Tax Division cannot ccept Petitioner's
cOntention,

Grounds, Petitioner states that the contract between Petitioner and [COMMUNICATIONS] supports an allocation between the taxahle and non-taxable

Petitioner also argues that some of the advertising materials purChased by Petitioner were directed to out-ostate locations so they ate not subject to Texas use tax. Petitioner submits a copy of an exemption certificate supporting its claim. The Tax Division submits that this certifcate is not adequate to supporf an exemption. An exemption certificate was issued by etitioner to the seller so it protects the seller if he accepted it in good faith. However, the certificate does not support Petitioner's claim of exemption. Petitioner has the burden of proving by a clear and convincing evidence that it comes within an exemption. In this case, Pettioner has lailed to rneet its burden.

The ALJ agrees with the Tax Division's position regarding the purchases lrom COMMLJNICATIONS, and the items should remain in the audit exam 6. Petitioner

'

submitted

evidence, other than the exemption certificate that it gave COMMUNICATIONS, to support its assertions; thus, Petitioner has not met it burden ol

no

proof, Rule 1,40(2) requires Petitioner to prove that it is entitled to the relief requested by a preponderance olthe evidence, unless Petitioner is claiming it is entitled to an exemption, in which case, Petitioner's burden of proof is one of clear and convinoing evidence. As the record shows, Pctitioner has failed to plead and prove its case with the required specificity, Bare assertions, without any Supporting evidence, are not sufficient to, oVercome the presumption of validity afforded to thc Cornptrolleros assessment EIUIPLOYEB v. Bullock, 529 S.W.2d 279 (Tex. Civ" App. -- Austin 1975, writ rcf d n.r.e,) and State v. Glass,723 S"W.zd 325 (Tex. App. -- Austin, 1987, writ reld n.r.e.).

l5

RECOMMENDATION
Based upon the fndings of fact, conclusions of larv, and discussion oontansd herein,

the ALJ recqmrnsnds the following: The audit be amended based on the agreements:set out:in'the Tax Divisio's' Pos{tion Letter,dated May 25, 1995, 'and thsTax Dlv,ision's Response dated September 18, 1995. ?kese,greements include waiver of penalty for periods for which retums wete alrl 'timely fited (all.periods exeept Augusf 1991), and sredi't shtrld be given fof tax remined or Petitioner accrud on the materials related to Ride purehase agreemonts [FT.,.NOT: paid or ascrued tx on mterials ineorporated into the realp by the eontrastor,undsr. :lu,mp-sum contract$ to improve realty. for Petitioner, purehases of theme p.ark rdes-]"

l.

l:

As agreed in Petitioner's Proposed Findings of Faot and Cor,rolusions of Law filed $eptember 27, t996, and the Tax Division's Post-Hearin$'Response filed June [3" 1996, gtx* {.i#t' should be dEleted from audit exarn l 500 as the cost of installat,on of the
garnes at issue.

.2.

As agreed in Petitionpr's Proposed:Fndings of Fact and'Conclusions of Law flled Septernber 2?, ,1996, and the'tax Divislisn's P'ost Flearing Response filed June 13, l,996, S**'*'** should be deleted frorn audit exam 0008 - Adj:gslmenfsto DataFwcessing
Charges.

3,

4, 5.

The,rernander of the audit assessment shoutd be upheld.

Because of the time taken to issue the Proposed Decision in this cars, interst should be waived from February 18, 1997, through the. date of issuance of the Proposed Decision, SXGNED this the lst day of December, 1997"

ELIZABETH MLSON DAVIS Administrative Law Judge

l6

H'EKIN,GNO';

Su

'6.5,

QRER oF TFI Colv{fTROLLER

id$

"
d'e,ired,

.:*, .&fi$,.:n$ T$$.{Jg:tltis l:st 'day'i'f eee,nobnri I,99i-

$.++99,9,0r'

'TAX T$F 8"ALS

tl

Texas Cornptroller of Fublic Accounts 9107F{11lC,02

STAR System

HEARTNG.NO. 27,467

IN

R,: {ttt:t

*'l'*'{* *

TAXPAYER NO.: *{.* + +** * * r.:i' A,UDIT OFIC *'*,t'r*'*rt *,untirgnor JANUARY 1, 1988 THROUGH DECEMBER 3I, 1989 SES TAX

TF PTBT.IC ACCOUNTS OF THE STATE OF TEXAS


'BEN

SA

TIT

*dminislrative Law Judge KATHLEEN CORDCIVA Representing Tax Division


* *,*t*+ {. k* Rp,resenting Petitioner

COMPTROLTER'S DECISION PRETIIVIINARY


C

OMMENTS

'hiscasewas prsented on written submissions. RepresentingtheTaxDivisionwasHeings {t*t***t** of Attomey Kathleen Cordova. Representing the Petitioners was their Attomey,
*rt,k r{.*t}+ *

*,

TOXaS.

On May 30, 1991, the Petitioner filed exceptions to the Proposed Comptroller's Decision, dated May 14, L99t.The Tax Division filed its response to these exceptions on June 6, 1991, The Administrative Law Judge and the Comptroller have consdered both the exceptons and the response thereto, and this Comptroller's Decision represents the nrling thereon.
I

PETITIONER'S CONTNTION NO. I


That the purchase of Plush (small toys for use as prizes in the Petitioners' coin operated machines) s exempt from sales and/or use tax because it is purchased in connection with the P eti tioner's non-taxabl e alnusement service.

F'INDINCS OF FACT

The Petitioners are a Texas partnership, providing amusement services through

coin-operated machines. These machines have as prizes certain small toys known as 'Plush".

2. A typical machine is operated by a consumerlayer who is sometimes succeSsful in winning aprlze,by operating a crane or similar devce.
3.,

The machnes are placed in commercal locations, and the Petitioners sBlit the proceeds with the location's owner.

CONCLUSTONS OF'LAW

(The Pettioners urge two separate arguments under this contention, but since recommending that both be rejected, I will deal with them together.)
The Petitionr's contention should be ovemled'
Rule 3.301(bX2) reads, in, pertinent part, as follows:

I am

The operators of games, or other concessions, in which each participant does not receive sorne merchandise or prze become the consumers of merchandise so used by them and are liable to the State of Texas lor tax based on the sales price or use of the taxable items purehased for use bY em-'.. This issue has recently been determined by the Comptroller in Hearing #26,058. Rule 3.298 allows a provider of amusement services to buy goods tax-free, if care, custody and control of the goods are transferred to the customer as an integral part of the service. The Comptroller concludcd that the provisions of Rule 3.301, quoted above, govern these facts, since the Plush is not always transferred to the customer, but is transfened quite unpredictably to random customers, That is to say, "each participant does not receive some rnerchandise orprize", and, therefore, the Petitioners "becorne the consumers of merchandise so used by them ard are liable to the State of Texas for tax based on the sales prce or use of the taxable items purchased for use by them.,.."
2

i
:

Thus, under Hearing #26,058, the Petitioners have anon-taxable service, and are the ultimate consumors of the Plush. Therefore, this portion of their contention should be overuled, The second argument urged by the Petitioners is an odd one. The contention is that the Plush is exempt "since the items were purchased lor use in a service which is generally taxable". I will not tarry over this contention, because it does not merit more than summary disposition.

The resale exemption applies only to tangible personal property that it to be resold for consideration or transfened to another party as an integral part of a taxable service, Se Texas Tax Code Section t51,302 which states, "the sale for resale of a taxable item is exempted from the taxes imposed by this Chapter, Taxable personal property used to porform a taxable service is not considered resold unless the care, custody, and control of the tangible personal roperty is transfened to the purchaser of the service". The facts above having established that the amusement services here do not meet these criteria, the Petitioners' contention should be ovemrled.

PETITIONER'S CONTENTION NO.

ln the altemative, "tbe purchase of Plush is not subjeot to sales and/or use tax because the 'faxpayer received and relied on erroneous advice from Comptroller employees, which resulted in the Taxpayers' failure to collect sales and/or use tax for the Plush".

FINDINGS OF FACT
3. The tax challenged is tax on purchases, and results lrom the Petitionrst failure to pay sales or use tax.

CONCLUSION OF LAW
The Petitioners' contention should be ovemrled'
The Petitioners strenuously urge that they should be relieved from tax Iiabilify because they

did not collect sales or use tax when they purchased Plush. This mayhem of taxation doctrines presented by the Petitioners, in ther pleadings and proof petsuades me that, even
collecting tax on sales. I can only conclude that there is no telling what they asked the * *+ **+** i' Enforcement Office. Therelore I conclude that they have failed to meet the first test lor estabtishing a detrimental reliance claim, i.e., proving that they asked the right question or questions. (A second muddled claim, that bad advice kept them from charging tax is too spurious to consider, inasmuch as they are performing a non-taxable service.) Accordingly, their contention should be ovemrlecl'
1

at this late date, they do not understand the difference befween paying tax on purchases, and

,)

RECOIU}TENDATIO.N
Tat the udlt stnd without change, Signed this 2nd day of July, l99l
.

BEN TT Adrnin:istrative Law' Judge-

ORN.ER OF TI{E C.OMPTROLLER


The above decision of the Administrative Law Judge,.resulting in Petitioner's tiablity as set *A'i whish ls inoorporated by. referelc, approved and adopted in all out in Attaehtl.snt 'is raspets, Ttis. decisi* bec.omes:final fwenly ctays {Z0}from the date:o:f this rder" and the' total sUm of th tax, and interest amounts is due and payable witn'in twenty (20) days thereafter. [,f'uch sum is not paid within such time, apenalty often,percent of the taxes due will accnre, and inte-res:t will eontinue to acrue' desire.d, a Motion for Rehearing must he fld with the,clerk of the' Administafiv Law J,udges trwenf.y {2) days from the date of this Order.,and rnust state the grounds upon whi-ch the rnotion is,based.

If'a tehearing,is

ISSI"D this 2nd day of July, 1991.

JCIHN SHARP Cornptrolier ot' Publ ic Aecounts olthe State of Texas

ACCESSI0 Ntih4BEn SUPERSEDED: N


DOCUMENT TYPE: F{ DATE: t7fi211991 TAX TY?E: SALES

: 9 107[{ I I I 8G02

is'TR $,fs.i.Fm

,ffiA.Rsl'iN,,ff;t
IN
Hl:*-*;***i*rr*i'r*:.

Ttffi.4.1fi,rl!,.,r,*r**.**.*"*1,:

AUDIT QFFICE;'** r' *'r' t * *'t A,UDITP'ERICID: -JULY l" '1985 's'19t9,

S.f"iE$

,I-:$

TAX

TX

..F,,$
Law llrdge

f i-d.rninf"straiiie

.*if+.*Tt'd.{r:'#

,'Reres-eri{ibg'F Pn-r
CO

NIPfROLTER' S DBC'TS ION

F.NffiI{trN.Y .T$TETWENT
Or{ l!(ereh ,f ,n990, tPetiffiaer requesod,that gubmissions' of thP'Partles.
,a d.tisioa,

be made b.oii, on the Written

The Tx Division ag.rees that no tax is due on Petitioner's charges fot resurfacing bowling lanes" xams t0 an,& 1l slrould be delete.d fiom the'audil The eci.on:b ow:a{d,gges,t}e Gontentions that rgrnai in dispute

PETITIONER' $ CONTENTIONS

l. Fetitioner
2"

has already paid tax on certin purehases included in

the audit.

No tax is due on Petitioner's purchasss of "plush", lerm used to describe prizes (small toys) won by successful players of coin-operated amusement machines,

FINDINGS OF FACT
Petitioner ws audited fcrthe above re renced period and'tax. Petitioner was $efit a Texas. N,otioe ofTax Due of $r*,'r.***+** including tax, penalty, and interest.
I
"

2, Fetitioner rnakes sales and provides services to the bowling and billiards industrios.
Petiticnelalso provi'des ariusrnent se-ryices through coin-operated machines"
3, No,evidence was sub.mi*ed in support of Petitioner's,first contention. 4. CIne type of Ptitioner's,coin-operated machines dispenses prizes to,successfu[ st$t0r-ner-s:. ,4,. cane r other device is used to secure the prize and manipulate t to nn exit point, The prizes are ref,erred, to as 'iush". Some cnstomers re successfi:l and obtain,a pril2e' ofhers'
,do no.t.

CONCLUSIONS OF LAW
Petitioner,did not,.subrnt any evidence to support its first contention. It has failed to met its, burden ofp,mof as required by Comptroller's Rules sf,Practice and Procedure, Seetion 1.40* The first eCIntention must be tlenied. Petitioner's second contention should also be denied.

In support of its,second csntention Fetitioner first argues that no taxa'b,le rse of the "plush?' gccuis because of the exclusion in Tex. Tax Cocle Ann., Seetion l5 1.0 I 1 (c) which sttes, (c) ,*Use" does not include the sale of tangible personal property or a taxable servioe in the regular oourse of business, the transfer of a taxable service as an integral part of the transfer of tangible personal property in the regular course of business, or the transfer of t'angible peruonalproperty as an integral part of the transfer of a taxable seryice in the regular oourse oIbusiness.

Petitioner further cites Tex. Admin" ode Section 3.298((l) (hereafter Rule) and (g) (a), These sections allow a provider of amusement services to purchase items tax-ftee if oare, custody, and control of the item is transfened to the customer as an integral part of the service.
The Tax Division cites Rule 3.30 I (b) (2) in its opposition to PetitiQner's frst argument. This section states, in pertnent part:

"The operators of garnes, or other concessions, in rvhich each participant does not receive some merchandse or prize become the consumers of merchandise so used by them and are tiable to State of Texas for tax based on the sales price or use oflthe taxable items purchased for use by them. ... "
The Tax Division asserts that this rule clearly covets the taxability

of the items in question.

Petitisner alternatively argues that its purchases of "plush" are for resale as defined by Tax Code Sestion 151.006, which statesi
'lSale lor resale" means a sale of:
(

l) tangible personal property or a taxable service to a purehaser who acquires the property or service for the purpose of reselling it in the Unted States of America or a possession or territory of the United States of Arnerica in the normal course olbusiness iq the form or con{ition in which :t is acquired or as an attachment to or integral part of other tangible
Petitioner next cntends that the plush is transt'erred to the customer as an integral part providing the arnusement service. The personal property or taxable service;

of

(2) tangible personal property to a purchaser for the sole purpose of the purchaser's leasing or renting it in the United Statss of America or a possession or tenitory of the United States of Arneriea to anotherperson, but not if incidental to the leasing or renting of real estate;

(3) tangible personal properfy to a purchaser who acquires the property for the purpose ol transferring it in the United States of America or a possssion o tenitory of the Unted States of America as an ntegral part of a taxable service; or

(4) a taxable service performed on tangible personal properry that is held for sale by the
purchaser of the taxable service.

careful reading oflthis definition reveals that Petitioner r.voulcl only be entitled to purchase the items tax-free if it resells thc items as tangible personal propefry flor consideration or
3

transfers the items as an integral part of a taxable service. If Petitioner resold the items as tangible personal properfy, it would be required to collect and remit tax on the, resale' Petitioner would then owe a greater amount of tax than that assessed in the audit, assuming that the cost of playing the game exceeds the cost of one item of "plush'n.

" The Comptroller

has treated receipts from coin-operated amusement machines as service receipts ratherthan sales of tangible personal property, even when prizes are involved. Under Tax Code Section l5 I .0101 (b), the Comptroller has exclusive jurisdiction to interpret the meanng of "taxable service" as defined in Tax Code Section 151.0101 (a), The designation olPetitioner's coin-operaterl machines as services rather than sales is a proper exercise of that authority. Fetitioner's first alternative argument s without merit.

Petitioncr next contends that the "plush" is transferred to the customer as an integral part of providing,the amusemont service, The Comptroller, by adopting Rule 3.3CI1(bX2), has rejected this argument, The amusement service is provided in exactly tJre same manner and at exactly the same price regardless of whether or not tho player wins a prize. The transfer olthe plush is not therelore an integral part of theservice. Petitioner's second contention should be denied.

RECOMMENDATION
Exams l0 and l
respects,

should be deleted lrom the audit, which should then be made frnal in all

Signed this 9th day of July, 1990.

THOMAS L. POOLE Administrative Law Judge

ORDER OF THE COMPTROLLER


The above decision of the Administrative Law Judgc, resulting in Petitioner's Iiabili$; as set out in Attachment "A" which is incorporated by reference, is approved and adopted in all respects. This decision becomes final twenty (20) days from the date of this Order, and the total sum of the tax, penalty and interest amounts is due and payable within lwenfy (20) days thereafter. If such sum is not paid within such time, an additional penalfy of ten percent of the taxss due will accrue, and interest will continue to accrue.
4

ir$nt

f,fi$I.tlts.8 day.:ofAu.gwh

tr9

;SrGffi$sI$.$sl $ittP.,gx u
'd.AIfi\f$TTIH

r gO'g.8fi=f0+q.g$s

I'

$,*r#**99'0 AXT,Y-.PEi $A,LB$

Exhibit F

Rn Beal'

Professor & Attorney at La\u


One Bear Place #97288

Waco,TX 76798-728 (2s4) 710-6seo

Bon Beal@baylor,edu
Janary 28, 2CI11 The Honorable Chief Justice Jones, and Justices Puryear and Pemberton 3td courtofApealE state ofTex

P.O.9c/i,t2547
Austn, TX787L1

Re:

Amlcus Letter: Bosrk Amusement & Vendng, L-P. v, Combs, Cause Nol 03-10-00105-CV

i
i
I

To the tlonorable Chlef Justice Jones, Justice Pemberton and Justice Puryearl
I h-umbly submit this amicus requestlng tht ths Courtsu sponte withdraw its opinlon due'to legal error and ssue a Rew opnlon ln lts place.
a

,
I

My nam.e is Ron Beal. I am a professor of law and a licensed, practicing attorney in te State of Texas, I ltave dedicted over 25 years of my professlonal areer tg prsrve, promol and enhance the quality of administfative law ln this great State to ensure effective, faii and efficientgovernrnental acti6n by our stt agencles and to nsure fair treatment n decision-making towards our citizens of the
f

State of Texas.
I have no nterest ln thfs litlgation. I do not have a relationshlp

with any of the Partis or lawyers

ro rhls ppeal and the ltrlgarlon of thls cause in the dlstrlct court or th 0rlglnl roceedngs of thts Court. I am not belng paid or otherwise compensated for my views. I am writing Lo this Court on my own accord and to solely preserv the integrity of the admlnlstratve process. This Court interpreted the relevant statute and determined that the Comptroller had nnisnterprtcei lts provlslons nd reneiered Judgrnent ln favorof the appellanl ln footnote 5, il no^red lhat the Comptroller had adopted a rule dlrectly on point to the issue at hand, but that due to thls Cuft'3 lntefpfe?tion f the rlevntJttute, ths Couftstted "w do not defr to the Comptrollert interpretatton of this rule, as it conflcts with our fnterpretation of the unambguous provision of the tax

code." {Mem op&ln t n.6}.


Rules adopted by an agency have th e fo rce
a

nd effect of law, Rodriguez v. Service Lloyds lns. Co.,

997 S.W.zd 248,254 (Tex 1.999), As long ago es 1939, tjr Texs Suprame Court held: "All rules.,. are presumed valid until the contrary is made to apear. lf a rule...is found to be lllegal orinvalid by a court

ofmpetentjurisdiction, suchcourtroysoadladg*Thecourtcnnotsubsttuteanew
one adjudged invald." Gulf Lond Co"

ruleforthe

v. Atlantic Reflning Co, 1315.W,2d 73,85 (Tex. 1939)(emphass

-**ry

added). As this Court has held many tmes, a valid rule has the force and effect of a statute nd in fact,

are construed like statutes bythe Court nder the canons of statutory construction, County of Reeves
T,C.E.Q, 266S,W.3d 516,527 (Tex.App,-Auslin2008); Gotesv.Tex.Dept,of Farn.Prot.Serv.,252

v.

s.W.3d 90, 98 (Tex- App.-Austn


As

2008).

.'

lnt*pret

the Texas Supreme Court recently held, if the Comptroller n adopting lts rule was required to lts delegated stlutry uthrrlryr th court wlll fllw lh ComptrlllJs ntrprfftft of th

statute if t is reasonable and does not contradict the plen meanlng of the statute, Firrt Am. fitle lns, Co, v. Combst 358 S,W3d 627,632" (Tex.2008). ln fact, ths Court hald in 2010, that f thc stftite could be reasonably read as the agency has ruled and that the reading is in hatmonywith the rest olthe statute, then the cuit ls boud tr cpi tht nti?fri svt If thsl feso?bl i1efpf iils Nlst, Tex" Dept o tns. v Am, Ndfl" lns. Co.,-f ex. App. Lexls 3005 (No. t0-0374) (Tex. App..Auslln ?010, pet, filed).
Eventhough such extreme deference is subJect to dspute on appeal of that case, it is humbly subrnifted rh oly lg0 f all the bv ss ls tht thls curt Rrot rnily t8nre th comtIllrs rule in a footnote but must adjudge it to be invalid in order for it to be ignored- As the Court noted, the very issue of t'frc, custody nd control/ had to be concluslvely proved by the appellant and thc relevnt rule interpretlng that phrase, which has been in effect since January 1, 1976. was wholly reiected by thls Court wthot discussion and/or analyss as to why it was outside the scope of, inconsistent with or not n hannony with the statute, Ths was a rule that is presumed to be vlid artd binding on this Court. Further, it appeors the rule was conqrned with thlld with horrible hand-eye coordination having to ultimately buythe plush tor7 after trylng so many tlmes to do it rlghtand not whther the company ultlmaly dalivered ll of th push toys to smn. But w io not lw thi.s CurilJ lnle*rtlon
due to the fact the rule was lgnored-

I humbly submlt that this Court must dirrectly address the validlty of lhe rule not only for falrness ln thls case, butmore lrnprtntlyr t preservthecleastandatds of theJudiclal revlew of agency interpretations and when a properly promulgated rule of long-standing is or is not valid,

ProTessor of Law Bar Card: 24A05:4I

Exhibit G

WestLaw
34 TAC $ 3. 301
Page I

Tex. Admin. Cocle tit. 34, $ 3.301

c
Tex. Admin. Code tit. 34, $ 3,301
(2) The redemption of trading stamps by exchanging merchandise for ther is a sale af retail of merchandse for a consideration. Trading stamp companies selling tangible personal property or redeeming trading stamps by exchanging n:rerchandise fo them or both re retailers, Trding stano companies or rher rtilers so edeerning tading stamps must collect and rernit to the state sales lax based on the redernptive value of ths st4mps surrendered or on the reasonable retail price of the taxable merchandise utlized in the transaction, whichever ls the larger.

Texas Administrative Code Curreltness Title 34. Public Finance

Part 1. Cornptroller of Public Accounts Chapter 3. Tax Administration

"d&cJgplerO" Srate
Tax

Sales and Use

3,301, Promotiona Plansl Coupons, Retailer Reimbursemen t


$

(a) Tracting sl.arnps.

) The sale of [ading stamps to a retailer is a sale of intangible personal property and nof turable under the Limited Sales, Excise, and Use Tax Act. The sale to a
(I

(b) Games Rd conccssions. dispensing


mechandise.

retailer of catalogues, stamp books, advertising, or printed matter, or other tangible personal property used in connection with the conduct or promotion of his business is a sale of tangible personal property and subjects such retailer to liablity for the sales or use tax, which tax must be collected and remitted in accordance with the terrns of the Lrnited Sales, Excise, ancl Use Tax Act. When a retailer disftibutes trading stamps to cu.stomers along with the sale of nrerchandise, such stamps are considered to be given in addition to the merchandise, unless the terms of the sale reveai an intention that a part of the consideration is for the .stamps.

(l)

The operators of, games, grab-bag concessions, or other operations similar in nature, in whch eaeh customer receives some merchandise or prize are regarcled'as retailers and must collect nd remit to rhe State of Texas the sales tax; sales to these
operators are sales for resale. Tax on the sales of such merchandise or prizes is due on the gross receipts from such operations, and a reimbursement tax shall be collected from their customers. If an operator disposes of both taxable and nontaxable items, his tax to the State of Texas will be measured by the percentage of his taxable sales to his total sales, but not less than the

reimbursement taxes collected from his customers. Such operators may give their

O 2010 Thomson Reuters. No Cairn to Orig. US Gov, Works,

34 TAC $ 3. 301

Page2

Tex. Admin. Code tit.34, $ 3.301 with an additional charge being made therefor* the premium is purchased for resale and sales tax should be collected on sueh additional charge This does not apply to transactions in which trading
stamps are used,

suppliers resale certif icates for taxable items purchased,

(2) The operators of ganres, or other concessions, in which each participant


does ro receive some nrerchandise

or
(d) Cash discounts. The actual selling price of taxable tangible perSonal property is the msasure of the tax due under the terms of the

prize, become ihe consumers of rnerchandise so used by them and ae liable to the State of Tex for tax based on the sales price or use of the taxable items purchased fr use by them. Retailers selling taxable tangible personal property to such opsrators or concessionaires shall collect and remit to the state the tax due on the sales to them.'I'he Texas use tax is due on out-of-state purchases of taxable tangible personal property based on the purchase price of the merchandise.

(c) Gifts, .rmples,, prizes, prerniums.

(1) Sales of taxable tangible personal property to persons who make gifts of the property or use the property for samples or advertising purposes are taxable. For n explanation of the taxability of an item purchased for use as a prize when the winning of the prizes depends upon chance or skll, see $ 3.298(l) (l) of this title (rel ating to Amusement Service^s)-

Limited Sales, Excise, and Use Tax Act. Bona fide cash discounts taken by the buyer at the time of the sae pose no problem, as they are uever part of the sales price and are never in the tax base. However, if cash disoounts are taken after the amount of the sales have been used in the moasure of the tax, such cash discounts rnay be deducted frorn the measure of tax liabilty for the reporting period in which such discounts are taken in which instancs the retailer seeking an adjustntent in his tax lability must show he has adjusted pro rata the reimbursement tax collected, if any, from his purchasers. Cash discounts so tken and becomlng the basis of tax adiustment bet./een retailers, their purchers, andlor the State of Texas, must be substantiated in the accounts, invoices, and records of such retailers to the satisfaction of the comptroller's office.

(e) Coupons. When coupons or certificates are

(2) Sales of taxable items to persons who give the property as a premium with bona fide sales of other taxable items are not saes for resle whore no additional charge is made for such premiurns, However, when a taxable iten is given as apremium

accepted by retailers as a part of fhe selling price of any taxable item, the value of the

coupon or certificate is excludable from the tax as a cash discount, regardless of whether the retailer is reimbursed for the amount represented by the coupons or cetificate-

O 2010 Thomson Reuters. No Claim to Orig. US Gov.'Works,

34,tAC:$3,30t
tex, Adrnn. Code tit. 34, $ 3,301

F,gg,3r

,$i#ig

ftS$,*, 3,T*9.,.' ,3$*

@ 2010

Thomson Reuters. No Claim to Qrig. US Gov. Works-

Exhibit H

\\testtaw
V,T.O,A., Tax Code$ I51.335
F,age

Q:

Effective: [See Text m endm entsl

Vemods Toxas Stalutes and:Codes Annotated Cune,ntness Tax Code (Re- Aruros) Title ?,, State TExation LReft &, Annos,) Subtirtle E",Sales.Excise, and Use Taxes Lirnited Sales, Excise,,and,UbeTax,l$gf$ U.,Exemptions fRpfq & Annos) '*$' S1.335. Coin-Opernted Services

lggg i Itrj$g

&-

Ugs

[a]Alnusemrt,aadpef$na] services provided ttxough eoin-operated machines{hatareopefted by the cnsunr:-r'oxEtpt from the taxes imposeel by thi's chapter,

{b :ltis sctio

does not apply to, the sale of tanglble personal properd}' CIr to the urchase of an admission through the use of a coin-operated machine.

CRDIT(S)

Added by Acts 1984, 68th Leg-,2nd C.S., ch. 31, art. 7, $ 15, eff, Oct. 2, 1984,

LI.ERARY'REFERNCES

2008 MainVolume

TaxadonS:658.

Vfestlaw Tapic {o,

37.1,.

V. T. C. 4,,'[ax Code $ 15t.335, TX TAX $ 151.335

O 2010 Thornson Reuters. No Claim to Orig. US Gov. Works,

Exhibit I

9611765L [Tax Type: Sales] [Document Type: Letter/Memo]


Texas Comptioller of Public Accounts STR Systfii

Page I

of I

96117651

DATE; November 27, Lg96

TO: Ron E, Marsh, Tyler Audil


FROM; David S.omerville, Tax Policy

SUBIECTI Taxability of Monies Collected by Club

There is no question that a table dance/couch dance by a topless dancer is an arnusement or entertainment. However, that does not make it a taxable transaction between the dancer and the customer. Texas Tax Code Section 151,005{3) states that a sale or purchase includes "the performance of a taxable servlce or, in the case of an amusement service, a transfe;: ol ttle to or possession of a tlcket or other admission document, the collection of an admission fee, whether by individual performance, subscription series, or memership privlege, the collection of dues or a fee, charge, or assessment, including an initation lee, by a club or organization for membeship or a special privilege, status, or membership classification n the club or organization, or the use of a con-operated machine," Therefore, the performance ol an amusement servlce as defned in Section 151.0028 of the Tax Code is not taxable unless there is the r:equisite sale of an admission to the amusement service. The Comptroller's office has never taxed [he voluntary transacEion between a dancer and a customer as a sale of an admssion to amusement servces,

If sales tax is not imposed on the transaction belween the dancer and the customer, then the fact that the money collected by the
dancer is put In a lock box, recorded by the club, and then dsbursed by the cluh to the dancer atter the club takes a percentage does not make the original transaction between the dancer and the customer taxable. This issue has previously been addressed. Clubs process customer credit cards so dancefs cn get paid for their table dances and even though a club keeps a percentage of the dancer's receipts, the club is noL required lo remt safes tax on its percentage of the recepts. The handling of the dancer's receipts from credit card purhases is done as convenience provided by the club, Although your situation involves cash and lock boxes rather than ciedit cards, sales lax is still not imposed on the voluntary transaction between Lhe dancer and the customer, Unlike the cover charge pad by a customer to enter the club, the transaction between the dancer and the customer is not a sale of an admission to an amusement service.

ACCESSION NUMBERI 96117651 SUPERSEDED: N DOCUMENTTYPE: L

DATE;

II/27/Ie96

TAX TYPE; SALES

http ;//aixtcp. cpa,state.tx.us/opendocs/open

3I9

6l 1765l,html

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