Texas Third Court of Appeals Hears Argument on Sale-for-Resale Exemption for Toys Used in Coin-op Machines–Possible Impact on Upcoming Hotel Line of Cases

By Paul Masters

On December 15, 2010, the Texas Third Court of Appeals heard oral argument on an appeal by Roark Amusement & Vending, L.P. in response to a lower court’s decision upholding the Texas Comptroller’s action imposing sales and use tax on the purchase by Roark for toys placed in a claw machine. Roark argued the sales and use tax sale-for-resale exemption applied as the toys in the claw machine were used in the performance of a taxable service. It argued that coin-operated amusement services should be subject “to the integral transfer sales and use tax exemption found in the ‘sale for resale’ tax exemption statute.” Roark alternatively argued that 34 Tex. Admin. Code § 3.301(b) is invalid to the extent it excludes Roark’s transaction from the sale-for-resale exemption, as the Comptroller improperly limited the Legislature’s exemption.

First, Roark argued that amusement services are taxable, albeit exempt, pursuant to Tex. Tax Code § 151.0101. Thus the case appears to hinge on statutory construction. The Comptroller urged the Court to look to the overall tax scheme, as opposed to the technical argument, and then pointed out that even if Roark prevails on the first argument that the Comptroller’s exclusive authority to determine what is a taxable service gives her the right to make that determiation in Roark’s case. Finally, the Comptroller highlighted that Roark failed to transfer care, custody and control of the toys to the buyers, on the basis that not every buyer received a toy. Roark’s compared the lack of a transfer of a toy at each purchase at the coin-operated machine as products to use in connection with taxable janitorial services, and also relied on her “consistent application” of Comptroller Rule 3.301(b)(2) that treats the operator of a coin-operated machine as using prizes in the machine where “each participant does not receive some merchandise or prize”.

This case may also have application to a line of cases in which the district court recently ruled in favor of the Comptroller, denying the taxpayer’s argument that it had engaged in a sale for resale transaction as a result of the transfer of hotel consumables, such as shampoo, to its guests in connection with a taxable service, being lodging.

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