Combs v. Roark Amusement, Petitioner's Brief on the Merits (Sept. 19, 2011)

8/4/2019 Combs v. Roark Amusement, Petitioner's Brief on the Merits (Sept. 19, 2011)

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NO.11-0261

In theSupreme Court of Texas

SUSAN COMBS,COMPTROLLER OF PUBLIC ACCOUNT

OF THE STATE OF TEXAS, AND GREG ABBOTT,ATTORNEY G

OF THE STATE OF TEXASPetitioners,

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 O

ACCOUNTS AND GREG ABBOTT,ATTORNEY GENERAL O

STATE OF TEXAS

GREG ABBOTT MARC A. BARENBLAT

Attorney General of Texas Assistant Attorney General

State Bar No. 24038758

DANIEL T. HODGE Financial and Tax LitigationFirst Assistant Attorney General P.O. Box 12548

Austin, Texas 78711-2548

BILL COBB Telephone: (512) 475-4255

Deputy Attorney General for Civil Litigation Telecopier: (512) 477-2348


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IDENTITY OF PARTIES AND COUNSEL

Petitioners Susan Combs, Comptroller of Publiof the State of Texas, and Greg Abb

Attorney General of the State of Tex

Petitioners Counsel Marc A. Barenblat

Assistant Attorney General


Financial and Tax LitigationP. O. Box 12548


Phone: 512/ 475-4255

Fax: 512/ 477-2348

Respondent Roark Amusement & Vending, L.P

Respondents Counsel James F. Martens

Martens, Seay & Todd


301 Congress Ave., Ste. 1950

Austin, Texas 78701

Amanda TaylorHohmann, Taube & Summers, L.L.


100 Congress Ave., 18th

Floor

Austin, Texas 78701


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TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL ....................................................

INDEX OF AUTHORITIES .............................................................................

STATEMENT OF THE CASE .........................................................................

STATEMENT OF JURISDICTION .................................................................

ISSUES PRESENTED ......................................................................................

STATEMENT OF FACTS ................................................................................

SUMMARY OF ARGUMENT .........................................................................

ARGUMENT

A. The appellate decision is based on a misinterpretation of tax statutes ...1. Thetransfer of the plush toys is not an integral part of Roarks ser2. Tax exemptions must be strictly construed against the taxpayer.....3. Roarks reliance on 7-Eleven is misguided......................................4. Roarks attempted analogies to tournament sponsors, janitorial

service providers and bowling alley operators are readily distingui

B. As it pertains to the tax treatment of merchandise used by operators ofgames in which each participant does not receive a prize, Comptroller

Rule 3.301(b)(2) is valid, directly on point and entitled to deference. ..

C. The decision of the court of appeals expands the scope of the sale-for-exemption beyond that which the legislature intended. .........................


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PRAYER ...........................................................................................................

CERTIFICATE OF SERVICE ..........................................................................

APPENDIX

Order on Summary Judgment (February 22, 2010)...........................................

Opinion of the Third Court of Appeals (January 26, 2011) ..............................

Tex. Tax Code Ann. 151.006 (West 2009) ....................................................


Tex. Comp. Pub. Accts, Hearing Nos. 46,885, 2006 WL 4007577 (Aug. 31,

43,477, 2003 WL 22148970 (May 14, 2003); 39,909 & 39,110, 2001 WL 182

(Oct. 23, 2001); 33,665, 1997 WL 806986 (Dec. 21, 1997); 27,467, 1991 WL157425 (July 22, 1991) and 26,058, 1990 WL 149561 (Sept. 17, 1990) ..........

Beal Amicus Letter ............................................................................................

34 Tex. Admin. Code 3.301 (1988) (Promotional Plans, Coupons,

Retailer Reimbursement) ...................................................................................


Comptroller Letter 9611765L ............................................................................


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INDEX OF AUTHORITIES

CASES

7-Eleven, Inc. v. Combs,

311 S.W.3d 676 (Tex. App.Austin 2010, pet. denied) ....................................

Bullock v. Natl Bancshares Corp.,

584 S.W.2d 268 (Tex. 1979) .............................................................................

Combs v. City of Webster,

311 S.W.3d 85 (Tex. App.Austin 2009, pet. denied) ......................................

Day & Zimmerman, Inc. v. Calvert,

519 S.W.2d 106 (Tex. 1975) .............................................................................

DTWC v. Combs, et al.,appeal docketed, No. 03-10-00801-CV .............................................................

First Am. Title Ins. Co. v. Combs,

258 S.W.3d 627 (Tex. 2008) .............................................................................

McLane Co., Inc. v. Strayhorn,

148 S.W.3d 644 (Tex. App.Austin 2004, pet denied) .....................................

N. Alamo Water Supply Corp. v. Willacy County Appraisal Dist.,

804 S.W.2d 894 (Tex. 1991) .............................................................................

Rodriguez v. Serv. Lloyds Ins. Co.,

997 S.W.2d 248 (Tex. 1999) .............................................................................

Sharp v. Clearview Cable TV, Inc.,


Strayhorn v. Raytheon E-Systems,



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STATUTES

Tex. Tax Code Ann. 1.03 (West 2009) ..........................................................

Tex. Tax Code Ann. 151.0028 (West 2009) ..................................................


Tex. Tax Code Ann. 151.0101 (West 2009) ..................................................




Tex. Govt Code Ann. 311.023 (West 2009) .................................................

Tex. Occ. Code Ann. Chapter 2153 (West 2009)..............................................

RULES

34 Tex. Admin. Code 3.298 (West 2009) (Amusement Services) .................

34 Tex. Admin. Code 3.301(b) (West 2009) (Promotional Plans, Coupons,


34 Tex. Admin. Code 3.301(c) (West 2009) (Promotional Plans, Coupons,


OTHER AUTHORITIES

Tex. Comp. Pub. Accts, Hearing No. 26,058, 1990 WL 149561 (Sept. 17, 19

Tex. Comp. Pub. Accts, Hearing No. 26,065, 1990 WL 283056 (Nov. 6, 199


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Tex. Comp. Pub. Accts, Hearing Nos. 39,909 & 39,110, 2001 WL 1821659

(Oct. 23, 2001) ...................................................................................................

Tex. Comp. Pub. Accts, Hearing No. 43,477, 2003 WL 22148970 (May 14,

Tex. Comp. Pub. Accts, Hearing No. 46,885, 2006 WL 4007577 (Aug. 31, 2

Tex. Comp. Pub. Accts, Tax Exemptions & Tax Incidence Report, February

Comptroller Letter No. 8411L0630C13 ............................................................

Comptroller Letter No. 9310136L .....................................................................






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STATEMENT OF THE CASE

Nature of the Case: This is a sales tax case involving the salexemption.

Trial Court: The Honorable Suzanne Covington, 9

Court, Travis County.

Trial Courts Disposition: Granted the States motion for summary ju

denied Roarks motion for partial summarAttached at Appendix, Tab A.

Parties in Court of Appeals: Roark Amusement & Vending, Inc., Appe

Combs, Comptroller of Public Accounts o

Texas, and Greg Abbott, Attorney General

of Texas, Appellees.

Court of Appeals: Third Court of Appeals; Chief Justice

Jones joined by Justices David Puryea

Pemberton. Roark Amusement & Ven

Combs, et al. No. 03-10-00105-CV, 2011

(Tex. App.Austin 2011, pet. filed). Opin

at Appendix, Tab B.

Court of Appeals Disposition: Reversed the trial courts disposition o

judgment, remanded for factual determin

amount of the refund to which Roark

entitled. Motion for rehearing denied.


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STATEMENT OF JURISDICTION

The Texas Supreme Court has jurisdiction over this appeal becau

involves the construction of a statute necessary to a determination of this case

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 personconstitute an integral part of a coin-operated amusement service whe

is often completed without the property transferring?

2. May the court of appeals ignore without invalidating a Comptroller on point on a given issue, finding instead that the Comptrollers inteher adopted rule conflicts with the courts interpretation of a Texa

provision?

3. For purposes of the sale-for-resale exemption, can a service retain status when there exists no circumstance in which the service wo

subject to sales and use tax?


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NO.11-0261

In the

Supreme Court of Texas

SUSAN COMBS,COMPTROLLER OF PUBLIC ACCOUNT

OF THE STATE OF TEXAS, AND GREG ABBOTT,ATTORNEY GOF 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 OACCOUNTS AND GREG ABBOTT,ATTORNEY GENERAL O

STATE OF TEXAS

TO THE HONORABLE SUPREME COURT OF TEXAS:

The Third Court of Appeals erred by rewriting the sale-for-resale e

allow the provider of a service that would never be subject to sales and

purchase taxable items tax-free that, as contemplated and required under the


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deference to the Comptrollers longstanding statutory construction and inte

her rules.

STATEMENT OF FACTS

From October 1, 2000 to February 29, 2004, Roark provided an

service through its coin-operated crane machines in which not every purc

service received a plush toy as a prize. (CR: 161, 3; 163 16). Under th

Code, Roarks service is never subject to sales and use tax. Roark placed in

plush toys that it purchased from vendors and on which it paid sales and u

162, 10, 11). Roark sought a refund of sales and use tax paid on its purch

toy prizes based on the Texas Tax Codes sale-for-resale exemption on the

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 requir

tangible personal property to a purchaser who acquires the property for the

transferring care, custody and control of the tangible personal property to the

a taxable service as an integral part of the service. Tex. Tax Code Ann. 1

(West 2009), attached at Appendix, Tabs C, D. Because not every purchase

service receives a plush toy, the transfer of the toys does not constitute an int


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Comptrollers application of her valid and longstanding administrative rule

deference. Moreover, because tax code section 151.335 precludes any circ

which Roarks service would ever be subject to sales and use tax, Roark does

a taxable service. Thus, the Comptroller properly denied Roark the sa

exemption for its plush toy purchases.

The Third Courts opinion significantly expands the scope of the sa

exemption beyond that which the legislature intended through its enactment

to stand, the opinion could facilitate further expansion of the scope of the e

other contexts, including a case currently pending where the underlying taxa

is taxed not under Texas Tax Code Chapter 151 (sales and use tax), but un

156 (hotel occupancy tax), thus precluding the possibility of double tax

Chapter 151, which the exemption was enacted to prevent. See DTWC Corp

et al., appeal docketed, No. 03-10-00801-CV. To avoid such a result, the

grant the Petition for Review, reverse that portion of the judgment of the cou

holding that Roark qualifies for the sale-for-resale exemption and grant judg

to Petitioners.

ARGUMENT

A. The appellate decision is based on a misinterpretation of tax statut


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part of a taxable service. See Tex. Tax Code Ann. 151.006(a)(3) (

(emphasis added). Thus, even if Roark is found to have provided a tax

which the State maintains it did not, it is the transfer of the toys that must b

the service not the toys themselves or the potential for such transfer. In th

plush toys offered as potential prizes in coin-operated amusement machine

Courts opinion undermines decades of Comptroller precedent cons

constitutes a transfer of care, custody and control of tangible personal pr

integral part of a taxable service as required under tax code sections 1

151.302.

2

In its opinion, the Third Court asserts that [o]n appeal, the State does

that the plush toys are integral to the performance of Roarks amuseme

agreeing that the plush toys serve as the incentive to play the game. See Ap

B at page 9. While the physical presence of the toys or the chance or po

permanent transfer might serve as an incentive to play the game, thes

hypotheticals. The State unequivocally disputes the Third Courts finding

and without explanation that [w]e likewise conclude that the transfer of p

integral to the amusement service. See id. n.5. If 1 in 20 customers

emerges with possession of a toy, it follows that 95% of the time, Roarks se


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a toy, a transfer with a 25% chance cannot realistically be held to constitute

part of Roarks service.

Conceding from the outset that not every paying customer receives

Roark erroneously asserts entitlement to the resale exemption for its plush to

on the basis that it eventually transfers all of the toys it purchases to selec

except for toys lost, stolen or damaged.3

However, under the express lang

sale-for-resale statute, [t]angible personal property used to perform a taxab

not considered resold unless the care, custody and control of the tangib

property is transferred tothe

purchaser of the service. Tex. Tax Code Ann.

(West 2009) (emphasis added). In administering the tax code, the Com

reasonably and consistently held that such a sporadic transfer of tangib

property to select purchasers of a given service does not constitute an integ

taxable service in the context of plush toys offered as potential prizes in c

amusement machines.4

The Third Court of Appeals failed to defer to the C

reasonable interpretation of the statute she is charged with administering

allowing Roark the sale-for-resale exemption in direct contravention

construction of the exemption statute. See N. Alamo Water Supply Corp

County Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991) (exemptions ar


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uniformity by placing a greater tax burden on some businesses and indivi

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 m

show that it falls within the statutory exemption claimed. N. Alamo Water

S.W.2d at 899; Bullock v. Natl Bancshares Corp., 584 S.W.2d 268, 272

Thus, while a plaintiff in a tax refund case must prove entitlement by a prepo

the evidence, if the refund sought is based on an exemption, the plaintiff fa

burden of proof.

Roark contends that the plain language of the exemptions resale

under tax code section 151.302 that care, custody and control of the tangi

property transfer to the purchaser of the service constitutes an integral part

even though the tangible personal property at issue does not transfer to e

purchaser. However, the Comptroller has reasonably, consistently and

construed sections 151.302 and 151.006 together with section 151.335 to

each purchaser of the service receive a toy prize before the exemptio

applicable.

As it pertains to the transfer of tangible personal property to the purc


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purchasers of a given service. Section 151.302(b) expressly provides t

personal property is not resold unless it is transferred to the purch

contemplating a transfer with each purchase. Thus, under the plain languag

151.006 and 151.302, given that Roark can provide its service in its entiret

not most of the purchasers of its service without a toy transferring, the spor

of a plush toy cannot reasonably be held to constitute an integral part of Roa

But cf. Sw. Bell Tel. Co. v. Combs, 270 S.W.3d 249, 260 (Tex. App.Amarill

denied) (If a statute can be reasonably read as the agency has ruled, and th

in harmony with the rest of statute, then we are bound to accept t

interpretation even if other reasonable interpretations exist.) (emphasis ad

3. Roarks reliance on 7-Eleven is misguided.In ascribing as integral the transfer of toys to its service, Roarks co

self-defeating. Roark argues that the transfer of toys is integral to its s

though customers do not receive a toy every time they use Roarks

Roark attempts to analogize its allegedly integral sporadic toy transfer

appellate opinion wherein, according to Roark, the Third Court of Appeal

that tangible personal property is an integral part of a taxable service if i

an important part of the performance.6

In 7-Eleven, however, the Third C


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Websters Third New Intl Dictionary at1173 (1986)) (integral means o

or serving to form a whole; essential to completeness; constituent; inherent

this clarification by the Third Court of Appeals was in response to the State

against entitlement to the resale exemption in 7-Eleven that only a small p

[tangible personal property] can be characterized as an integral part of a

processing service. Id. at 687.

In stark contrast to the fact that Roark can provide its service in it

many if not most of the purchasers of its service without a toy transferring, th

component analyzed in 7-Eleven was not in relation to whether tangible perso

transferred with every performance of the taxable service. Rather, the conclu

phrase essential to completeness helped clarify the definition of integral

in the context of the Third Court of Appeals rejecting the States argument

that the tangible personal property therein at issue had to be committed s

performance of the taxable service in order for the integral componen

151.006(a)(3) to be satisfied. Id. As Roark concedes that not every payi

receives a prize, the transfer of a toy cannot reasonably be held to be esse

completeness of the provision of Roarks service.

Not to be deterred, Roark further argues that the sporadic tran


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be on Roarks intent in purchasing the plush toys.7

Yet again, Roarks re

Eleven is misplaced. In 7-Eleven, transferor intent was not analyzed in th

whether tangible personal property transferred with every performance o

service; rather, it was in the context of the Third Court of Appeals rejecting

argument that the resale exemption required that the purchaser of tangib

property who transfers it as an integral part of a taxable service not also

benefit from the transaction. 7-Eleven, 311 S.W.3d at 685. Thus, the unav

of the 7-Eleven decision to Roark is multi-layered. Roarks integral

arguments8

4. Roarks attempted analogies to tournament sponsors, janitproviders and bowling alley operators are readily distinguishable.

presuppose that the precepts Roark paraphrases from 7-Ele

response to an analogous context wherein a resale exemption was sought

personal property that did not transfer every time a service was provided

patently not the case in 7-Eleven.

Notwithstanding Roarks contentions to the contrary, there is nothing

Comptrollers position that each purchaser of a service like Roarks receive

before the resale exemption would be applicable to Roarks plush toy

7 See Response to Petition for Review, p. 5, citing to 7-Eleven, 311 S.W.3d at 686 (S

Asserting that Comptroller policy exempts from sales tax items transferred


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as an integral part of a taxable service, even when service providers do

property every time they perform a service, Roark continues to advance its

analogizing its situation to that of certain providers of taxable services and

personal property that the Comptroller permits these entities to purchase tax-

vein, Roark cites a Comptroller Letter as authority for the propositi

Comptroller grants the exemption in contexts where not every participant w

Roark also erroneously likens its situation to providers of taxab

services as well as bowling alley operators and the tangible personal prop

Comptroller permits these respective entities to purchase tax-free. How

contexts are distinguishable: paying customers (presumably building

companies) of the taxable janitorial services provided in Roarks example ar

a property transfer if so desired, be it liquid hand soap, toilet paper or floor

this principle also holds true for bowling alley patrons and bowling balls an

However, Roarks conclusory assertion that the trophies addressed in tha

which the exemption was granted) were not distributed to all participant

assumes facts not in evidence, particularly given that the list of exemp

included food and drink for players. It is extraordinarily unlikely that fo

would only be provided to select players.


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Stated differently: bowling alley patrons who do not bring their ow

not bowl and would never pay to bowl without the integral transfer of a b

because the taxable service (bowling) cannot be completed without it.11

Similarly, paying customers of the taxable janitorial services would ne

leave money on the table in the absence of a transfer of the tangible person

Even if lightbulbs or paper towels do not transfer every time janitorial

performed for a given paying customer, these items will eventually transfer

the same paying customer; otherwise, presumably, the customer will not

service, or potentially has a breach of contract action available. This

distinction from Roarks situation, where Roarks service can be completed 2

potentially only 1 or even 5 out of 20 paying customers emerging with a toy

been transferred. Under the tax code, tangible personal property used t

taxable service is not considered resold unless the care, custody and co

tangible personal property is transferred to the purchaser of the service.

(West 2009). Given that not every purchaser of Roarks service receives

Con

high percentage rate, Roarks paying customers often emerge from the comp

without a toy.


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sections 151.006 and 151.302 as necessarily read in tandem, the transfer of th

cannot reasonably be held to constitute an integral part of Roarks service.12

Moreover, although Roark cites multiple authorities for the prop

taxable service providers are allowed the sale-for-resale exemption eve

tangible personal property does not transfer each time the services are perform

the authorities were decided based upon or even addressed the propositio

advances.

13Comptroller Letters 9310136L, 9406413L and 9902484L all d

janitorial supplies eligible for resale based on whether the items tangibly rem

job site (e.g., floor wax vs. tile cleaners and detergents, both the latter of wh

up in performing the service and neither remain on the customers site nor qu

exemption). Roarks proposition is thus conclusory: although attempting

analogy its entitlement to the sale-for-resale exemption even when a toy does

every time a paying customer plays the game, none of Roarks cited lette

address whether a transfer occurred every time the services at issue were perf

12 Roark previously likened itself to a toy store [that eventually] transfers every toy it p

customers, in that Roark completely and permanently transferred every toy it pucustomers. However, this analogy fails in presupposing, by extension, that most toy swillingly leave the store without the toys that they purchased.13 See Comptroller Letter Nos. 9310136L, 9406413L and 9902484L, publicly

http://cpastar2.cpa.state.tx.us/index.html, and Tex. Comp. Pub. Accts, Hearing No. 26,

283056 (Nov. 6, 1990).


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Critically, therefore, no authority expressly supports Roarks proposi

Comptroller exempts items transferred to paying customers as an integr

taxable service, even when service providers do not transfer property eve

perform a service. Moreover, while Roarks service can be performed for an

paying customers without a toy transferring, for those alley patrons who d

their own bowling ball, bowling cannot and does not happen unless the al

(integrally) transfers a bowling ball. Even if Roarks proposition was found

in the context of janitorial services, Roarks situation is distinguishab

associated with the janitorial services will eventually transfer to e

customer/building management company, as opposed to the conservative esti

95% of paying customers often disappointed children who emerge fr

completed service provision down 50 cents and toyless.

Moreover, a critical distinction exists that fully extinguishes Roark

attempts at analogizing its situation to that of janitorial service providers

alley operators.15

Roarks service provision is specifically governed by Com

addressing games in which each participant does not receive a prize. Neith

service providers nor bowling alley operators are contemplated under the con

therefore, the exposed flaws in Roarks attempted analogy to these servic


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notwithstanding, the fact that both service provider types fall outside the pu

controlling Comptroller rule completely removes any remaining signs of lif

attempted analogy.

B. As it pertains to the tax treatment of merchandise used by operators

which each participant does not receive a prize, Comptroller Rule 3

valid, directly on point and entitled to deference.

The Third Court ignored without invalidating Rule 3.301(b)(2

deference to a rule that conflicted with its interpretation of an unambiguous

the tax code. See Appendix, Tab B at page 10 n.6. However, in determinin

intent, a court may also consider the object sought to be maintained, conse

particular construction and the administrative construction of the statute, wi

to whether a particular enactment is facially ambiguous. Tex. Govt C

311.023 (West 2009); Tex. Tax Code Ann. 1.03 (West 2009).16

Initially adopted in 1976 and never invalidated, Comptroller Rule

applies to games where each participant does not receive a prize.

17Under th

each participant does not receive a prize, the game operator or concessiona

retailer, but a consumer of the items it purchases to provide its service;

operators are therefore not eligible to claim the resale exemption on purc

prizes.18

The Comptroller has consistently applied Rule 3.301(b)(2) to den


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exemption to operators of coin-operated amusement services like Roarks,

participant does not receive a prize, rendering Roarks plush toy purchases ta

Under section 151.335, amusement services provided through c

machines do not constitute a taxable service. Tex. Tax Code Ann. 15

2009), attached at Appendix, Tab H. Thus, Roarks plush toys could never

double taxation, eliminating any justifiable policy reason to allow the sa

exemption in the context of Roarks service provision. Moreover, Roark ha

arguments demonstrating as erroneous the Comptrollers construction that

user of the plush toys because each participant does not receive a prize.

Rule 3.301 is a reasonable and harmonious implementation of tax c

151.006, 151.302 and 151.335, and its applicability to Roark is reasonable be

neither provides a service taxed under Chapter 151 nor transfers a toy to each

The rule is also a valid exercise of the Comptrollers exclusive authority to in

constitutes a taxable service under section 151.0101(b).20

19See FN2, supra. In Tex. Comp. Pub. Accts, Hearing No. 26,058, 1990 WL 149561 (S

the Administrative Law Judge concluded that Rule 3.301(b)(2) applied in a factual con

Roarks, and that the taxpayer there was not entitled to the resale exemption for its plush

Thus, Rule 3.301(b

and Roark is liable for the sales and use taxes on its toy purchases as expres

thereunder.


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Contrary to Roarks assertion, Comptroller Rule 3.301(b) ha

superseded.

21

Rule 3.301(c)(1): For an explanation of the taxability of an item purc

for use as a prize when the winning of the prizes depends upon ch

or skill, see 3.298(f)(1) of this title (relating to Amusement Services

In fact, taxpayers are directed to Rule 3.298(f), which Roark

believes controlling, in a subsequent subsection of Rule 3.301, indic

Comptrollers intent to keep Rule 3.301(b) intact and valid. Specifically

provide:

Rule 3.298(f)(1): Sellers of service may issue a resale certificate in li

tax to suppliers of tangible personal property only if care, custody

control of the property is transferred to the client.22

Although the Comptroller asserts that her never invalidated Rule

applies, Roark would still be denied the resale exemption for its plush toy pu

if this Court finds that Rule 3.298(f)(1) controls. While Rule 3.301(b) ma

cleanly in expressly differentiating in separate subsections between games in

participant does or does not win a prize, Rule 3.298(f)(1) via Rule 3

conceptually tracks the same principle, more efficiently differentiating the tw

in just the one subsection. Stemming from the reference to 3.298(f)(1) in

21 Although Roark labels the continued presence of Rule 3.301(b) an oversight, since it

more recent subpart (c)(1) and Rule 3.298(f)(1), the former applies to services that are not

the latter enactments apply to taxable amusement services. Moreover, although Roark ci


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when the winning of prizes depends upon chance or skill, it follows from

language in Rule 3.298(f)(1) that the resale exemption is available only if ca

and control of the property is transferred to the

Stated differently: Roarks read of the rule it believes applicable wou

the resale exemption so long as all toy prizes eventually transfer to se

regardless of how many clients leave the completed service provision toyles

an interpretation blatantly disavows the language in Rule 3.301(c)(1)

explanation of the taxability of prizes in the context of games when the

prizes depends upon chance or skill. Roarks read allowing for the exem

that all toy prizes eventually transfer to select clients renders meaningless

in Rule 3.298(f)(1) allowing for the issuance of resale certificates in lie

suppliers of tangible personal property

client. As is the case un

section 151.302, Rule 3.298(f)(1) does not contemplate a property transfer t

certain clients of a given service. See N. Alamo Water Supply, 804 S.W.2

exemptions are disfavored and strictly construed against the taxpayer

Rodriguez v. Serv. Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999) (ad

rules, which have the same force as statutes, are construed in the same

statutes).

only if care, custody, and con


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pet denied); see alsoRodriguez, 997 S.W.2d at 254 (administrative rules, wh

same force as statutes, are construed in the same manner as statutes).

Although the Comptroller contends that Rule 3.301(b)(2) applies

exemption requirement that each purchaser of a service like Roarks receive

applies regardless of which Comptroller rule controls, and Roark is liable

and use taxes on its toy purchases as expressly provided thereunder.

C. The decision of the court of appeals expands the scope of the sa

exemption beyond that which the legislature intended.

1. There is no circumstance in which Roarks specific service wosubject to sales and use tax.

Under section 151.335, [a]musement services provided through c

machines that are operated by the consumer are exempt from [sales and use]

Tax Code Ann. 151.335 (West 2009). Comptroller policy provide

exemption protects items that would be taxable except for specific provi

law.23

Moreover, tax code section 151.0101(b) grants the Comptrolle

From the plain language of this statement cited by both Roark an

Court, it follows that the existence of section 151.335 renders Roarks

taxable as there exists no circumstance in which Roarks service would eve

to sales and use tax.


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treated services like Roarks as taxable services, having long recogniz

performance of an amusement service as defined in tax code section 151

taxable unless there is the requisite sale of an admission to the amusement ser

In spite of the 1984 enactment of section 151.335 exempting its servic

and use tax, Roark asserts a legislative intent that its service remain taxable

same legislation raised the annual occupation tax Roark pays for each mach

in Texas.25

Moreover, the purpose of the sale-for-resale exemption is to pre

taxation in the context of sales and use tax: the exemption was enacte

However, Roarks attempts at analogizing its alleged taxa

service with other tax code exemptions conflate the status of the purchaser

services or the context in which services are provided with the inherent

the tangible personal property or services, i.e., every example depicts tangi

property or a service exempt from sales and use tax in certain instances, b

sales and use tax in others. In contrast, section 151.335 completely remo

service from the taxable amusement services purview, because there is no c

in which Roarks specific service an amusement service provided th

operated machines operated by the consumer would ever be subject to sales

24See Comptroller Letter 9611765L, attached at Appendix, Tab I. Although the Third Co


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taxing both the taxable service provider and the taxable service purchaser

tangible personal property necessary to provide a taxable service. Sharp v

Cable TV, Inc., 960 S.W.2d 424, 426-27 (Tex. App. Austin 1998, pet. d

Third Court appeared to give credence to Roarks theory of the potentia

taxation, citing to a publication explaining the classifications of sales

exemptions wherein the Comptroller notes that coin-operated amusement m

taxed under a separate (occupation) tax levied on a per machine basis.26

Ho

and use taxes and occupation taxes are mutually exclusive statutory schemes

v. Strayhorn, 124 S.W.3d 722 (Tex. App. Austin 2003, pet. denied). If pa

occupation tax exempted a taxpayer from paying sales and use tax on tangi

property used to conduct the occupation, the legislature would have so state

2153 of the Texas Occupations Code.27

For purposes of the sale-for-resale exemption, qualifying as taxabl

that, while never subject to sales and use tax, is taxed under a different statu

would clearly expand the exemption beyond what the legislature intended.

151.335 precludes any circumstance in which Roarks service would ever b

There is no such provision. In fac

point to no authority that the collection of the occupation tax prevents the

imposing sales and use taxes on items purchased for use in conducting the oc


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double taxation; therefore, the Comptroller properly denied the exemption

purchases of plush toy prizes.

2. The Third Courts decision is based on a misapplication of precedent as well as its own prior decisions in Raytheon and 7-Ele

In support of its finding of a taxable service, the Third Court cited a 20

in which it applied the analysis from Day & Zimmerman, Inc. v. Calvert,

106, 110-11 (Tex. 1975), wherein this Court held that the sale-for-resale

applied to the purchase of items by a defense contractor used in performin

with the federal government, even though any ultimate resale could never in

in light of the tax code exemption for governmental entities. Strayhorn v.

Systems, 101 S.W.3d 558, 570 (Tex. App. Austin 2003, pet. denied). Wh

and Day & Zimmerman both held that the sale-for-resale exemption applied

despite the exempt status of the end use purchasers, ensuring that the items p

resale in those cases were not, in fact, taxed, there is a clear and viabl

between the goods at issue in those cases and Roarks service: the tangi

property in both Raytheon andDay & Zimmerman would be subject to sales

if resold to a non-exempt entity. In contrast, regardless of the status of Ro

customers, under tax code section 151.335, Roarks service would never b

sales and use tax.


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instance in question. 7-Eleven, 311 S.W.3d at 690 (emphasis added). Even

Eleven proposition contemplates that a taxable service is a service that can

certain contexts, i.e., that there exists a particular instance wherein a g

would, in fact, be subject to sales and use tax. In the case of Roarks spe

there is no such particular instance.

7-Eleven is, however, relevant to this case for the proposition addre

decision in the context of analyzing the exemption:

The more reasonable interpretation of the purpose requirement is t

exists to prevent parties from obtaining favorable tax treatment premis

a sham arrangement wherein little or no taxable services are ac

rendered. This is consistent with the sale-for-resale exemptions pubeing to avoid double taxation, because if there were no performan

significant services subject to sales and use tax, taxing any tan

personal property integral to the performance of those services woul

result in double taxation.

311 S.W.3d at 686. Because tax code section 151.335 renders Roarks spe

not subject to sales and use tax, not only is there no performance of signific

subject to sales and use tax, there is no performance ofany services subject

use tax. Thus, by extension of7-Eleven, taxing any tangible personal prope

integral to the performance of Roarks service would not result in double taxa

Furthermore, the otherwise viable distinction between tax exem

exclusions should have no bearing on the outcome of this case. In finding to


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taxable repair and restoration services listed [in tax code section 151.0

See id. 151.0101(a)(5) (defining repair, remodeling, maintenance

restoration services as taxable except those performed on aircertain watercraft, motor vehicles, and computer programs).

See Appendix, Tab B at page 7 (emphasis added). Even the Third C

exclusions presuppose contexts in which the exact same repair services woul

to sales and use tax, casting further doubt on the misplaced emphasis and rel

distinction between exemptions and exclusions as bearing on the outcome of

If left intact, the Third Courts opinion allows Roarks service to retain

status, even though there is no context in which the Comptroller could ever

and use tax on Roarks service. Under the exclusive jurisdiction granted her

code section 151.0101, the Comptroller consistently interprets taxable ser

include coin-operated amusement machines operated by the consume

longstanding interpretation is entitled to deference.28

In addition, the decision of the Third Court of Appeals has implicat

this case. The Third Court erroneously held that Roarks service remaine

See First Am. Title

Combs, 258 S.W.3d 627, 632 (Tex. 2008) (serious consideration given

construction of a statute it is charged with enforcing, particularly when

involves complex subject matter within the agencys area of expertise, so

construction is reasonable and consistent with the statutory language).


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that its interpretation of taxable services was consistent with the object an

the resale exemption, which is designed to prevent double taxation, sin

machines were taxed under the occupations code. See Appendix, Tab B at

Given the Third Courts willingness to qualify as taxable a service that,

subject to sales and use tax, is taxed under the Texas Occupations Code, the

could apply the same flawed logic in the aforementioned hotel case where th

service is subject not to sales and use tax but to hotel occupancy taxes, pre

possibility of double taxation under Chapter 151. See DTWC Corp. v. Co

appeal docketed, No. 03-10-00801-CV (recent district court denial, in

Comptroller policy, of a taxpayers claimed entitlement to the resale exemp

purchase of hotel consumables e.g., shampoo which are placed as co

amenities in hotel rooms for use by guests in connection with a service lod

not under Texas Tax Code Chapter 151 (sales and use tax), but under Chapte

occupancy tax)). If allowed to stand, the Third Courts decision could f

undesirable ripple effect in expanding even further the scope of the exe

beyond the legislatures intent.

To date, the Comptroller consistently achieves the objective of the sa

exemption in uniformly allowing the exemption in cases where the underly


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reasonable and harmonizes with the relevant statutory language: beca

service, under section 151.335, would never be subject to sales and use tax

not provide a taxable service for purposes of the resale exemption.

PRAYER

Petitioners ask this Court to grant this Petition for Review, reverse th

the judgment of the court of appeals holding that Roark qualifies for the sa

exemption and grant judgment in full to Petitioners. Petitioners also request

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 L

David C. Mattax

Director of Defense Litigation

Jeff M. Graham

Chief, Financial and Tax Litigation


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/s/ Marc A. Barenblat

MARC

A.B

ARENBLATAssistant Attorney General


Financial and Tax Litigation

P. O. Box 12548


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 w

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


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t o A

FE 2?-27 11r59 A ' DISTRICT COURT 5r? '854 2a6B P'2293


37/117

NO. D-1.cN-06-00,4125ROARK AMUSEMENT ,IVENDING, L.P, IN TT{E DISTRICT COURT OF'v.

TRAVIS COUNTY' TEXASCAROLE KEETON STRAyH'ON,COMPTROLLER OF PUBLICACCOUNTS OF TITE STATE O['TEXAS, AND GREG B'3OTT,ATTORNEY GENERAL OF TIIESTT OF TXS .9.81H JT'DICIAL DISTRICT

OnpEB oN'SqMM-nY JUDGMENTOn Fbruary 17, 2010, tho Motion for Summary Judgment of Susan Combs,

Comptroller of Public.llccounts, sucsgsor to Carole Keeton Strayhoro, and Greg Abbottttorney Cerreral of th,State of as (r'efendanlst'), and the Motion for Partial SummaryJu{gment of Roark Atr'usemcnt & Vendng, L,P. ("Plintiffl'} were submitted to the Curtfor 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 nogenuine issue of,material fact, and rules as follows:Dcfcndants' objections o 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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38/117

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TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTINJUDGMENT RENDERED JA}TIJAIIY 26, }OLI

NO, 03-10-00105-cv

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

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 COUNTYBEFORE CHIEF JUSTICE JONES, JUSTICES PURYEAR AND PEMBERTONREVERSED 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, and the same beingconsidered, because it is the opinion of this Cou thal there lwas crrer in the trial court'sjudgmentr IT IS THEREFORE considered, adjudged arrd ordeted that the judgment of the trialcourt is reversed, and judgment is rendered that Roark is entitled to the clainred sale-for-resaleexemption. We remand the cause to the trial coufi for further proceedings to determine theamount of refund to which Roark is entitled. Itis FURTHER ordered that the appelleepay allcosts relating to this appeal, both in this Court and the cout below; and that this decision becertified below for observance.


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TEXAS COURT OF APPEALS, THIRD DISTRICT, T AUSTINNO. 03-10-00105-cv

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

Susan af the Stte of TexasoAppellees..,,,.||T'ROM THE DISTRIC,.T COT.IRT OF'TRAYIS COUNTY, 9STIT,JUDICIAL DISTRICTNO. 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 P iN,f P NAppellantRorkA.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 taxassessed on its purchase of the "plush toysl' used to stock its coin-operated amusement cfanemachines. Tho parties filed cross.motions for summaryjudgmenf; the trial oourt grated the State'smoon and denied Roark's; cletermining that Roark was not entitled to the claimed sale-for-resaleexemption. -5e Tex. f'ax Code Arin, |j 151.006(aX3) ('trest 2008). On appeal, Roark argues thatit is entitled to the exemption because the record conclusively establishes that it purchased the plushtoys for the purpose of permanently transferring them to its customets as an integral parr of itstaxable amusement services- See id. We will reverse the trial court's grant of summary judgment


42/117

in favor of the State, render judgment that Roark is entitle


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try.: If th clarv hs success:rlly grabbed and held a toy," the'claw relsases the toy,tfirough the chuteand.,nlo ,the tray, wherc it can bo letdeved by the ciistmet. It is undisputed that if the olawis positionccl conectly, it will retrievc 'a ,to!; over which :the patrol gains permanerrtphysical possession,

On the basis of these stipulated facts, Roark sought a rfund of,the sales tfix it pidon the plush toysused to stoclc the machinss, arguing that the toys are,sub,ect to the salE.for'iesaleexemption'because they.are traRs{red as,an inlegral pait ofRoarkts taxable musernent service.^$ee Tex; Tax Code 'Ann" 151.06(X3) (defining o'sale for rsalel ta:include sale of "tangiblepersonal propertyto a putcha.ser \vho acquires the:property u s,:puryose of transferring'it . . . asanintegralpartofataxableservicel');rd.$ l5l.0l0l(a)(l)(including"amusemsntservices"withindefinition-af "taxble,serviccs"). Ttre State counteretl that the integralitrarr$fer eNernption does notapply arguingtht&orlds services arEot,"taxable" for purposes of'lhe sale-for.resale'exemptionbecausethe tax.eodeispecifically-exempts coin-operated amusement sorvicos:&or sale$ anduse tax"See.irt.$ t 5l .33.5 ("Arnuseaent ndlpersonal services provided through coin-operated tnachines thatare operated by the oilsumer exsmpt. fom the xs impo$ed by this chapter.")- Thus, in theSlatens view, Roarkis the,ultimale consurRer ofany.tangiblopersonal property-including the plushtoys-used to perform ils.non'taxable amusernent sewices. 'Ihe parties urged their respectivepositions on cross-motions forsummarV judgment; the trial court gtanted the State's motion anddenied Roark's. This appeal followed.

J


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STANDARDS OF R-VIEWTo 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 resolveany 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 ande distrct court grants oncmotion and denics the other, weeview thesumrnary-judgment evidencepresented 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. .rlev. Shumake,lgg S.1V'.3d 279,284 (Tex. 2006), In so doing, we use definitions prescribed by theIegislahrre an


45/117

in the sa{ne mqnef a-s statutes. Rodrlguez v., Servlce Llayds Ins. Co., 99? S'IV.2d 248,754(Tex. 1999)., Unless the ruie is, ambiguous,, we follow ils alear language. Irt. So long as $eadr-ninistrtivelinterpretation is not plainly efioneous or inconsistent rith tho regulation,we defer.to,an goncy'sintepretation,ofs swnde,whenthere is vagueness, arnbiguity, orroom for:polloydeter,mintions in ths regulation. See id. at 2.54-55;.Gates v Tex,s Dep't of Famly & PratectiueServs., 252- S,11.3:d 90, 98 (Tex. App.*Austin 2008, no pff,).

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

preponderance oithe evidence; thar it is entitled to a refind of the sles tax it paid on itsurchaseoflplush,toys r,rsed to stock its amusement crane rnachines. 5,North Alamo lVater Suppy Car'',t: ltttlacy County ppraisal r;r:t", 804 S.fl,2d 894"899 (Tex, l99ll tTX Terrnnals Corp.v, 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 themusomenf service it provides:*-a servie thal it says is "taxablel'under sectiorr 151,0101 gventhough its coit-operated nahre subjects it to an exomption under section 151,335.1 Being"la:rablexsmpt," Roark maintains, is not the sanre thing,as being lrnon-taxahle."

In so arguing, Roark analogizes to other scenarios in which courts have reeognizedthat, for purposes of eonstruing the sale-foruesale exemption, it is sufficient that the eervice

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


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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 exeuiptionuppliedto the trnsfer'of items from a defcnsecontractor:to the federalgovement, even though fheuttimate resale could ncvt in fact be taxed in light of the tax code exemption fo gov.erlnrentalentities. 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 analysist6 exemption elsimed under tax code seetion 151.309 for items sold to gnvernmental etitig,. lbboth of these cases, the sale-for-resale exemption was held to apply despite the applicabiliry of anadditicnal 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-resaloexempion d.oes not tuln o whethe the taxpayer cn show that the subjett iterls are aehrally resoldand 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 sf tangible p-ersonalpropertyr is i*tegral be a taxable service*not that it actually he taxed in the particular insfanoein question.").

Roark's view also finrls support in th toxt and overall statutory scheme of the laxcode. S,ubehapter A of chapter l5l of the ,code, which govems sales and use txo prssents*f*xability" as a'theshold question: an item is eithe taxable beoause it is tangible personal properlyorataxableservice,oritisnottaxable.,feeTex.TaxCodeAnn"$151-010("'Taxableitem''meanstangibl.e personal property andtaxable services."). s discussed above, "'ft]axable services' means,'"

6


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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 anyserviccs thatit,did notjnteod tobecategori?d:as,'rta(abl"t''as, forexainple, it has dne in cawingout the repair and restoration of certain vehicles and computer progfams from the otherwise-taxablerepairandrestorationserviceslistedtherein. Seeid. $ l5l.0l0l(a)(5)(definingrepair,remodeling,mtintenance, and restoiation ,senices as, laxble except Those perbrmed,on ,iriaft; certainwatercraft, rnotor vehicles, and computer programs).

Once ,n itern is determined ,to be taxable under subohapter',, the nexl question iswhethsr,itissubj,ecttonexernptionundersubchapterH..Seetd $$ t51.3tl-.355. The.initialpr-ovisi'on ofsubchapter H states that "[i]f a tatcable ffem isexempted foar the taxesirnposed bylhisehaptor, th.e sale,tcrage, uss or,otherconstrmption'pf thc item is not subjec't to the,sales tax impotetiby 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 theappticabi 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'tIprovides,,exernptions'.for rmuseaentservices that are provided through coin-operated machinesrseet g I 5 1 ,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


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andgoyernmentalentitiesandpoliticalsubdivisionsoftheState,seeid" $ 151.3101(a). Nothingiuthe 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 anexemption has been recognized in a number of other irnportant contcxts- With respect to burdensof proof n tax cases. for examplc, Texas co-urts have lortgheld that

rrhere a question of exemption from taxation is involved, the stahrte rust becsnstrued liberally in f,avor ef the taxing authorty, and strict against the oneclairnirrg the exernption To the contraqy, weie the question involved.is whether thepersotronwhom thet*x.is,sougttobeirrp.Qed comeswithin the stantorvprvisionimposing the tax, the statute must be construed strictly against the taxing authorityan 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 Strayhamv. 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 "anexemption carves out an otherwisE taxable item, whereas an exeluson js an item that is simply nottaxed by the cocle." Comptroller Hearing No. 30287 (1993); see a:lso'Comptroller HearingNo,44,389 (2001) ("Claimant's argumentthat the services purchased frorn [seller] are non-taxablesuggests that it is claiming an exchnion from tax, but th is a mischaracterization. Claimant'sargulnent 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 of San Antonov, City of Boerne,lLl S,W.3d22,25 (Tex. 2003), we cannot adopt an interpretation that improperlyconflates these tu'o concepts when the legislature has clearly indicated that they are distinct.

I


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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 entitledto summary judgment on the glound that section I5 1 .335 of the tax code renders Roark's services"nontxable" as a mtter of lalv.

To be entitled to sumrnary judg.ment itself, however, Roark rryas required to proveconclusively that it acquired the plush toys for lhe purpose of transferrjng them as an integral partof its amusement sewices. ,9es Tex. Tax Code An. $ 151.006(a)(3). On appeat, the Statc does notdispute that the plush toys are integral to the pertbrmance of Rork's amsemsnt serviceso agreeingth! rhe plush toys serve s the incentive lo play the game,s lnslead, the State argues bhat Roarkfailed to "qhow that the plush toys were o'resold" by demonstrating that care, custody, and control ofthp items was transfened to the purchasers of the amusement service, particularlyto those who wereunsuccessful at retrievirrg a toy" See id. $ l5 1.302(b) ("Tangible personal propely used to perform,a taxable service is not considered resold unless the care, custod and control of the tangiblepersonal property is transferred to the purchaser of tire sewice-").

{ We note that our interpretation of "taxable services" here is consistent with the object andpurpose 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)' Thsparties acknowletlge that the coin-operated nature of the amusement seryices does not permit themio ,*..pu axation, because they are irl fact taxed under the occupations code and, zis the Cbmptrollerhas 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 ispresent 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)(construing "integfal" to mean "important to the performance" of taxable scrvice).9


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In response, Roark points to the parties' stipulations that a patron gains operationalcontrol over the mechanical arm and claw by inserting coins into thb machine; that if the claw ispositionedcorrectly, itretrieves aplush toy; and thatwhen apatronsucccssfullyobtains aplushtoy,hc gains permzurent physical possession of it. The summary-judgment recod also contains anafhdavit from Roark's president, who averred that "Roark transferred all ofthc toys it purchased toits 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 satisfactionofsection 151.302(b), even if everycustomerdoesnotnecessarilyobtain toyeverytimehe playsthegame. Basedontherecordinthiscase,weagreewithRoarkthatthecare,custody,andcontrolelement s satisfiecl here"6 We therefore sustain Roark's issue on appeal.

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

it trnsferrcd as an integral partof its amusementservicesr wereverse the trial court's summaryjuclgment in favor of the State and rende judgment that Roark is entitled to the sale-for-resale

The State further argues that he Comptroller has by rule determined that a game operatorsuch 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; Promotionalplans, Coupons, Ietaler Reimbwsement) (providing that operators of games in which eachparticipant does not receive some merchandise or prize become consumers of merchandise so usednd are liable for tax assesse


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.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 pasttF'led: Jn$Arryi6, 201

Itr


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a 'lrIIC

Westlaw


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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-essTax Code pf's &-Annps)Title 2, State Taxation (Be_& Annqs)Subtitle E, Sales, Excise, and Use Taxesop]]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


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sommunicationdevice or whetherthe pwchaser'is fhe provider of the taxable:se*ice, fpayment forthe,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. i, 1982. Amended'by Acts 1984, 68th Leg., 2ndC.S.,o eh.3l, art.7,7,efl Oct.2,1984; ;ActsHISTO'RIC.AL .ND STATUTORY'NOTSE2008 Main VolumeAets 2007i, 80th Leg., ch. 1266 inserted subsec" (a):designation, in subsec. (a)(2) inserted "in thenormal 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, andthe fbnnr law is continued in effect for the collection of taxes due, and fur clvil ,and eriminalenforement 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.


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Exhibit D

Westtaw


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

Effective: [8ee Text rn ertdmentslVemon'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 theserrice"(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 thepurposeof fu*herng the sale of the tangible personal propeftt or the service may not be purchased by theperson for resale.(d) In this seetion, "wiapping,' r*packing," and "packaging supplies" include:

(l) wrapping paper, wrapping Wvine, bags, oartons, rates, crating material, tape, rope, rubberbands,labels, staples, glue; and mailing tubes; and(2) excelsior, strawo cardboard fillers, separators, shredded paper, ice, dry ice, cotton batting, shirtboards, hay laths, and property used inside a package to shape, form, s(abilize, preservs, or protectthe contents.

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


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Exhibit E


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Texas Comptrollbr of Publo 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

.?,0060&,864HHEARING 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$E r ,B EFORE TH COMPTKO'ILEROF FIIBLTC ACCOTIN.T$OF THE STATE OF TtsT(AST$ANOR H. TIIMChief AdmrltFative taw JudgeV[0f0R t6,!{N. Sih{$:N*Representing, Tax, DVsiont*,***r**{':t*.$ flRepres-enting,.CffmaRt,OMFTR DECT$TNPRELtrII{INARY DISCIJSSION;At Claimant's requestn this Decision is based on the written submissions of the.par,ties..Of..,ficai notlae has'b'eea talsen of-al{ rEcords of th'e Comptrollar's,offtc.e thatp,erfi t'o elajmant and tho,esUes lnvolvpd irt the ease, [Inles-s pthenviseirndicatod, allspation refr.enCes,e,to.Ttle,? ilf lexas: Tax Code andllrefrences fo R.los,'are to ssctions.of Title 34, Texas Administative Gode:

1


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CLAIMANT'S CONTENTION:Claimant contends that a refund is due for tax paid on prizes and merchandisesused in its coin-operated amusement machines because they were purchased forresale.FINDINGS OF'FACT:I, C la im an t op erates RESTAUI{ANT restaurants.2. Claimant has various coin-operated games and amusement machines at its restaurants.3. On February 8, 2005, Claimant fled a claim for refund of sales and use tax paid duringthe periocl olJanuary t,2002 through September 30, 2004. Claimant's refund claim seeksthe recovery of tax paid on prizes and merchandise (hereafter referred collectively as"'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 thatClaimant cannot purehase prizes tax flree because Claimant "'is not providing an amusementservice."' Clairnant's request lor a hearing resulted in ttre docketing of the above-captionedhearing,

5. Claimant holds a license issued by the Comptroler's of fice lor amusement machines andpays an annual license fee. Claimant is also required to pay annually an occuption tax oneaeh coin-operated machine that it exhibits or displays. For payment of the tax, Claimantreceives an occupatisn tax permit decal which rnust be affixed to each coin-operatedmachine.6. Clairrrant's subrnssion of evidentiary materials consists solely of rend schedtlespertaining to the refund claim period. No verification of the claim has been accomplished.7 . Claimant presented no evidence to show that it has non-coin operated amusement gamesat its restauranls.8. Claimant was audited for sales and use tax complianee lor the period January l, 1999through 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 refundclaims 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


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61/117


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Claimant does not provide taxable amusement services throgh con-operated machines.


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Beeause Claimant has not established the applicability of Rule 3.301(bX2) to the facts of itscase, 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 coveredby the refund.perod ofJanuary 1,2002 through May 3 |,2002 is barred because it constitutesa prohibited second refund claim.The burden is on the Tax Division to demonstrate that the claim is a prohibited second refundclaim. See, Comptroller's Decision No. 42,657 (2006). The Tax Divjsion relies on therefund period noted in Flearing No. 45u577 as the basis of its defense, but agency recordsdoes not indicate that the refund claims precipitating Hearing No. 45,577 included the periodof January 1,2Q02 through May 3 1,2002. Actually, all of the prior refund claims involvingprizes were for tax paid or accrued during various reporting periods in 2000, indicating thatrhe auditor had erroneously included periods 2001 and 2ftO2inthe refund denial letter. Se,Finding of Fact Nos. 9, 10, and ll. The Tax Division's contention that a portion of therefund claim is barred as a prohibited second reftrnd claim is unfounded.Claimant's refund elaim, however, was properly denied besause Claimant providesnon-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 therefund claim should be upheld.Signed August 3 l, 2006ELEANOR FI. KIMChief Administrative Law Judge

HEARING NO. 46,885ORDER OF THE COMPTROLLER

The above decision of the Administrative Law Judge is approved and adopted in all respctsThis decision becomes final twenty-three (23) days from the date olthis Order.6

;


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(lg.fotlqds'upqrr whiffi$IPBES. ntld IS$[m on,A'ug'us.:' , 20016'i.ARGL]T{TN S.'legarsglp$e-[r$,1ttr

f.rtugti$.tft',Th-'

7

Texas Comptroller of Fublic Accsuns STAR System


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-----J------20305r-8H{,RIN,NO. 43,477Rg. *** i'*:f **'*'&'tc***,TAXPAYER. NO. ;,*,* t * t'**,*,$ d.,t * t rAUDIT OFFICE: N/AUDIT'PERXD: 03/0 l/98 THROUGF{ l.2l3V:A1'S,AI.ES A.iI USE TAXI'RFDEgFORg. THE C OMPTROL L gROF.PUBLXE ACCO.TTNTSOF THE STATE OF TEXASTIMOTHY MAST.{BURNAdministrative [.aw JudgeDEANNE: Z, CUMMINGS-SCOTTRepresertting Administrative l-learings Sectiont *,* **r( l( t't ,f t t *t *R.ep resenting C lairnant

COMPTROLLER'S DECTSIONP'RELIMINARY COMMENTS :AtClaimant's request, this Comptroller's Decision is based,on the wrtten subrnissions oftheparties and is issued pursuant to Expedited Hearing Rule I .13., Claimant has waived theissuanoe of a proposed Comptroller's Decision.The Administratve Law Judge (ALJ) has taken official notice of all records ol theComptroller's sffic.e that pertain to the Claimant and the issues involved in the case. Unlessotherwise indicated, all Section references are to Tex. Tax Code Ann. (Vernon 2002) and allreferences to Rules are to Title 34, Texas Administrative Code (2002),

CLAIMANT' S CONTENTIONS:


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l. Clairnant contends that purchases of prizes awarded patrons at Claimant's theme park areexempt under Seclion t 5 I .302 and sales tax paid thereon for the involved period should berefunded,2. Claimanl contends that the allocation of credits for the involved period was elroneous, orrequires explanation, and that if erroneous, a refund is due flor any overpayrnent.FINDINGS OF FACT:I. Claimant, *******{'*'1"*i'*r operates an amusement park 1 lt*+*+tt++*+l')t*, Texas,2. 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 Resultsdated 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 inthe industry as "plush") lo be awarded to patrons of Claimant's amusement park. Exam 12of 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 interestpaidparticularly relating to Exam l2 of the audit, Claimant has requested an expedited hearingunder Rule Lll, and all prerequisites to the issuance of this Comptroller's Decsion underthe rule have been fulftlled.5. In Hearing No. 33,665, the Comptroller considered the redetermination olClaimant'spredecessor'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.6. In Hearing No. 39,110, the Comptroller considered the redetermination of Claimant'spredecessor's Texas sales and use tax compliance audit for the period May l, 1993, throughMarch 3 l, 1996, and in Hearng 39,909, the Comptroller considered the redetermination ofClaimant's Texas sales and use tax compliance audit for the period March l, 1996, throughFebruary 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.

2

7. Caimant operates coirr-operated and non coin-operated games of skill and chance at its


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amusement park. Only successful contestents are awarded prizes.8. No evidence was presented of any change or dillerence in the lacts presented in HearingNos.33,665,39,1l0 and 39,909 and considered by the Comptroller in denying Claimant'sfirst 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:o'The Taxpayer contends that the purchase oflthe prizes was exempt under the sales for,resaleexemplion in Texas Tax Code section l51.302. The Taxpayer contends that the prizes wereeither resold to the Taxpayer's customers in the regular course of business in the form orcondition in which they were acquired, or the prices were resold as an attachment to orintegral part of a taxable service.The Taxpayer contends that Rule 3,301(bX2), which states fhat the 'operators of games, orother 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 fortax based on the sales price or use of the taxable items purchased for use by them' isinapplcable, In the alteratve, the rue is invalid because it violates the Texas Tax Code oris unconstitutional.The Taxpayer contends that the Comptroller failed to follsw its own Rule 3.298(0( I ), whichprovides: 'sollers of service may issue a resale certificate in lieu of tax to supplers oftangible personal property only if care custody and control of the prope(y is translened tothe client.'The Taxpayer contends that taxing its purchases of prizes would result in illegal doubletaxation because the Taxpayer already remits tax on the fees it charges to game participantsfor non coin-operated games and Taxpayer remits occupation tax on its coin-operatedmachines.The Taxpayer contends that the taxation of the purchase of the prizes is unconstitutionalbeeause there is no legitimate state interest in the distnction made by the Comptroller andthe means chosen by the Comptroller to implement the tax bear [sic] no rcasonabls orsubstantial 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


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velrdor to purchase the prizes tax-free."The taxabilify of game prizes awarded to suceessful, but not all, game participants, is thesubject of Rule 3.301(bX2), which provides:The operators of games, or other concessions, in which each participant does not receivesome merchandise or prize, become the consumers of merchandise so used by them and areliable to the State of Texas for tax based on the sales price or use of the taxable itemspurchased for use by them. Retailers selling taxable tangible personal property to suchoperators or concessionaires shall collect and remit to the state the tax due on the sales tothem. The Texas use tax is due on out-ostate purchases of taxable tangible personalproperty based on the purchase price ofthe rnerchandise.Clairnant afracks Rule 3.301(bxz) as inapplicable or unonstitutionai. lts applicabilitt toClaimant's game prizes for past audit periods was affirrned in Cornptroller's Decisions39,110and39,909(2001)and33,665(1997), Theapplicabili$oflRule3,301(bxz)inothervirtually identical factual circumstances was decided before then in Comptroller's Decisions26,058 (1990), 27,467 (1991) and 31,8394,31,7094 and 3l,7llA (1996). TheComptroller's interpretation is established and has not been showrr by Claimant to beerToneous,Norhas Rule 3.301, or its application in the circumstances presentecl, been shown to beconstitutionally invalid or prohibited. Claimant's identical constitutional argumen wasrejec.ted in Comptroller's Decisions 39,1 l0 and 39,909 (2001) for prior audit periods and isrejected again here, Likewise, Claimant's argument that the game prizes are govemed byRule 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 Claimantfor the preceding audit periods. Because there are no lactual differcnces that have beenestablished for the instant period, the ALJ concludes, based on these prior holdings and theprior 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 theapplication of the credits that are the subject of this contention:

4

"Claimant reported its sales to the Comptroller's Office on a monthly basis during the auditfor Texas


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period. And when the Comptroller's Office audited sales and usecompliance, the auditor observed that Claimant had underpaid the tax during some monthsand accrued tax credits during other months. The Comptroller's auditor therefore took eachtax credit and applied them to Claimant's earliest tax shortfalls, penalties,and interest untilthe credit amounts were exhausted. After all credits were exhausted, Claimant still owed theState [tax, penalties and interes

Combs v. Roark Amusement, Petitioner's Brief on the Merits (Sept. 19, 2011)

Documents

Transcript of Combs v. Roark Amusement, Petitioner's Brief on the Merits (Sept. 19, 2011)