No Resale Exemption for Health Club Equipment, Appeals Court Finds

The Texas Third Court of Appeals issued its opinion today in Fitness International, LLC v. Hegar.  It held that certain equipment, such as cardio machines and weight racks, that a health club purchased for its customers’ use, was not exempt from Texas sales and use tax under the sale for resale exemption.  The court based this decision on its finding that the health club did not ever legally transfer title or possession of the equipment to its customers.  This opinion may narrow the scope of the sale for resale exemption for taxpayers who provide taxable services.  We discuss the court’s opinion and its implications for taxpayers below.

Background

Texas imposes the Texas sales tax on tangible personal property, as well as certain taxable services.  One of these taxable services is “amusement services,” which generally includes a membership to a health club.

Texas law exempts from Texas sales and use tax the purchase of tangible personal property for the purpose of selling or leasing it to someone else.  This exemption also includes the purchase of tangible personal property by a provider of taxable services for the purpose of transferring it to the customer as an “integral part” of the taxable service.

The taxpayer, Fitness International, LLC, (“Fitness”) owns and operates several health clubs in Texas.  It sought a refund of Texas sales tax it paid on various items it used in its clubs, arguing that it qualified for the sale for resale exemption on these items because it purchased them to either lease to its customers or to transfer them to its customers as an integral part of the taxable service it provides.  The trial court found that Fitness qualified for a refund of Texas sales tax it paid on towels, basketballs, and consumables like shampoo and body wash, but that Fitness did not qualify for a refund of Texas sales tax it paid on cardio machines, weight racks, weight machines, and similar items.  Fitness appealed the trial court’s ruling that it did not qualify for a refund of Texas sales tax on some equipment, but the Texas Comptroller did not pursue an appeal of the portion of the trial court’s ruling in Fitness’s favor.

The Court’s Opinion and Its Implications

The Third Court of Appeals upheld the trial court’s opinion and found that Fitness didn’t qualify for the sale for resale exemption on its fitness equipment purchases.   The Third Court of Appeals looked to the dictionary definitions of the words “transfer,” “possession,” and “resell,” and found that, based on Fitness’s contracts with its customers and the actual circumstances under which the customers used the equipment, Fitness did not “transfer” or “resell” the equipment to its members.  The court wrote that Fitness’s agreements with its customers could not be construed as leases.  It also concluded that Fitness in no way made its customers property rights in the equipment equal to or superior to its own, but instead only allowed customers to use equipment in its own facilities under its terms in which it retained superior property rights.  Therefore, under the plain definitions of those words, Fitness did not purchase the equipment to transfer, resell, or lease it to its customers.

The Court’s ruling seems to suggest that a taxpayer must purchase an item in order to provide equal or superior property rights in the item to its customer in order to qualify for the sale for resale exemption.  It remains to be seen whether this decision may reign in the scope of the sale for resale exemption.  Currently, amusement service providers qualify for the sale for resale exemption on items like bowling balls, bowling shoes, towels, and other items that service providers provide customers for use only in their facilities.  In light of these circumstances, taxpayers who find themselves uncertain of their Texas sales tax obligations may wish to seek the advice of a Texas tax professional, such as a Texas tax attorney, in order to clarify their obligations.


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