Texas Supreme Court Refuses to Defer to Texas Comptroller’s Interpretation of Sale-for-Resale Exemption


Today, the Texas Supreme Court continued its trend of giving little deference to the Texas Comptroller in Combs v. Health Care Services Corporation.  There, the Texas Supreme Court held that Health Care Services Corporation, a company that administers federal health insurance programs, was entitled to the sale-for-resale exemption from Texas sales and use taxes on items it used to perform non-taxable services to administer those health insurance programs on behalf on the federal government.  These items included tangible personal property, such as printers and office supplies, and taxable services, such as printer repair services and landscape maintenance.  The federal government reimbursed Health Care Services Corporation for its purchases of these items.

Tangible Personal Property

The Texas Supreme Court held that Health Care Services Corporation qualified for the sale-for-resale exemption on the tangible personal property because it purchased the property for the purpose of reselling it to the federal government.  Importantly, Health Care Services Corporation’s contracts with the federal government stated that title to the tangible personal property Health Care Services Corporation used to perform its services transferred to the federal government as soon as Health Care Services Corporation acquired it.  Therefore, since Health Care Services Corporation purchased the tangible personal property for the purpose of transferring title to them to the federal government for consideration (in this case, the reimbursement Health Care Services Corporation received for the purchase), the Court held that Health Care Services Corporation qualified for the sale-for-resale exemption.

In doing so, the Court rejected the Texas Comptroller’s argument that Health Care Services Corporation didn’t qualify for the sale-for-resale exemption because its primary purpose for purchasing the tangible personal property was to use it to perform services, not to resell it to the federal government.  The Texas Supreme Court held that, under the plain language of the statute, a purchase of tangible personal property qualifies for the sale-for-resale exemption if one of the taxpayer’s purposes in purchasing the property is to resell it, regardless of whatever other purposes the taxpayer may have for the property.  The Texas Supreme Court then further chastised the Comptroller for attempting to impose requirements on taxpayers in excess of those stated in the statute.

The Texas Supreme Court also reaffirmed its earlier ruling in Day & Zimmerman v. Calvert, which applied the sale-for-resale exemption a similar government contract situation nearly 40 years ago.  The Court rejected the Texas Comptroller’s office that the addition of taxable services to the Texas sales and use tax statutes and other statutory changes altered the result in Day & Zimmerman.

Deference

In rejecting the Texas Comptroller’s arguments that Health Care Services Corporation didn’t qualify for the sale-for-resale exemption on its tangible personal property purchases, the Texas Supreme Court reaffirmed important limitations on the amount of deference courts should give to the Texas Comptroller.  Much of this analysis built on the Texas Supreme Court’s decision in Combs v. Roark Amusement & Vending, L.P. earlier this year.  (Full disclosure: I am one of the attorneys who represented Roark Amusement & Vending, L.P. in that case).  For additional discussion of Combs v. Roark Amusement & Vending, L.P., check out Michael’s earlier post about it.

In particular, the Texas Supreme Court reaffirmed that court will not defer to the Texas Comptroller’s (or any other agency’s) interpretation of an unambiguous statute unless interpreting the statute as written would lead to absurd results.  The Texas Supreme Court further emphasized that the “absurd results” must truly be absurd – merely strange or quirky results do not qualify.

Further, the Texas Supreme Court emphasized that, despite the Texas Supreme Court’s discussion in Combs v. Roark Amusement & Vending, L.P. of the importance of considering the economic realities of transactions in interpreting the taxing laws, the Texas Comptroller may not impose additional requirements not found in the plain language of the statute in the guise of recognizing economic realities.

Taxable Services

Similarly, the Court held that the taxable services Health Care Services Corporation purchased qualified for the sale-for-resale exemption because Health Care Services Corporation purchased them for the purpose of reselling them to the federal government.  The Court held that Health Care Services Corporation resold the services by “directing that they be performed on the government’s behalf with the purpose of receiving reimbursement and compensation (consideration) from the government (the resale).”

Leases

The Texas Supreme Court didn’t find in favor of Health Care Services Corporation with regard to items Health Care Services Corporation leased to perform its services for the federal government.  The Texas Supreme Court found that Health Care Services Corporation did not qualify for the sale-for-resale exemption on these leased items because it did not re-lease them to the federal government.

The Bottom Line

While Combs v. Health Care Services Corporation’s main holdings regarding the sale-for-resale exemption will have little effect on taxpayers who aren’t government contractors, its place in a continuing line of cases limiting the Texas Comptroller’s attempts to broaden her authority may prove to be very helpful to taxpayers indeed.

Written by: Amanda Traphagan

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