Texas Tax Appellate Court Decisions: The Year in Review
This post takes a quick look at the decisions regarding Texas sales and use tax and Texas franchise tax that the Texas Supreme Court and Texas Courts of Appeals have handed down in the past year. While this blog has already discussed some of these, now is a good time to revisit them in light of the recent changes the Texas Legislature has made to the Texas tax laws.
Texas Franchise Tax: Texas Supreme Court
In re Nestle USA, Inc., No. 12-0518 (Tex., Oct. 19, 2012). The Texas Supreme Court upheld the constitutionality of the Texas franchise tax. It found that Nestle did not prove that the Texas franchise tax violated any provision of the Texas or United States constitutions. Nestle argued, in essence, that the Texas franchise tax violated the equal and uniform clause of the Texas Constitution and the equal protection, due process, and commerce clauses of the United States Constitution because the Texas franchise tax gives taxpayers in some industries more deductions and a lower tax rate than others.
Sales and Use Tax: Texas Supreme Court
Combs v. Roark Amusement & Vending, L.P., No. 11-0261 (Tex., Mar. 8, 2013). The Texas Supreme Court found that Roark was entitled to the sale-for-resale exemption for its purchases of the “plush toys” that it used to stock its coin-operated amusement crane machines. The Texas Supreme Court’s opinion holds that any purchaser, who acquires property for the purpose of transferring it as an integral part of a “taxable service,” as defined by the Texas Tax Code, qualifies for the sale-for-resale exemption. Importantly, the Court’s opinion clarifies that an item may be integral to a taxable service even if the service provider does not transfer the item to the customer each time the service is provided. The Court also determined that whether a purchaser must actually collect tax from its customers on the services it provides has no bearing on whether the purchase of items transferred as an integral part of a taxable service qualifies for the sale-for-resale exemption. (Full disclosure: I am one of the attorneys who represented Roark Amusement & Vending, L.P. in this case.)
Sales and Use Tax: Courts of Appeals
Assignees of Best Buy, OfficeMax, and CompUSA v. Combs, et al., No. 03-10-00648-CV (Tex.App.—Austin, Feb. 22, 2013). The Third Court of Appeals found that the courts did not have jurisdiction to hear class action suits by individuals who were assigned refund claims by retailers who allegedly collected sales tax in error on items the individual purchased for which they later received mail-in rebates. The court found that the individuals administrative refund claims were improperly filed because class counsel filed the refund claims on a class basis. (Motion for Extension of Time to File Petition for Review granted – petition is now due June 7, 2013).
DTWC Corp. v. Combs, et al., No. 03-10-00801-CV (Tex.App.—Austin, Apr. 11. 2013). The Third Court of Appeals allowed a hotel company the sale-for-resale exemption for non-reusable, consumable items like shampoos, shower caps, notepads, and pens that it provided for its guests. The court relied heavily on the parties’ stipulation that the fee for overnight lodging included use of the hotel consumables. (Motion for Extension of Time to File Petition for Review granted – petition is now due June 27, 2013)
Energy Education of Montana, Inc. v. Combs, et al., No. 03-10-00644-CV (Tex.App.—Austin, Apr. 25, 2013). The Third Court of Appeals found that Energy Education of Montana, Inc. was not entitled to the sales and use tax exemption for purchases for use out-of-state on its purchase of an aircraft. Energy Education of Montana, Inc. argued it was entitled to this sales and use tax exemption because it took delivery of the aircraft out-of-state and used the aircraft for a few days before bringing it into Texas. However, the court noted that Energy Education of Montana, Inc. hangared the aircraft in Texas and the majority of the aircraft’s flights originated in Texas.
FM Express Food Mart, Inc. and Fouad Hanna Mekdessi v. Combs, et al., No. 03-12-00144-CV (Tex.App.—Austin, Mar. 15, 2013). The Third Court of Appeals found that the Texas Comptroller complied with the statute and rules regarding estimated audits when auditing the taxpayer’s convenience store. The court also found that it did not have jurisdiction in the case to consider the constitutionality of the requirement that taxpayers prepay assessments before filing suit to challenge them in district court.
Verizon Business Network Services, Inc. v. Combs, et al., No. 07-11-0025-CV (Tex.App.—Amarillo, Apr. 3, 2013). The Seventh Court of Appeals found that Verizon owed tax on its vendors’ charges to enhance the operational performance of digital switches on Verizon’s telecommunications network. The vendors rewrote codes in the switches’ existing operating software and created new codes that produced new and/or modified computer programs that were subsequently loaded into the switches. The software developments allowed existing features on the telecommunications network to work in a new or different manner. The court found that Verizon made taxable purchases of new software. Verizon contended it had purchased maintenance services that were exempt to the extent Verizon used the services outside Texas. The trial court ruled based on the trial court’s fact finding that Verizon had purchased a single license and tested the new software in Texas before copies were installed at switches located outside of Texas. (Motion for Extension of Time to File Petition for Review granted – petition is now due June 19, 2013).
Written by: Amanda Traphagan