Last month, the Texas Supreme Court in Combs v. Roark Amusement & Vending, L.P. was faced with a “fun” question – whether Roark, an owner of “claw” machines located in malls, grocery stores, and restaurants, was entitled to a sales tax refund for tax paid on stuffed animals used to stock the taxpayer’s machines? Roark argued that it was exempt, and thus deserving of a refund, under the sale-for-resale exemption. The Court found that Roark purchased the toys “for the purpose of transferring” them “as an integral part of a taxable service.” Slip op. at 4. The toys, in fact, are “more than integral to the machines’ amusement service—they are indispensable” because “[t]here would be no point (or profit) to the game—and thus no game—if customers had no chance of winning a toy.” Id. Roark’s purchases of the toys qualified for exemption. Id.
The Court rejected two un-amusing arguments raised by the Comptroller. First, the Court dismissed the contention that the sale-for-resale argument must fail because Roark was not providing a “taxable service.” Texas exempts amusement services provided through coin-operated machines operated by the consumer. That the Code establishes this exemption “does not alter the fact that the machines provide a taxable service.” Slip op. at 5. Roark provided a taxable service – that was then exempted. Slip op. at 6. The Court read and interpreted the statutes as a cohesive, integrated whole in accepting Roark’s position. Id.
Second, the Court rejected the argument that a stuffed animal must be conveyed to a player each and every time the game is played in order to qualify for the sale-for-resale exemption, reasoning that no such requirement existed under the economic realities of the tax at issue. Slip op. at 7. All stuffed animals eventually became the player-customer’s property, except those that were lost, damaged, or stolen. Further, the economic reality of the facts was such that no-one would spend money and play the game without the chance of winning an animal. This meant that the animals were integral to the amusement service. Slip op. at 7-8.
The Court ruled for Roark, finding that it was entitled to the claimed sales tax refund under the language of the applicable statutes. The case was remanded to the trial court for further proceedings. Slip op. at 9.