### T E X A S C O U R T O F A P P E A L S , T H I R D D I S T R I C T , A T A U S T I N

NO. 03-13-00101- CV

Rent-A -Ce nter, Inc., Appellant

v. Gle nn H egar, in his capacity as Com ptroller of P ubl ic Acc ounts of the State of T exas; and Ke n Paxt on, in his capacity as Attor ney Ge neral of the State of Texas, App ellees

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 250 TH JUDICI AL DISTRICT NO. D-1 -GN-1 1-0 0105 9, H ONO RAB LE LO RA J. LI VINGSTO N, JUDGE P RESIDING

O P I N I O N

This case prese nts an issue of first impressi o n : wh ether a “re nt-to-own” business whose majority of reve nues comes from making merc handise av ailable to customers via “re ntalpurcha se” ag ree ments is “primar ily eng ag ed in reta il trade ” for Texas fra nchise-ta x purposes. The 1 Comptroller audited Rent-A- Center, I nc.’s f ranc hise tax re turn for 2008 a nd assessed a

defic iency of over one milli on dollars beca use it deter

mined that Rent-A-Cente r was not primarily eng ag ed in

Rece nt amendments to the Tax Code rende r this issue moot g oing forwa rd. See Tex. Tax 1 Code § 171.0001(12)( D) (def inition of “re tail trade” now specific ally includes “re ntal-purc hase ag ree ment activities reg

ulated by Chapter 92, Business & Commerce Code” as well as sever al other activities involving renta l of items). Howeve r, the statute applicable at the time of the dispute was silent on the subject of renta l-purcha se ag ree ments. See Act of May 2, 2006, 79th L eg ., 3d C.S., ch. 1, § 2, sec. 171.0001( 12), 2006 Tex. Gen. L aws 1, 2 (a mended 2015) (cur

rent ve rsion at Tex. Tax Code § 171.0001(12)( D)). We ma y not look to the rece nt le g islature’s amendments for insight on the intent or understanding of a previous leg islature. See Strayhorn v. W illow Creek Res., Inc. , 161 S.W .3d 716, 722 (Tex. App.—Austin 2005, no pet.).reta il trade and not, there fore , entitled to the one-ha lf-pe rc en t tax rate with which Rent-A-Cente r

calc ulated its taxes. See Tex. Tax Code § 171.002(a) , (b) (fr anchise tax is one perc ent of taxab l e marg in except for entities “primar ily eng ag ed in reta il or wholesale trade ,” which are subject to onehalf-pe rce nt rate)

.

Rent-A-Cente r paid the defic iency under protest and filed a suit for a ref und. See id. §§ 112.001, .051, .052. The case was tried befor e a jury , but the trial court dismiss ed the jury afte r deter mining that the only issues in dispute wer e leg al questi o n s for the court to decide

. The trial
court held that Rent-A-Cente r is not entitled to a ref und. Be cause we conclude that Rent-A-Cente r 2 is primarily eng ag ed in reta il trade , we reve rse the trial court’s judgme nt, rende r judgme nt that RentA-Center is entitled to a ref und based on computing its taxes with the one-ha lf-per cent tax rate , and

rema nd this c ause for a dete rmination of the amount of ref und to w hich Rent-A-Cente r is e ntitled.

BACK GR OUND Rent-A-Cente r is the larg est “re nt-to-own” business in the United States, opera ting

o v e r 3 , 0 0 0 s to r e s n a

ti o n w id e , in Ca

n a d a , a n d in Pu e r to Ri c o . T h r o u g h it s s h o w r o o ms , Re n t- A

- Ce n te r offe rs its customers merc handise in four basic product cate g ories: furniture and acc essories, major

consumer elec tronics, appliance s, and computers. All of the merc handise is available for immediate purcha se from the showroom floor by pay ment with cash or cre dit car d. Howeve r, the vast majority

Be cause of its leg al deter mination on Rent-A-Cente r’s entitlement to a ref und, the trial 2 court did not rea ch the second main issue at trial: the amount of deduction for the cost of g oods sold that Rent-A-Cente r i s en t i tled to deduct from its total reve nue. See Tex. Tax Code §§ 171.101, .1012(c- f) (taxable marg in is lesser of (1) 70% of total reve nue or (2) amou n t o f t o t al revenue, reduc ed by (a) compensa tion pa id to indivi duals serving active military duty and (b) either

cost of g oods sold or other compe nsation paid). 2of R ent-A- Center’ s reve nue derives from pay ments for mercha

ndise m ad e av ai lable to customers

on a “re nt-to-own” basis pursuant to “re ntal-purc hase ag ree ments.” Under such an ag ree ment, the
customer may choose among wee kly , semi-monthly , or monthly pay ment intervals. Pay

ment is due
at the beg inning of eac h term, and the ag ree ment rene ws autom atically for another term upon

rec eipt of ea ch pay

ment. The ag ree ments further provide th at a customer acquir es owner ship of the

merc handise by making all require d pay ments over a specifie d period of time; the aver ag e full term for a merc handise item is eig hteen months, which is substantially shorter than the useful life of the

merc handise. Whil e a customer may terminate the ag ree ment at any time and return the merc handise without penalty

—and may later “re instate” the ag ree ment by rec eiving cre d i t fo r the pay ments alre ady made on either the same or substantially the same merc handise—Rent- A- C en t er may not terminate the ag ree ment so long a s the customer f ulfills it s terms. I n addition to the automatic owner ship transf er afte r the period established in the
renta l-purchas e agr eeme nt, the ag ree ments provide two other flexibl e options throug h which
customers may sooner acquir e owner ship of the merc h an dise: (1) a “90-da y s same as cash” provision, by which the customer may purcha se the merc handise by pay ing t h e s p ecified “ca sh purcha se price ” wi t h i n ninety day s of enter ing into the ag ree ment; and (2) an “ea rly purcha se option,” by which the customer pay s a spec ified per centa g e of the amount of remaining pay ments due at the time such option is ex erc ised. Merc handise that ha s been r eturne d to or repossessed by Rent-A-Cente r i s re furbished and made available to customers under simil ar terms as new

merc handise, with a pr ice a djustment to reflec t that the merc handise is used.

3Ninety -seve n perc ent of Rent-A-Cente r’s merc handise is sold to customers by means

of showroom-floor cash purcha ses, “90-da y s same as cash,” “ea

rly purcha se options,” or completion of all schedule d pay

ments under renta l-purcha se ag ree ments. The rema ining three perc ent that is
not sold is merc handise that is stolen, damag ed, or lost throug h casua lty

. I n 2007, the aver ag e time that a merchandise item spent in Rent-A- C en t er ’s sy stem was twenty months, including time in a customer’ s possession while subject to a renta l-purcha se ag ree ment plus any idle time in inventory , and owner ship to any g iven item transfe rre d to a customer afte r an aver ag e of three renta l-purcha se ag ree ments. Also in 2007, o v er n inety perc ent of Rent-A-Cente r’s revenue s wer e from pay ments

rec eived unde r re ntal-purc hase a g ree ments.

I n it s o ri gi nal fra

nchise tax repor

t for 2008, Rent-A-Cente r repor ted that its 3 business activities wer e d es cribe d in Division G (Retail Trade ) of the Standard I ndustrial Classification (SI C) Manual a nd asser ted that it was subject, ther efor e, to t he one- half-pe rce nt tax rate applicable to entities primarily eng ag ed in reta il trade

. S ee Ac t o f M ay 2, 2006, 79th L eg ., 3d C.S., ch. 1, § 2, sec. 171.0001(12) , 2006 Tex. Ge n. L aws 1, 2 (ame nded 2015) ( curr ent ver sion
at Tex. Tax Code § 171.0001(12)) (“F ormer Section 171.0001(12)” ); Tex. Tax Code § 171.002(a) , (b). Rent-A-Cente r also claimed a deduction for its cost of g oods sold in the amount of $1,200,108,807. I n an audit of this re p ort, the Comptroller deter mined that Rent-A-Cente r was a service business under Division I (Service s) of the SI C Manual and that, acc ording ly , Rent-A-Cente r

was not elig ible for the one-ha lf-per cent rate but instead was subject to the one-pe rce nt tax rate for

A ta x r e p o r t f o r a g iv e n y e a

r is b a s e d o n r e v e n

u e s a n d o th e r f in a n c ia l d a ta f r o m th e p r e v io u s 3 y ear . See Universal Frozen Foods Co. v. Rylander , 78 S.W .3d 588, 590 (Tex. App.—Austin 2002, no pet.). 4entities not primarily eng ag ed in retail trade

. See Tex. Tax Code § 171.002(a) , (b). Additionally , the Comptroller disallowed Rent-A-Cente r’s claimed deduction for cost of g oods s o l d

. The Comptroller issue d an Adjustment Report assessing a defic iency of $1,070,683.67, plus interest. Rent-A-Cente r paid this amount under pr otest and, in this lawsuit, seeks a re fund.

DISCUSSIO N The basic fac ts in this case are not in dispute, and the only issue for our revie w is the proper app l i ca t i o n of the fra nchise-ta x statutes to the undisputed fac ts, requiring us to deter mine whether Rent-A-Cente r is “primar ily eng ag ed” in r etail trade

. See id. § 171.002(c) (taxable entity is primarily eng ag ed in reta il or wholesale trade i f “t o t al re venue from its activities in reta il or wholesale trade is gr eate r than the total re venue f rom its activities in trades other tha n the reta il or wholesale trade s”); For

mer Section 171.0001(12) (“r etail trade ” means “the activities descr ibed in Division G of the 1987 Standard I n d u s t ri al Classification Manual publi shed by the federa l Offic e

o f M a n a g e me n t a

n d B u d g e t” )

. E s s e n ti a ll y , w e a r e a s k e d to d e te r

mi n e w h e th e r th e tr ia l c o u r t p r o p e r ly conclude d that Rent-A-Cente r’s rent-to- own activities are more like leasing than selling. We conclude that they are not. Rather, we conclude that the majority of Rent-A-Cente r’s activities constitute reta il trade and—bec ause the majority of i ts reve n u es comes from such activities—it is primarily eng ag ed in re tail trade a s a matter of law. The construction of a statute is a question of law that we revie w de novo. First Am. Titl e Ins. Co. v. Combs , 258 S.W .3d 627, 632 (Tex. 2008). Our primary objecti v e i n co nstruing
statutes is to g ive eff

ect to the leg islature’s intent, which we seek first and fore most in the statutory text
. Id. Absent l eg islative definition, we rely on the pl ai n m ea n i n g o f the t ext unless a differe nt
5meanin g is appar ent from the context or application of the literal lang uag e would lead to absurd

results

. C i t

y o f R o ckwall v. Hughes , 246 S.W .3d 621, 625-26 (Tex. 2008); see Tex. Gov’t Code § 311.011(a) (“Words and phr ases sha ll be rea d in context and construed ac cording to the rules of g rammar and common usag e.”)

. I f an undefi n ed t er m has multipl e common meaning s, we will apply the definition most consistent with the context of the statutory scheme

. State v. $1,760.00 in U.S. Currency , 406 S.W .3d 177, 180-81 (Te x . 2013).

The Tax Code ref

ers to the well-known SI C Manual for descr iptions of activities that fall under the umbrella of reta il trade

. A copy of the re l evant portions of the SI C Manual was admitted into evidence . Division G of the manual, c overing reta il trade, provide s:
This division includes establishme nts engaged in selling m erc hand ise for persona l or household consumption and rende ring service s incidental to the sale of the g oods. I n g ener al, retail establishments are classified by the ki nd o f b u s i ness according to the principal lines of commodities sold (g roce ries, hardw are , etc.) , or the usual trade desig nation (drug store, ciga r st ore, etc.). Some of t he im portant charac t er istics of reta il trade establishments are : the establishm ent i s usually a place of b usiness and is eng ag ed in activities to attrac t the g ener al public to buy ; the establishment buy s or rec eives merc handise as well as sells; the establishment may proce ss its products, but such proce ssing is incidental or subordinate to selling; the establis h ment is considere d as reta il in the trade ; and the establishment sells to customers for persona l or household use. Not all of these char acte risti cs need be prese nt and some are modified by

trade prac tice. (Emphasis adde d.)

T h u s , w e mu s t d e te r

mi n e w hether Rent-A-Cente r is “eng ag ed in selling me r c h a n d is e ”

as contemplated by the SI C Manual and, if so, whether the majority of its reve nues comes from such activities. The following undisputed fac ts are rele vant: (1) one hundred perc ent of Rent-A-Cente r’s

merc handise is offe red for sale; (2) ninety -seve n perc ent of its merc handise, for which it rec eives
6ninet y perc ent of its reve nues, is sold in an aver ag e of twenty months per item; (3) the aver ag e

number of renta l-purcha se ag ree ments afte r which an y gi v en i tem is ultimately sold is three ; and (4) the total price that a customer must pay for a g iven item decr ease s from one renta l-purchase ag ree ment to the nex t fo r that same item due to the item’s then being considere d used. I n short: ninety -seve n perc ent of Rent-A-Cente r’s merc handise, for which it rec eives ninety perc ent of its

reve nues, is sold in an aver ag e of twe nty months. Given these fac ts, the Comptroller’s contention that Rent-A-Cente r is not primarily eng ag ed in “re tail trade ” (i.e., selling merc handise) is strained. The Tax Code asks wheth er t h e

reve nues from Rent-A-Cente r’s activities in reta il trade exceed those from activities in other trade s, but the Comptroller fra

mes the quest i o n as asking whether Rent-A-Cente r’s reve nues from sales exceed its reve nues from leases

. The Comptro l l er relies almost exclusively on Rent-A-Cente r’s SEC 10-K filing wher ein it char acte rized its reve nues from the renta l-purcha se ag ree m en t s as “re ntals and fee s” and only a small minority of its reve nues as “mer chandise sales” as well as the fac t the agr eeme nts ref

er to the arr ang ement as a “rental” ag ree ment. The chara cter ization in Rent-ACenter’ s 10-K is neither dispositi ve nor, in light of all the fac ts, acc urate
. See Destec Energy, Inc. 4

v. Houston Lighti ng & Power Co. , 966 S.W .2d 792, 794-95 (T ex . Ap p . —Austin 1998, no pet.) (substance of transac tion will g ener al l y co n t rol over its form); see also Southgate Master Fund, L.L.C

. ex rel. Montgomery Capital Advisers, LLC v. United States , 659 F.3d 466, 479 (5th Cir. 2011)

For example, besides the 10-K, the rec ord also contains Rent-A-Cente r’s fede ral tax return 4 for 2007 in which it identified its “business activity code” as num ber 453990, which is define d as “all other miscellaneous store reta ilers,” appea ring as a subcate g ory under the larg er principal activity of “retail t rade ” and in which it claimed its revenue s from the renta l-purcha se agr eeme nts on line 1 as “g ross rec eipts or sales” rathe r than on line 6 a s “g ross rents.” 7(transa ction’s tax consequenc es depe nd on its subst ance rathe r than its form). The Comptroller also t ak es issue with the use of the following terms in the renta lpurcha se ag ree ments, arg uing that the terms support its contention that Rent-A-Cente r is primarily eng ag ed in renting : “re ntal,” “lea se,” “lessor,” and “lessee .” Howeve r, the ag ree ments also use terms supporting char acte rization of these arr ang ements as sales: “purc hase,” “consume r,” “owne r,” and “owne rship.” The defa ult occur renc e, upon the customer making all specifie d pay ments under the ag ree ment’s terms, is that the customer acquir es owner ship of the merc handise. Rent-A-Cente r may not preve nt the customer fr om acquir ing owner ship in this manner once the ag ree ment is in place unless the customer brea ches one of the ag ree ment’s provisions. And, while the Comptroller
notes t h at t i t l e t o the m erc handise remains with Rent-A-Cente r at all times until the full purcha se price has bee n paid, such fa ct is not inconsistent with t he fa cts that (1) f or ninety -seve n perc ent of

merc handise, title in fac t does pass to the customer; and (2) the customer may acq u i re t i t l e t o the

merc handise at any ti me by pay ing the rema ining cost. Undoubtedly the renta l-purcha se transac tions

are hy brids of re ntals and sales. The salient question is: Are they more like sales or le ases? I n light of the undisput ed fa cts , we conclude that Rent-A-Cente r’s offe r of

merc handise to customers under the renta l-purcha se ag ree ments is more like selling than leasing and that Rent-A-Cente r is, there fore , primarily eng ag ed in reta il trade

. We sustain Rent-A-Cente r’s first issue and hold that the trial court err ed in deter mining that Rent-A-Cente r is not entitled to a ref und. I n its second issue, Rent-A-Cente r seeks a judgme nt that it is entitled to its reque sted cost-of- g oods-sold deduction, without r eduction for depre ciation claimed on its fede ral tax r eturn,

as no statutes expli citly require such deduction. See Tex. Tax Code § 171.1012(b-f ) (p ro v i d i ng

8extensive lists of includable and excludable direc t and indirect costs in computing cost of g oods

sold). Howeve r, beca

use it conclude d that Rent-A-Cente r was not entitled to a ref und, the trial court did not rea ch the issue of the amount of deduction to which Rent-A-Cente r is entitled and whether the amount of depre ciation claimed on its fede ral tax return should opera te to reduc e its fra nchise-tax deduction. Acc ording ly , we make no deter mination on the issue of the amount of Rent-A-Cente r’s deduction for cost of g oods sold a nd rema nd that issue to the trial court for a fac tual deter mination in the first instance. 5

CONCLUSION

The trial court err ed in deter mining that Rent-A-Cente r is not entitled to a franchisetax ref und. Acc ording ly , we reve rse its judgme nt and rende r judgme nt that Rent-A-Cente r is subject to the one-ha lf-per cent fra nchise-tax rate for tax y ear 2008 and is, the ref ore, entitled to a ref

und of its overpa y ment. We rema

nd this cause to the trial court for a deter mination of the amount of ref und to which Rent-A- Center is entitled.

We also note that, despite Rent-A-Cente r’s repr esenta tions to the contra ry , we cannot g lean 5 from the rec ord any specific stipulations by the parties about the schedule s that Rent-A-Cent er submitt ed as evidenc e of its cost of g oods sold and, t h er ef o re, we are not prese nted with mere ly a question of law on the issue of cost of g oods sold. Cf. Texas Utils. Elec. Co. v. City of W aco , 9 1 9 S. W. 2 d 4 3 6 , 4 4 0 ( T e x. A p p . — Wa c o 1 9 9 5 , w r it d e n ie d ) ( w h e n is s u e to b e d e te r mi n e d is q u e s ti o n of law, a ppellate c ourt may

rende r judg ment instead of r emanding case for f urther pr ocee dings)

. 9_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ David Pury ear , J ustice Be fore J ustices Pury ear , Goodwin, and F ield Reverse d and Remande d Filed: June 11, 2015

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