### 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. 03-10-00105- CV

Roark Am usem ent & Ve ndi ng, L.P., Appellant

v. Sus an Com bs, Com ptroller of P ubl ic Acc ounts of the State of T exas, and Greg A bbott, Attor ney Ge neral of the State of Texas, App ellees

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 98TH JUDICI AL DISTRICT NO. D-1 -GN-0 6-0 0472 5, H ONO RAB LE SUZ ANNE COVI NGTON, J UDGE P RESIDING

M E M O R A N D U M O P I N I O N
Appellant Roark Amusement & Vending , L .P. (“Roar k”) filed suit ag ainst appellee s Susan Combs, Comptroller of Pu b l i c Ac counts of the State of Texas, and Gre g Abbott, Attorney Gene ral of the State of Texa s (c o l l ec t i v ely , “the State”), seeking a ref und of sales tax assessed on its purcha se of the “plush toy s ” u s ed to stock its coin-ope rate d amusement cra ne machines. The parties filed cross-motions for summary judgme nt; the trial court g rante d the State’s motion and denied Roark’ s, determiningthat Roark was not e ntitled to the c laimed sale- for- resa le exemption. See Tex. Tax Code Ann. § 151.006(a) (3) (West 2008). On appeal, Roark a rg ues that it is entitled to the exemption beca use the rec ord conclusively establishes that it purcha sed the plush
t oy s for the purpose of perma nently transfe rring them to its customers as an integ ral part of i t s taxable amusement ser

vices. See id. We w ill re verse the trial court’s g rant of summar y judgme ntin favor of the State, rende r judgme nt that Roark is entitled to the exemption, and rema nd the cause to the trial court f

or a de termination of the amount of the ref und to which Roark is entitled.

F ACTUAL AND P ROCEDURAL BACK GR OUND Acc ording to the stipulated fac ts, Roark owned and lease d coin-ope rate d amusement

cra ne machines, which it place d at various g roce ry stores, restaur ants, and shopping malls in Texas and other states. Roark held a license issued by the Comptroller’s office for amusement machines. I t paid Texas sales tax on its lease pay ments for the machines and an annual occupation tax for eac h machine it owne d in Texas. 1

Eac h amusement cra

ne machine consists of a g lass cabine t situated on top of a metal bin that holds the plush toy s. Wit hin the g lass cabine t is a mecha nical cra ne arm fitted with a claw
at one end. A handle on the o u t s i d e of the machine controls the cra ne arm and claw; the handle
operates as a joy stick to control t he movem en t of t he crane arm. Patrons g ain operational control of the cra ne arm and claw for a short period of time by inserting coins, ty pically one or two quarte rs, into the machine. Pre ssing a button on one end of the handle cause s the mecha nical ar m and claw to lower. Once the claw drops, moving the handle cause s the claw to close and lift, raising any plush toy that it may have g raspe d. The arm then positions the claw over a chute, which leads to a

In a pub l i ca t i o n ex plaining the classifica tions of sales and use tax exemptions , the 1 Comptroller notes that coin-ope rate d amusement- and persona l-servic es machines w ere exempted from sale s tax in 1984 a

nd are instead taxed “ under a separ ate tax levied on a per machine basis.” See Texas Comptr o l l er of Public Acc ounts, “L imited Sales and Use Tax,” available at http:// window.state.tx.us/ taxi nfo/incidenc e/limit.ht ml (acc essed De c. 15, 2010). 2tray

. I f the claw has succe ssfully g rabbe d and held a toy , the claw rele ases the toy throug h the chute

and onto the tray , wher e it can be retrie ved by t h e cu s t o m er . I t is undisputed that if the claw is positioned corr ectly , i t will retrie ve a toy , over which the patron g ains perma nent phy sical possession.

On the basis of the se st ipulated facts, Roark soug ht a re fund of the sa les tax i t paid

on the plush toy s used to stock the machines, arguing that the toy s are subject to the sale-f or-r esale exemption beca

use they are transfe rre d as an integ ral part of Roark’s taxable amusement service s. See Tex. Tax Code Ann. § 151.006(a) (3) (def ining “sale for re sale” to include sale of “tang ible
persona l property

to a purcha ser who acquir es the proper ty for the purpose of

transfe rring it . . . as

an integ ral part of a taxable service ”); id. § 151.0101(a) (1) (including “amuse ment service s” within definition of “taxable service s”). The State counter ed that the integ ral-tr ansfe r exemption does not apply , arguing that Roark’s service s are not “taxable” for purposes of the sale-f or-r esale exemption beca use the tax code specific ally exempts coin-ope rate d amusement service s from sales and use tax. See id. § 151.335 (“A musement and persona l service s provided throug h coin-ope rate d machines that

are opera ted by the consumer are exempt from t h e t axes imposed by this chapte r.”)

. Thus, in the State’s view, Roark is the ultimate consumer of any tang ible persona l proper ty —including the plush toy s—used to perf

orm its non-taxable amusement service s. The parties u rge d their respe ctive positions on cross-motions for summary jud gment; the trial court g rante d the State’s motion and denied Roar

k’s. This appea l followed.

3STANDARDS OF REVIEW To be entitled to summary judgme nt, the movant must establish that no g enuine issue of materia l fac t exis ts and that it is entitled to judgme nt as a matter of law. Tex. R. Civ. P. 166a(c ). I n our de novo revie w of a summar y judgme nt, w e indulge ever y rea sonable infere nce and resolve
any doubts in the nonmovant’s favor

. Southwestern Elec. Power Co. v. Grant , 73 S.W .3d 211, 215 (Tex. 2002). When, as h er e, both parties move for summ ary judgme nt on overla pping issues and the district court g rants one motion and denies the other, we revie w the summary -judg ment evidenc e prese nted by both sides, deter mine all questions prese nted, and rende r the judgme nt that the district
court should have rende red. Texas W orkers’ Comp. Comm’n v. Patient Advoc ates , 136 S.W .3d 643, 648 (Tex. 2004).

To the extent that the issues in this appea l tur n on matters of statutory construction,

we revie w those questions de novo. See Bragg v. Edwards Aquifer Auth. , 71 S.W .3d 729, 734 (Tex. 2002). Our primary conce rn in construing statutes is to g ive eff ect to the leg islature’s intent. State

v. Shumake , 199 S.W .3d 279, 284 (Tex. 2006). I n s o d oing, we use definitions presc ribed by the leg islature and consider any technica l or part i cu l ar meaning that the words have acquir ed. Tex. Gov’t Code Ann. § 311.011(b) (West 2005). Otherw ise, we construe the statute’s words acc ording
to their pl ain and common meaning , Texas Dep’t of T r a n s p . v. C ity of Sunset Valley , 146 S.W .3d 637, 642 (Tex. 2004), unless a contra ry intention is appar ent from the context, Taylor v. Firemen’ s & Policeme n’s Civil Serv. Comm’n , 616 S.W .2d 187, 189 (Tex. 1981), or unless such a construction would lead to absurd results, University of Tex. Sw. Med. Ctr. v. Loutzenhiser , 140 S.W .3d 351, 356 (Tex. 2004). We construe administrative rules, which h av e t h e s am e forc e and eff ect as statutes,

4in th e same manner as statutes. Rodriguez v. Servic e Lloyds Ins. Co. , 997 S.W .2d 248, 254

(Tex. 1999). Unless the rule is ambig uous, we follow its clea r lang uag e. Id. So l ong as the administrative i n t er p retation is not plainly err oneous or inconsistent with the reg ulation, we defer
to an ag ency ’s interpre tation of its own rule when there is vag ueness, ambig uity , or room for policy deter minations in the regulation. See id. at 254-55; Gates v. T ex a s De p ’t of Family & Protective Servs. , 252 S.W .3d 90, 98 (Tex. App.—Austin 2008, no pet.).

DISCUSSIO N As the plaintiff in a t ax -r ef und case , Roark had the burden of proving , by a preponde ranc e of the evidenc e, that it is entitled to a ref und of t he sale s tax it paid on its purchase of pl ush toy s used t o stock its amusement crane machines. S ee North Alamo W

ater Supply C orp.

v. W illacy County Appraisal Dist. , 804 S.W .2d 894, 8 9 9 (T ex . 1991); GATX Terminals Corp.

v. Rylander , 78 S.W .3d 630, 634 (Tex. App.—Austin 2002, no pet.). On appea l, Roark argues that it is enti t led to a ref

und beca use the toy s are transfe rre d to the customer as an integ ral part of the
amusement service it provides—a service that it say s is “taxable” under sec t ion 151.0101 even though its coin-ope rate d nature subjects it to an exemption under section 151.335. Be ing 2 “taxable-e x empt,” Roark ma intains, is not t he same thing a s being “non-ta x able.”

I n so arguing, Roark analog izes to other sce narios in which c ourts have rec og nized that, for purposes of construing the sale-f or-r es al e ex empt ion, it is sufficie nt that the service

See also 34 Tex. Admin. Code § 3.298(g )(4) (2008) (Tex. Comptroller of Pub. Acc ounts, 2 Amusement Se r

v ic e s ) ( a mu s e me n t s e r

v ic e s provided throug h coin-ope rate d machines that consumer operates are exempt from sales tax). 5is classified as taxable , irrespe ctive of whether it is actually t a xed

. For example, in Day

& Zimmer man, Inc. v. Calvert , the Texas Supreme Court held that the sale-f or-r esale exemption applied to the transfe r of items from a defe nse contra ctor to the fede ral g overnme nt, even though the ultimate resa le could never in fac t be tax ed i n l i gh t o f the tax code exemption for g overnme ntal entities. 51 9 S.W .2d 106, 110-11 (Tex. 1975); see also Strayhorn v. Raytheon E-Syste ms , 101 S.W .3d 558, 570 (Tex. App.—Austin 2003, pet. denied) (apply ing Day & Zimmerman analy sis
to exemption claimed under tax code sec tion 151.309 for items sold to g overnme ntal entities). I n both of these c ases, the sa le-for -re sale e x emption was held to apply despite t he applicability of an additional exemption ensuring that the resold items wer e not taxed in fac t. Consist ent with these
prec edents, this Court rec ently held in 7-Elev en, Inc. v. Combs that application of the sale-f or-r esale exemption does not turn on whether the taxpay er can show that the subject items are actua lly resold and taxed in Texas. 311 S.W .3d 676, 690 (Tex. App.—Austi n 2 0 1 0 , p et

. denied) (“The sale-f or-r esale stat u t e s imply require s that the service to which the transfe r of tang ible persona l
proper t y is integ ral be a taxable service —not that it actua lly be taxed in the particula r instance in question.”). Roark’ s v iew also finds support in the text and overa ll statutory scheme of the tax code. Subchapter A of chapte r 151 of the code, which g overn s s al es an d use tax, prese nts “taxability ” as a threshold question: an item is either taxable beca use it is tang ible persona l proper ty

or a taxable service , or it is not taxable. See Tex. Tax Code Ann. § 151.010 (“‘ Taxable item’ means tang ible pers o n a l p r o p e r

ty a n d ta xa b le s ervic es.”)

. As discussed above, “‘[t] axable service s’ means,”

6among other specifica lly enumer ated se rvice s, “amuseme nt service s.” Id. § 151.0101(a) (1). I t is 3 in this section of the code that we would expect the leg islature t o ex cl u d e from taxabili ty any service s that it did not intend to be cate g orized as “taxable,” as, for example, it has done in car ving
out the repa ir and restoration of cer tain vehicles and computer prog rams from the otherwise- taxable
repa ir and restoration service s listed there in. See id. § 151.0101(a) (5) (def ining repa ir, remode ling, maintenanc e, and restoration service s as taxable ex ce p t t hose perf ormed on airc raf

t, cer tain
water cra ft, motor vehicles, a nd computer pr og rams). Once an item is dete rm i n ed to be taxable under subchapte r A, the next question is whether it is subject to an exemption under subchapte r H. See id. §§ 1 5 1

. 3 01-.355. The initial provision of subchapte r H states that “[i] f a taxable item is exempted from the taxes imposed by this chapte r, the sale, storag e, use or other consumption of the item is not subject to the sales tax imposed by Section 151.051 of this code or the use t ax i m p o s ed b y Section 151.101 of this code.” Id. § 1 5 1

. 3 0 1 (empha sis added)

. Thus, as the plain lang uag e of section 151.301 demonstrates, th e applicability of an exemption does not transfor m the char acte r of an item from taxable to nontaxable; rathe r, it rema ins a taxable item , but is one t h at i s s u b j ect to an exemption. Her e, subchapte r H provides exemptions for amusement service s that are provided throug h coin-ope rate d machines, see id. § 151.335, as well as those provided by cer tain nonprofit org anizations, educational instit utions,

See also id. § 3.298(a) (1)( E)(iv) (including “g ames o f s kill” within definition of 3 “amuse ment service s”)

. Ba s ed on the stipulated fac ts attache d to the parties’ summary judgme nt motions, which state that a patron’s succe ss in secur ing a plush toy depends on whether he corr ectly positions the mecha

nical arm and cl aw, Roark char acte rizes its amusement cra ne machines as g ames of skill. 7and g overnme ntal entities and political subdivisions of the State, see id. § 151.3101(a)

. Nothing in

the statute indicate s, howeve r, that such amusement servic es ce ase to be “taxable servic es.”

The distinction betwee n nontaxable sales and taxable s al es t h at are subject to an exemption has been re cog nized in a number of other important contexts. Wit h respe ct to burdens of proof in tax case s, for e x ample, Te x as cour ts have long held that

wher e a q u est ion of exemption from taxation is involved, the statute must be construed liberally in favor of the taxi ng aut h o ri t y , and strictly ag ainst the one claiming the exemption. To the contra ry , wher e the question involved is whether the person on whom the tax is soug ht to be imposed comes within the statutory provision imposing t he tax , the s tatute m ust be construed s trictly ag ainst the taxi ng authority and libera lly

in favor of

the per son sought to be he ld.

Texas Unemploy ment Comp. Comm’n v. Bass , 151 S.W .2d 567, 570 (Tex. 1941); see also Strayhorn

v. Lexington Ins. Co. , 128 S.W .3d 772, 785-86 (Tex. App.—Aus t i n 2004) (holding same), aff’d , 209 S.W .3d 83 (Tex. 2006). Simi larly , the Comptroller has consi s t en t l y emphasized that “an exemption car

ves out an otherwise taxable item, wher eas an exclusion is an item that is simply not taxed by the code.” Comptroller Hea ring No. 30,287 (199 3 ); s ee also Comptroller Hea ring No. 44,389 (2001) (“Claimant’s argument that the service s purcha sed from [seller] are non-taxable
sug g est s t h at i t i s claiming an exc lusion from tax, but that is a mischara cter ization. Claimant’s
argument is an exe mp t i o n cl ai m pursuant to [subchapter H of t he tax code].” (emphases added))

. Be cause we must rea d the statute as a whole and give eff ect to eve ry

part, see City of San Antonio

v. City of Boerne , 111 S.W .3d 22, 25 (Tex. 2003), we cannot adopt an interpre tation that improperly conflates these two c oncepts whe n the leg islature has c lear ly indicated that they

are distinct.

8Ba sed on the fore g oing, we hold that the amusement service s Roark provides are

“taxable service s” for purposes of the sale-f or-r esale statute. Acc ording ly , the State was not entitled
to summar

y judgme nt on the g round that sec tion 151.335 of the tax code rende rs Roark’s service s “nontaxable” a s a matter of law. 4 To be entitled to s u m m ar y judgme nt itself, howeve r, Roark was require d to prove conclusively that it acquir ed the plush toy s for the purpose of transfe rring them as an integ ral pa rt of its amusement service s. See Tex. Tax Code Ann. § 151.006(a) (3). On appea l, the State does not dispute that the plush toy s are integ ral to the perf ormanc e of Roark’s amusement service s, ag ree ing that the plush toy s serve as the incentive to play the g ame. Instead, the State argues that Roark 5 failed to show that the plush toy s wer e “re sold” by demonstrating that car e, custody , and control of the items was transfe rre d to the purcha sers of the amusement service , particula rly to those who wer e

unsucce ssful at retrie ving a toy

. See id. § 151.302(b) (“Ta ng ible persona l proper

ty used to perf

orm

a taxable service is not considere d resold unless the ca re , cu s tody , and control of the tang ible
persona l property

is transfer

red to the pur chase r of the se rvice .”).

We note that our interpre tation of “taxable service s” here is consistent with the object and 4 purpose of the sale-f

or-r esale exemption, which is desig ned to preve nt double taxation. See Sharp v. Clearview Cable TV, Inc. , 960 S.W

. 2 d 4 2 4 , 426 (Tex. App.—Austin 1998, pet. denied)

. The parties acknow ledg e that the coin-ope rate d nature of the amusement service s does not permit them to esca pe taxation, beca

use they are in fac t taxed under the occupations code and, as the Comptroller has explained, “imprac ticality ” in collecting a tax is a rec og nized basis for a tax ex emption, see “L imited Sales and Use Tax,” supra note 1. A coin-ope rate d service wher e no human attendant is prese nt to collect tax or provide cha ng e ar g uably

poses such a

n impractica l circumstanc e. We likewise conclude that the transfe r of plush toy s is integ ral to the amusement service

. 5 See 7-Elev en, Inc. v. Combs , 311 S.W

. 3 d 6 7 6 , 687 (Tex. App.—Austin 2010, pet. denied) (construing “integ ral” to mean “importa nt to the perfor

mance ” of ta x able se rvice ). 9I n response , Roark points to the parties’ stipulations that a patron g ains operational

control over the mecha

nical arm an d cl aw b y inserting coins into the machine; that if the claw is positioned corr ectly , it retrie ves a plush toy ; and that when a patron succe ssfully obtains a plush toy , he g ains perma

nent phy sical possession of it. The summary -j u d gm en t rec ord also contains an aff idavit from Roark’s president, who aver red that “Roark transfe rre d all of the toy s it purcha sed to its customers, except for t o y s l o s t, stolen, or damag ed.” Thus, the evidenc e establishes that car e, custody , and control of ever y plush toy is eventua lly transfe rre d to Roark’s customers in satisfac tion of section 151.302(b), even if ever y customer does not nece ssarily obtain a toy ever y time he play s the g ame. Ba sed on the rec ord in this case , we ag ree with Roark that the car e, custody , and control element is satisfied he re. We theref ore sustain Roar

k’s issue on appe al. 6

CONCLUSION Be cause Roark was entitled to the sale-f or-r esale exemption for the plush toy s that it transfe rre d as an integ ral part of its amusement service s, we reve rse the trial court’s summary judgme nt in favor of the State and rende r judgme nt that Roark is entitled to the sale-f or-r esale

The State further argues that the Comptroller has by rule deter mined that a g ame operator 6 such as Roark is the “consume r of the items it purcha ses to provide its service s that are not taxable.” See 34 Tex. Admin. C ode § 3.301(b) (2) ( 2008) (Tex

. Comptroller of Pub. Accounts; Promotional Plans, Coupons, Ret ai l er Reimbursement) (providing that operators of g ames in which eac h participa nt does not rec eive some merc handise or prize become consumers of merc handise so used and are liable for tax assessed there on). Having deter mined that the amusement service s in question are taxable se rvice s, howeve r, we do not de fer to the Comptroller’s interpre tation of this rule , as it conflicts with our interpre tation of an unambig uous provision of the tax cod e. S ee P u b lic Util. Comm’n v. Gulf States Util. Co. , 809 S.W .2d 201, 207 (Tex. 1991); Vista Healthcare , Inc. v. Texas Mut. Ins. Co. , 324 S.W .3d 264, 272 (Tex. App.—Austin 2010, no pet.). 10exemption under these circ umstances. We rema nd the cause to the trial court for further proce eding s to determine the amount of re fund to which Roar k is entitled.

J . Woodfin J ones, Chief Just ice Be fore Chief J ustice Jones, J ustices Pury ear and Pember

ton Reverse d and Rende red in pa rt; Reverse d and Remande d in part Filed: January

26, 2011

11