Court Opinion

ID: 4062712
Source: CourtListenerOpinion
Date Created: 2016-09-29 20:35:24.460339+00
Date Added: 2024-06-11T14:32:03.893653
License: Public Domain

ACCEPTED
                                                                                       03-14-00397-CV
                                                                                               5567564
                                                                            THIRD COURT OF APPEALS
                                                                                       AUSTIN, TEXAS
                                                                                   6/5/2015 3:02:35 PM
                                                                                     JEFFREY D. KYLE
                                                                                                CLERK
                              No. 03-14-00397-CV
         ____________________________________________________
                                                                       FILED IN
                        In the Court of Appeals                 3rd COURT OF APPEALS
                                                                    AUSTIN, TEXAS
                     for the Third Judicial District            6/5/2015 3:02:35 PM
                                                                  JEFFREY D. KYLE
                             Austin, Texas                              Clerk
         ____________________________________________________

                       American Multi-Cinema, Inc.,
                                          Appellant/Cross-Appellee,

                                         v.

Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and
        Ken Paxton, Attorney General of the State of Texas,
                                   Appellees/Cross-Appellants.
         ____________________________________________________
               On Appeal from the 200th Judicial District Court
                            Travis County, Texas
         ____________________________________________________

               APPELLEES’/CROSS-APPELLANTS’
                MOTION FOR REHEARING AND
               FOR RECONSIDERATION EN BANC
         ____________________________________________________

    KEN PAXTON                          CYNTHIA A. MORALES
    Attorney General of Texas           Assistant Attorney General
                                        State Bar No. 14417420
    CHARLES E. ROY
    First Assistant Attorney General    CHARLES K. ELDRED
                                        Assistant Attorney General
    JAMES E. DAVIS
    Deputy Attorney General             OFFICE OF THE ATTORNEY GENERAL
    For Civil Litigation                P.O. Box 12548
                                        512-475-1743
    ROBERT O’KEEFE                      512-477-2348 (fax)
    Division Chief                      cynthia.morales@texasattorneygeneral.gov
    Financial Litigation, Tax, and
    Charitable Trusts Division         COUNSEL FOR APPELLEES/CROSS-APPELLANTS
       The Court’s opinion made this case about much more than just the franchise

tax implications of exhibiting movies. Rehearing or reconsideration en banc should

be granted because the opinion’s construction of the statutory terms “tangible

personal property,” “goods sold,” and “sale,” throws into doubt a half-century of

established interpretation of Texas tax statutes, creates significant confusion in the

application of both franchise and sales tax law, and threatens the loss of billions of

dollars to the State.

                                         ARGUMENT
       Since 1961, the Texas Legislature has established a strict and careful

distinction between tangible personal property and services. This distinction has

been established in both the franchise and sale tax statutes since the taxes were

enacted. The Court’s broad construction of the term “tangible personal property” to

include any perceptible human experience, essentially extinguishes that distinction,

potentially converting the sales of most services into sales of tangible personal

property. The Court’s construction of the terms “goods sold” and “sale” also departs

significantly from traditional legal principles underlying the sales of goods,

potentially affecting not only the interpretation of state tax laws, but that of any state

law involving the sale of goods.

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 1
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
I.     THE COURT’S CONSTRUCTION OF THE TERM “TANGIBLE PERSONAL
       PROPERTY” AFFECTS BOTH THE FRANCHISE TAX AND THE SALES AND USE
       TAX.

       Because the term “tangible personal property” is also used in Tax Code

Chapter 151 concerning the sales and use tax (“Chapter 151”), the construction of

this term implicates not only the calculation of costs of goods sold under the

franchise tax (“Chapter 171”), but also the scope and application of Chapter 151.

       The use of identical language for the definition of “tangible personal property”

in Chapters 151 and 171, signals a legislative intent that this term have a consistent

meaning in state taxation. See Hegar v. Ryan LLC, No. 03-13-00400-CV, 2015

WL3393917, at *10 (Tex. App.—Austin April 30, 2015, no pet. h.). The relevant

language in Chapter 171 was enacted in 2006 and provides:

       [“Tangible personal property” means] personal property that can be
       seen, weighed, measured, felt, or touched, or that is perceptible to the
       senses in any other manner[.]

TEX. TAX CODE §171.1012(a)(3)(A)(i). This language is identical to the first clause

of the relevant language in Chapter 151:

       “Tangible personal property” means personal property that can be seen,
       weighed, measured, felt, or touched or that is perceptible to the senses
       in any other manner . . . [.]

TEX. TAX CODE §151.009. That portion of the sales and use tax definition of tangible

personal property is a long-standing one, existing in essentially the same form since

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 2
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
the adoption of the sales and use tax in 1961. See Act of August 8, 1961, 57th Leg.,

1st C.S., ch. 24, art. I, §1, 1961 TEX. GEN. LAWS 71, 76.1

II.    THE COURT’S OPINION EXPANDS THE DEFINITION OF “TANGIBLE
       PERSONAL PROPERTY” TO INCLUDE ANY PERCEPTIBLE EXPERIENCE, AND
       THE DEFINITION OF “SALE” TO NOT REQUIRE THE TRANSFER OF EITHER
       POSSESSION OF OR TITLE TO A GOOD, CONTRARY TO LEGISLATIVE
       INTENT AND TRADITIONAL LEGAL PRINCIPLES.

       A.      The Provision Of Entertainment Is A “Service,” Not The Sale Of
               “Tangible Personal Property.”

               1.     The sale of tangible personal property and the sale of
                      services are treated distinctly under Section 171.1012,
                      consistent with the sales tax treatment of such sales.

       Section 171.1012 clearly distinguishes between sellers of goods and sellers of

services, allowing a business that sells tangible personal property to make a

subtraction for costs of goods sold in calculating taxable margin, but not permitting

a business that sells services to claim a subtraction for the costs of providing services.

TEX. TAX CODE §§171.1012(a)(1), (a)(3)(A)(i), (a)(3)(B)(ii), (b). Services are

explicitly excluded from the definition of tangible personal property under the

franchise tax. TEX. TAX CODE §171.1012(a)(3)(B)(ii).

       This distinction in the franchise tax is consistent with that found in the sales

tax. From the time of the creation of the sales and use tax in 1961, the legislature has

1
 Art. 20.01(P): “Tangible personal property” means personal property which may be seen,
weighed, measured, felt, or touched or which is in any other manner perceptible to the senses.

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 3
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
made a clear and strict distinction between tangible personal property and services.

See Act of August 8, 1961, 57th Leg., 1st C.S., ch. 24, art. I, §1, 1961 TEX. GEN.

LAWS 71, 76. (Art. 20.01(T); Art. 20.02). That distinction continues in the current

separate identification of taxable personal property and taxable services in the

definition of “taxable items,” and in the restriction of the application of the sales tax

to tangible personal property and only a limited number of specific services. See

TEX. TAX CODE §§151.010, 151.0101(a)(1)-(17).

       The determination of whether a sale is of a service or of tangible personal

property is therefore fundamental to how the transaction and seller are treated under

both the sales tax and franchise tax laws.

               2.     At the time of the enactment of Section 171.1012, the
                      Legislature was aware of existing sales tax statutes that
                      define the provision of entertainment as a service, not the
                      sale of tangible personal property.

       By 2006, it was well established that the provision of entertainment is a

service, not the sale of tangible personal property; a movie ticket is merely a license

for entry to an entertainment; and the sale of a movie ticket is the sale of an admission

document to an amusement service. It was against this legal landscape that Section

171.1012 was enacted.

       Since 1984, the provision of a sight, sound, or other sensible entertainment

experience, has been classified as a taxable amusement service, notwithstanding the

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 4
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
already existing “seen . . . or that is perceptible to the senses in any other manner”

language of Tax Code section 151.009 defining tangible personal property. See TEX.

TAX CODE §§151.0101(a)(1) (listing taxable services; including amusement

services); 151.0028(a) (defining amusement services, in relevant part, as “the

provision of amusement, entertainment, or recreation”);2 151.009 (defining taxable

personal property). This classification of the provision of entertainment—which is

undoubtedly perceptible to the senses—as a service, indicates both legislative intent

and recognition that the provision of a perceptible experience is not a sale of

“personal property that can be seen . . . or that is perceptible to the senses in any

other manner.” Had that not been the case, the legislature’s enactment of statutes

imposing sales and use taxes on services that provide any type of sensory experience

would have been unnecessary.

       This classification is also consistent with the traditional judicial treatment of

the sale of an admission ticket as a mere license providing only a right of entry. See

Jordan v. Concho Theaters, Inc., 160 S.W.2d 275, 276 (Tex. Civ. App.—El Paso

1941, no writ); Kelly v Dent Theater, 21 S.W.2d 592, 593 (Tex. Civ. App.—Waco

1929, no writ); see also Sells v. Six Flags over Texas, No. Civ.A.3:96–CV–1574–D,

2
  Comptroller Rule 3.298(a)(1)(A), effective July 8, 1985, and adopted to administer Sections
151.0101(a)(1) and 151.0028, recognized motion pictures as amusements and movie theaters as
places that offer amusement services. 34 TEX. ADMIN. CODE § 3.298(a)(1)(A)(iv), (viii); 10 TEX.
REG. 2074–75, 2077 (1985).

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 5
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
1997 WL 527320, at *1 (N.D. Tex. Aug.14, 1997) (amusement park not strictly

liable under DTPA because it provided entertainment service and did not sell

product; park did not sell rides). Consistent with that legal principle, the sale of a

movie ticket is considered a transfer of title to, or possession of, an admission

document to an amusement service. TEX. TAX CODE §§151.005(3), 151.0028,

151.0101(a)(1).

       It is presumed that the 2006 Legislature was aware of the existing law and

acted in reference to it when enacting Section 171.1012. See Acker v. Texas Water

Comm’n, 790 S.W.2d 299, 301 (Tex. 1990); Canal Ins. Co. v. Hopkins, 238 S.W.3d
549, 564–65 (Tex. App.—Tyler 2007, pet. denied) (legislature presumed to know

prior state of the law, including prior interpretation of term, and to have intended

that new law be subject to prior consistent definition).                 Nothing in Section

171.1012(a)(3)(A)(i) provides that “personal property that can be seen . . . or that is

perceptible to the senses in any other manner” is to have a more expansive

interpretation than the identical pre-existing language in Section 151.009.

       Nor does any language in Section 171.1012(a) support extending the

definition of tangible personal property to include any experience or action that can

be seen, heard, felt, smelled, or tasted, regardless of whether it has historically been

viewed as a service, and in direct contravention of sale tax statutes classifying

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 6
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
experiences or actions that can be perceived by the senses, as services. See, e.g., TEX.

TAX CODE §§151.0028 (amusement services); 151.0033 (cable television services);

151.0035 (data processing service); 151.0038 (information service); 151.00394

(internet access services); 151.0045 (personal services); 151.0047 (real property

repair and remodeling); 151.0048 (real property services).

       Chapter 171 itself describes as services the provision of experiences or actions

that can be perceived by the senses, including telecommunication services, legal

services, data processing services, accounting services, internet hosting services,

transportation services, health care services, and emergency medical services. See

TEX. TAX CODE §§171.002(c)(3), 171.1012(f), 171.106(g), 171.1011(v),

171.1011(p)(3), 171.083. The mere fact that something can be perceived by the

senses does not ipso facto render it “tangible personal property,” nor disqualify the

provision of such sensible experience or action from being a “service.”

               3.     AMC’s provision of entertainment is the sale of a service,
                      not the sale of tangible personal property.

       The Court’s opinion holds that the evidence was legally sufficient to support

the trial court’s finding that AMC produces tangible personal property, and

concludes that AMC was therefore entitled to include its exhibition costs in its costs-

of-goods-sold subtraction. American Multi-Cinema, Inc. v. Hegar, 03-14-00397-

CV, 2015 WL 1967877, at *6 (Tex. App.—Austin April 30, 2015, no pet. h.)

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 7
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
(“opinion”). However, the opinion does not explicitly describe the tangible personal

property produced by AMC and sold to the moviegoers, instead implying that it is

either the: (1) film experience as perceived by the moviegoer (“the sights and

sounds” of the film); (2) AMC’s modified film reel consisting of the film, film

trailer, advertisements, and light and curtain cues; or (3) the actual film itself. Id. at

*5, *6, *9. The opinion rejects arguments that the movie exhibition was actually a

sale of a service or a sale of a license (intangible property), citing to Section

171.1012(a)(3)(A)(ii), which provides that films are tangible personal property.3

         While the film itself is undoubtedly tangible personal property, as is AMC’s

modified film reel, neither is sold to the moviegoer, as discussed infra, and so their

production costs cannot be subtracted as costs of goods sold. See discussion infra.

3
    Section 171.1012(a)(3)(A)(ii) provides:

         [“Tangible personal property” means . . .] films, sound recordings, videotapes, live
         and prerecorded television and radio programs, books, and other similar property
         embodying words, ideas, concepts, images, or sound, without regard to the means
         or methods of distribution or the medium in which the property is embodied, for
         which, as costs are incurred in producing the property, it is intended or is reasonably
         likely that any medium in which the property is embodied will be mass-distributed
         by the creator or any one or more third parties in a form that is not substantially
         altered[.]

TEX. TAX CODE §171.1012(a)(3)(A)(ii). This provision seems to be in response to earlier
arguments by theater companies—including AMC—to avoid paying a use tax by asserting that
theaters were not acquiring tangible personal property, but rather only the incorporeal right to
exhibit the film. See American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64, 65
(Colorado App. 1995, cert. denied). These arguments have been uniformly rejected by various
state appellate courts, id., including this Court. Bullock v. ABC Interstate Theaters, Inc., 577
S.W.2d 337, 342 (Tex. Civ. App.—Austin 1977, writ ref’d n.r.e.).

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 8
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
Moreover, Section 171.1012(a)(3)(A)(ii) does not convert the service of projecting

film images onto a screen for a patron’s entertainment into a sale of tangible personal

property because: (1) services are not tangible personal property; (2) AMC never

has ownership of the film;4 and (3) it never transfers any ownership rights in the

film to the moviegoer.5 See TEX. TAX CODE §§151.0028; 151.0101(a)(1);

171.1012(a)(3)(A)(ii); see also §§171.1012(a)(3)(B)(i); 171.1012(i).

       The Court’s conclusion that a business produces tangible personal property

by producing a “film experience” or the “sights and sounds” experienced by the

moviegoer, effectively construes “tangible personal property” to include any sensory

experience. Under this construction, the provision of any amusement that can be

sensed—although explicitly classified as a taxable service under Section 151.0028—

is a sale of “tangible personal property.” If this construction stands, the provision for

consideration of any sight, sound, touch, smell, or taste experience—such as

professional sporting events, art exhibitions, and music concerts—presumptively

becomes a sale of tangible personal property.

4
  AMC never owns the film it presents. DX4 at 2; DX5 at 6; DX6 at 6; DX7 at 2. Rather, it rents
films from film distributors; when a film is no longer making money, AMC returns it. RR.82-83,
86-87, 121-22, 126-28, 166. Moreover, AMC has no copyright in the films and is not allowed to
change the content of the films. RR.166; DX4 at 1; DX5 at 1; DX6 at 6; DX7 at 2.
5
  It is illegal for AMC’s moviegoers to make copies of the films, and if caught doing so, the
moviegoer will be arrested. RR.74. AMC’s contracts with distributors provide that AMC will not
allow customers to make copies of the films. DX4 at 2; DX5 at 6-7; DX6 at 6; DX7 at 2.

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 9
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
       Further, because the definition of “tangible personal property” in Chapter 151

includes identical language to that construed by this Court, a provision of any

services that can be perceived by the senses—e.g., medical treatment, legal

representation, architectural services—would all be presumptively taxable as the

sale of tangible personal property, despite the legislature’s express limitation of sales

tax on services to seventeen specific categories.

       Finally, the expansion of the definition of “tangible personal property” to

include anything that can be perceived through the senses will effectively result in

writing the exclusion for “services” out of Section 171.1012, and likely result in

traditional service providers claiming “costs of goods sold” for the costs of providing

services (e.g., examination rooms, legal offices, professional sports facilities), so

long as their services are perceptible to the senses.

       Such a construction of tangible personal property all but erases the distinction

between the sale of tangible personal property and the sale of services—a distinction

that the legislature has long maintained in the sale and use tax and carried over to

the franchise tax. While the legislature may certainly choose to provide a narrow

exception to the general rule,6 the opinion’s expansive construction of “tangible

6
  In 2013, the legislature granted movie theaters the ability to prospectively subtract movie
exhibition costs as cost-of-goods-sold. See TEX. TAX CODE §171.1012(t).

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 10
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
personal property” will affect the application of the sales and franchise taxes far

beyond the question of movie exhibitions, potentially cause billions of dollars of

losses to the public fisc,7 and obliterate the clear distinction between services and

tangible personal property that has been a part of Texas tax law for over fifty years.

       B.      No “Sale” Of Tangible Personal Property Takes Place When A
               Moviegoer Purchases An Admission Ticket.

       In order for a business to have “costs of goods sold,” a priori, it must sell

goods. “Goods” are defined in Section 171.1012 as “real or tangible personal

property sold in the ordinary course of business of a taxable entity.” TEX. TAX CODE

§171.1012(a)(1). While franchise tax statutes do not provide a definition of the word

“sold” or “sale,” the traditional legal definition of sale requires the transfer of

property or title for a price, and so includes as an element, property that is “capable

of being transferred.” BLACK’S LAW DICTIONARY (“Sale”) (10th edition, 2014). Thus

an actual transfer of possession of, or title to, property which is capable of being

transferred, is an inherent part of a sale of property.

       This element of transfer of title or possession is also incorporated in the

definition of “sale” in Section 151.005, which provides in relevant part that a sale of

7
  The Comptroller has estimated that the opinion’s construction of the term “tangible personal
property” could cost the State up to $6 billion from tax refunds and reduce the State’s annual
revenue by $1.5 billion. LETTER FROM GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS, TO
HON. GREG ABBOTT, GOVERNOR, HON. DAN PATRICK, LIEUTENANT GOVERNOR, AND JOSEPH R.
STRAUS, III, SPEAKER OF THE HOUSE, June 3, 2015, p.1.

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 11
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
tangible personal property is a “transfer of title or possession of tangible personal

property” for consideration.8 TEX. TAX CODE § 151.005(1). By contrast, the sale of

a movie ticket is considered a transfer of title to or possession of a ticket for

admission to a taxable amusement service. Cf. TEX. TAX CODE §151.005(1) to

§151.005(3); see also §§151.0028, 151.0101(a)(1).

       Yet, under the Court’s opinion, the sale of an admission ticket to an

entertainment—which is explicitly not a sale of tangible personal property under

sales tax statutes—is the sale of tangible personal property. Opinion at *6. In holding

that a theater has made a “sale” of “tangible personal property” by exhibiting a film,

the Court has advanced a definition of a “sale” that contravenes both traditional legal

principles and the definition of a sale in Section 151.005(1).

       The opinion does not directly address the requirement that a transfer of title

to or possession of tangible personal property is necessary for a sale, other than to

note the lack of a “take-home” requirement in the definition of tangible personal

property. Opinion at *5. However, a “sale” of tangible personal property requires

that the buyer take physical or legal possession of the property so as to exercise the

8
   Other subsections of Section 151.005 provide other methods of sale, but none would be
applicable to the issues in this appeal.

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 12
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
rights of ownership, including the right of control, exclusive possession, disposal,

and taking the property where the buyer choses.

          A moviegoer’s one-time experience of a movie’s sights and sounds is a

transitory perception created within the moviegoer as her eyes, ears, and mind

process the sights and sounds presented. Neither title nor possession of such

perception is ever owned by the theater nor could the theater transfer title or

possession of such perception/experience to the moviegoer.

          Nor does a theater transfer either title to or possession of: (1) of the actual film

that it leases; (2) the modified film reel with trailers and advertisements displayed in

the theater; or (3) the actual images or sounds as displayed in the theater. The

moviegoer never receives possession of or title to any of these and enjoys no rights

of ownership as to any film reel or film images or sounds.9

          Instead, the only transfer of title or possession is to an admission ticket, which

provides a license to enter the theater for a single viewing of a single film. Texas

sales tax law recognizes this as a sale of services, not the sale of tangible personal

property. TEX. TAX CODE §§151.005(3); 151.0028; 151.0101(a)(1). A movie theater

9
    See footnote 5, supra.

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 13
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
does not sell a “film” by selling tickets to a movie viewing any more than a museum

sells works of art by selling tickets to an art exhibit.10

       The opinion’s decoupling of the “transfer of possession of or title to”

requirement from a “sale of tangible personal property,” would mean that any sort

of presentation, activity, or exhibition, where consideration was provided, could

constitute a sale of tangible personal property, even though no actual transfer of any

property takes place. This expansion of the term “sale” of property to include

situations where no actual possession of or title to any property is transferred would

be a significant departure from traditional legal principles underlying the definition

of “sale,” potentially affecting not only sales and franchise tax law, but other areas

of Texas law involving “sales.”

       C.      Other States Have Rejected The Contention That A Movie
               Exhibition Is The Sale Of “Tangible Personal Property” To
               Moviegoers.

       Besides Texas, thirty-three states include the phrase “personal property that

can be seen, weighed, measured, felt, or touched or that is perceptible to the senses

10
   The language of Section 171.1012(a)(3)(A)(ii) “without regard to the means or method of
distribution or the medium in which the property is embodied” does not alter this analysis. The
medium in which the films are embodied are reels, which are not mass distributed to the
moviegoers. Even considering, arguendo, the screen as the medium in which film images are
embodied, see Opinion at *6, that would not make the images tangible personal property, because:
images are not films; images are only temporarily present on the screen, not embodied in it; and
because the screen is not intended to be, nor is it reasonably likely that it will be, mass distributed.
See TEX. TAX CODE §§171.1012(a)(3)(A)(ii).

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 14
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
in any other manner,” or one substantially similar to it, in their statutory definition

of tangible personal property for sales and/or use tax purposes.11 However, no other

state appellate court has ever held that the exhibition of a movie is a sale of tangible

personal property to moviegoers. Prior attempts by AMC and other movie theater

companies to convince other state appellate courts to adopt such a position have been

roundly rebuffed.

       For example, the Vermont Supreme Court rejected an argument that a theater

was not subject to use tax because it was merely renting films for resale to

moviegoers. In re Merrill Theatre Corporation Sales and Use Tax, 138 Vt. 397, 400

(Vt. 1980). In its analysis, the court held that the “tangible personal property” was

the film itself, not the image produced by it, and that the moviegoer, while possibly

being “‘sold’ or ‘leased’ some right to view and enjoy the product of the film's

projection,” acquired “no right whatever to the tangible property itself.” Id.

11
  ARIZ. REV. STAT. §40-5001(17); ARK. CODE §26-53-102(16A); CAL. REV. & TAX CODE §6016;
CONN GEN. STAT. §12-407(13); FL. STAT. §212.02(19); GA. CODE §48-8-2(37); ID. CODE §63-
3616(a); IND. CODE §6-2.5-1-27; IOWA CODE §423.1(59); KAN. STAT. §79-3602(pp); KY. REV.
STAT. §139.010(33); LA. REV. STAT. §47:301(16)(a); ME. REV. STAT. §1752(17); MI. COMP.
LAWS §205.92(k); MINN. STAT. §297A.61(Subd.10(a)); NEB. REV. STAT. §77-2701.39; NEV. REV.
STAT. §372.085; N.J. STAT. §54:32B-2(g); N.C. GEN. STAT. §105-164.3(46); N.D. CENT. CODE
§57-39.2-01(25); OHIO REV. CODE §5739.01(YY); 68 OK. STAT. §1352(YY); R.I. GEN. LAWS §44-
18-16; S.C. CODE §12-36-60; S.D. CODIFIED LAWS §10-45-1(14); TENN. CODE §67-6-102(89)(A);
UTAH CODE §59-12-102(123)(a)(i-ii); 32 VT. STAT. §9701(7); VA. CODE §58.1-602; REV. CODE
WASH. §82.08.010(7); W.VA. CODE §11-15B-2(60); WIS. STAT. §77.51(20); WY. STAT. §39-15-
101(ix).

Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 15
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       The court also noted that: “No transfer occurs to the patron in any reasonably

acceptable sense. He takes nothing into the theatre, neither does he take anything

out.” It rejected the contention that any “resale” of the film to the moviegoer took

place, holding that

       Under the tortured logic which the taxpayer would have us apply here,
       the light bulbs, the seats, and the projectors would be “used” by the
       patrons, with the use constituting a “resale” and exempting their
       original purchase from tax. Recoupment of cost undoubtedly enters into
       the price paid by every consumer, including overhead expense. But
       recoupment is not equivalent to resale.

Id. The court further rejected the argument that the film was part of a product created

by the theater and “consumed” by the moviegoer, stating

       As we have already ruled, the product of the projection, whatever it
       may be, is not “tangible personal property.” The film itself does not
       become an ingredient or component part of the product; it remains
       unchanged and unaffected. It is not consumed or destroyed; it does not
       lose its identity.

Id. at 401.

       AMC attempted to assert that a film exhibition is a resale of the film to the

moviegoers in Colorado. See American Multi-Cinema, Inc. v. City of Westminster,

910 P.2d 64, 66 (Colorado App. 1995, cert. denied). The court rejected AMC’s

argument, noting that moviegoers were not given, nor did they seek, possession of

the film. Id. at 67. Rather, they paid a fee in order “to be able to view images from

the film as they are projected onto the screen.” Id. The court concluded that “the

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American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
charge made by plaintiff for the privilege of viewing such images does not constitute

a re-sale of the film; it is [AMC], not its customers, who is the ultimate ‘user’ of

such tangible personal property.” Id. at 67.

       More recently, the same court re-affirmed City of Westminster, noting that the

“‘conversion’ to a ‘useable medium’ that may occur when a film's images are

projected onto a movie screen is merely the right to use the product as it was

intended, that is, to exhibit the film by projecting it onto a movie screen,” and

holding that “[m]ovie viewers are no more consumers of film reels than they are of

seats, screens, or projectors used in movie theaters.” Cinemark USA, Inc. v. Seest,

190 P.3d 793, 797, 799 (Colorado App. 2008).

III.   CONCLUSION

       The expansion of the term “tangible personal property” to include any sensory

experience effectively dismantles the legislature’s deliberate separation between

services and tangible personal property first established in Texas tax law over fifty

years ago. It further potentially renders a nullity not only the exception for services

in Section 171.1012(a)(3)(B)(ii), but also a host of sales tax statutes distinguishing

taxable personal property from services, and enumerating and describing taxable

services. See TEX. TAX CODE §§151.010, 151.0101(a)(1)-(17), 151.0028–.0048.

Such a broad construction would create widespread uncertainty regarding the

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application of both the sales tax and franchise tax, cause major difficulties in the

administration of taxes and the calculation of revenue estimates, and potentially

result in a massive loss of revenue to the State.

       This Court should issue a new opinion to harmonize its construction of the

terms “tangible personal property,” “goods sold”, and “sale” with the general

legislative intent expressed in Chapters 151 and 171 and traditional legal principles.

This Court should also hold that AMC provides an amusement service, accessed

through the sale of a license embodied in a ticket; its provision of movie images and

sounds for a one-time experience is not the sale of tangible personal property; and it

may not deduct its movie exhibition costs at issue as costs of goods sold. See TEX.

TAX CODE §§151.0028; 151.005(3); 171.1012(a)(1), (a)(3)(B)(ii).

                                           PRAYER

       The Court should grant this motion for rehearing and motion for

reconsideration en banc.

                                     Respectfully submitted,

                                     KEN PAXTON
                                     Attorney General

                                     CHARLES E. ROY
                                     First Assistant Attorney General

                                     JAMES E. DAVIS
                                     Deputy Attorney General for Civil Litigation

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American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
                                     ROBERT O’KEEFE
                                     Division Chief
                                     Financial Litigation, Tax, and
                                     Charitable Trusts Division

                                     /s/ Cynthia Morales
                                     CYNTHIA A. MORALES
                                     Attorney in Charge
                                     State Bar No. 14417420

                                     CHARLES K. ELDRED
                                     State Bar No. 00793681

                                     Financial Litigation, Tax, and
                                     Charitable Trusts Division
                                     P.O. Box 12548
                                     Austin, Texas 78711-2548
                                     512-475-1743
                                     512-477-2348 (fax)
                                     cynthia.morales@texasattorneygeneral.gov
                                     charles.eldred@texasattorneygeneral.gov

                                     ATTORNEYS FOR APPELLEES/CROSS-APPELLANTS,
                                     GLENN HEGAR AND KEN PAXTON

                           CERTIFICATE OF COMPLIANCE

       In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this motion

contains 4418 words, excluding the portions of the motion exempted by Rule

9.4(i)(1), according to Word 2013.

                                           /s/ Cynthia Morales
                                           Cynthia A. Morales
                                           Assistant Attorney General

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American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
                              CERTIFICATE OF SERVICE

       I certify that a copy of this Appellees’/Cross-Appellants’ Motion for

Rehearing        was       served       on      opposing        counsel,   Doug   Sigel,

doug.sigel@ryanlawllp.com, on June 5, 2015, via File & ServeXpress.

                                             /s/ Cynthia Morales
                                             Cynthia A. Morales
                                             Assistant Attorney General

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