Court Opinion

ID: 2952527
Source: CourtListenerOpinion
Date Created: 2015-09-16 22:06:24.819932+00
Date Added: 2024-06-11T11:41:48.525961
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                ON MOTION FOR REHEARING

                                        NO. 03-08-00212-CV

                                     7-Eleven, Inc., Appellant

                                                   v.

  Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott,
                 Attorney General of the State of Texas, Appellees

     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT
    NO. D-1-GN-04-003369, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING

                                           OPINION

                We withdraw our opinion and judgment dated August 31, 2009, and substitute the

following opinion in place of the earlier one.

                Appellant 7-Eleven, Inc. brought suit against Susan Combs, Comptroller of Public

Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas

(collectively, the “State”) seeking a partial refund of sales tax that the Comptroller assessed on

7-Eleven’s purchase of financial software for its retail stores. The parties filed cross-motions for

summary judgment; the trial court granted the State’s motion and denied 7-Eleven’s. On appeal,

7-Eleven asserts that it was entitled to recover taxes assessed on the portion of the sales price of the

software that was (1) transferred to stores operated by third-party franchisees, all of which were
outside of Texas, and (2) delivered to those 7-Eleven-operated stores (“company stores”) that were

located outside of Texas. We will reverse the summary judgment in favor of the State and remand

the cause to the trial court for further proceedings.

                      FACTUAL AND PROCEDURAL BACKGROUND

               7-Eleven is a Texas corporation that operates retail convenience stores, and franchises

others, throughout the United States. In 1993, 7-Eleven purchased a nonexclusive, perpetual license

to “use, reproduce, and possess” custom computer software developed by Canmax Retail Systems,

Inc. and designed to manage and automate 7-Eleven’s stores. The Canmax software was developed

and implemented in several phases. In the initial phase, “host software” was installed on 7-Eleven’s

corporate mainframe, referred to as the “host” computer, while “store software” was installed on the

in-store computers. According to Paul Hanson, who managed 7-Eleven’s Internal Audit Division

during the relevant period, Canmax delivered separate “gold masters” of the host software and the

store software. As Hanson explained in his deposition testimony, the host software permitted the

corporate mainframe to communicate directly with the store computers, allowing the stores to

transmit data to the corporate mainframe for processing. Hanson testified that a distinction was

made between the host software and the store software because those were “two separate things”

“based upon where that software resided and what it did.”

               Hanson testified extensively concerning the functionality and use of the Canmax

software, both by the 7-Eleven corporate office and by the stores themselves. Hanson stated that the

Canmax software was the “backbone” of 7-Eleven’s financial records because it captured the data

necessary to conduct and monitor sales and other store functions. The software’s “data-capture”

                                                  2
function replaced the system of manually submitting data from a store to 7-Eleven’s corporate office

on written forms.      He also explained how 7-Eleven then used the software to perform

“data-processing services” for the stores based on the information that was entered at the store level

and transmitted electronically to the host computer.1 In one example, Hanson discussed the

preparation of a payroll report, which would be generated by the host computer and provided to the

stores on a weekly basis, showing the “gross to net pay calculation” for each employee during each

pay period. In another example, Hanson explained how the Canmax store software could be used

“as a tool to help control the receipts or cash in the store and assign that to individual shifts, to

individual employees, to hold them accountable.” Such data, Hanson explained, would not

necessarily be transmitted “up to the mainframe,” but rather would be used in “purely a store-level

report to help the store manage its operation.”

                Kathy Naumann, 7-Eleven’s information systems manager during the relevant period,

also testified by deposition about the Canmax software’s functionality and how it permitted the store

computers to interface with the corporate host computer. Referring specifically to phase one of the

       1
           Hanson testified:

       All the Canmax software did was automate the capture of data that was already being
       captured manually. So, like, for instance, we’ve spoken about the sales. So prior to
       the Canmax software, the stores would fill out a piece of paper called a cash report
       and send that piece of paper to an accounting office, and the accounting office would
       take that piece of paper and key that data directly into our mainframe computer. The
       Canmax software allowed the store operator—instead of filling out a piece of paper,
       he filled out a computer screen, if you will. So the store operator keyed the data
       directly into a computer, a computer that resided at the store, and then a host
       computer would poll that computer once a day and extract that data out of it and then
       upload it to this mainframe.

                                                  3
Canmax store software, Naumann stated that it “processed—collected the information for—and

created the cash report” and allowed for “the gathering of timesheet data for payroll purposes, the

gathering of gasoline inventory measurements, the gathering of gasoline delivery invoice

information, the gathering of detail sales data for money orders and the gathering of transaction

information for credit card sales.”

               The next phase of the store software, according to Naumann, “ran on a scanning cash

register” and fed information that it collected from the cash register to the in-store computer. She

testified that this phase of the store software (referred to as “Pre-POS”) was installed only in

franchise stores located outside of Texas; it was not installed on the host computer or at any

company stores.

               The final software phase relevant to this appeal, Phase 2B, included “scanning

point-of-sale registers,” designed to replace non-scanning, Pre-POS software in the stores. The

Phase 2B software’s “key functionality” was to automate the stores’ ordering system. As Naumann

explained,

       The stores have in their store software their inventory items and the software allows
       them to place an order for each vendor for each merchandise item and then that order
       is uploaded to the host software and from there sent to the vendors and the CDCs
       [consolidated distribution centers] so that they can deliver that merchandise to
       the stores.

                                                 4
Like the Pre-POS software, the Phase 2B software was installed only in the stores, not at the host.2

By 1996, 7-Eleven had installed Canmax software at 286 company stores in Texas, 1,742 company

stores outside of Texas, and 2,946 franchise stores. All of the franchise stores were outside of Texas.

               Before installation of the Phase 2B store software was underway, the

Comptroller audited 7-Eleven for sales-tax compliance for the period of April 1, 1993, through

September 30, 1996. The auditor determined that the amount of the software-licensing fee

attributable to the retail store software during the audit period was $3,628,230, and assessed sales

tax on the store software in the amount of $299,328.98.3            7-Eleven filed a petition for a

redetermination and obtained a hearing, see Tex. Tax Code Ann. §§ 151.509-.511 (West 2008). The

Comptroller issued her original decision in the matter on June 10, 2002, granting 7-Eleven’s

contention that its purchase of Canmax store software for its franchisees was an exempt

sale-for-resale purchase; therefore, the Comptroller found that 7-Eleven “was entitled to relief for

software loaded onto the PCs of the franchisees.” The Comptroller also found that 7-Eleven was

entitled to relief “relative to software loaded onto PCs shipped from Atlanta, Georgia, [where the

software was staged] to its non-Texas company stores, because the software was purchased for

resale, and there was no divergent use of the software in Texas prior to its shipment to Atlanta,

Georgia, for staging.”

       2
          Naumann testified that Canmax developed only the Phase 2B store software. An entirely
different company developed the Phase 2B host software.
       3
         As the parties explained during oral argument, the Comptroller separately assessed sales
tax on the host software. 7-Eleven has challenged that assessment in a separate suit unrelated to
this appeal.

                                                  5
                The Administrative Hearings Section moved for rehearing, arguing that the resale

exemption did not apply “because (1) the software was not purchased solely for resale, citing [tax

code] section 151.006 (i.e., Petitioner also used the software in its company stores)” and “(2) there

was no showing that the software was held in inventory for resale.” Based on this first ground, the

Comptroller reversed her original decision, finding that because 7-Eleven’s transfer of the software

to its franchisees “was incidental to the real property rental,” the purchase was “specifically excluded

from the resale exemption” by section 151.006(a)(2).

                After paying the tax under the statutory protest procedures, 7-Eleven filed suit for a

tax refund under chapter 112 of the tax code. See id. §§ 112.001-.056 (West 2008). 7-Eleven sought

a partial refund in the amount of $282,118, plus penalties and interest. According to 7-Eleven, this

sum represented the portion of the sales price attributable to the store software that was either

(1) transferred to third-party franchisees outside of Texas or (2) delivered to 7-Eleven-operated stores

outside of Texas; 7-Eleven contended that neither should be subject to Texas sales and use tax.

7-Eleven argued that the software transferred to the franchise stores qualified for the sale-for-resale

exemption in section 151.302 of the tax code. See id. § 151.302(b) (West 2008) (providing that sale

for resale of taxable item is exempted from sales and use tax); see also id. § 151.006(a)(3) (defining

“sale for resale” to mean sale of tangible personal property to purchaser who acquires property for

purpose of transferring it in United States as integral part of taxable service). Therefore, 7-Eleven

urged that it was entitled to purchase all of the store software tax-free and place it in a “tax-free

inventory” because it intended to resell some of the software to its franchisees. With respect to the

software that was ultimately shipped to company stores outside of Texas, 7-Eleven argued that the

                                                   6
relevant inquiry is whether use tax—not sales tax—was due; thus, because the store software shipped

to out-of-state company stores “was never used in Texas,” 7-Eleven maintained that “it was not

subject to the Texas use tax under Texas Tax Code § 151.011(f).” See id. § 151.001(f) (West 2008)

(providing that “use” does not include exercise of right or power over tangible personal property for

purpose of transporting it outside state for use solely outside Texas).

               7-Eleven moved for summary judgment, attaching to its motion, among other

evidence, Hanson’s calculation that 7-Eleven would be entitled to a refund of $282,118 in the event

the court concluded that the copies of the software delivered to out-of-state company and franchise

stores were not taxable.4

               7-Eleven also attached a copy of a Store Franchise Agreement, which indicates that

7-Eleven provides data-processing services to its franchisees—including bookkeeping, payroll, and

accounts payable—as part of the bundle of services, the license of 7-Eleven’s service mark and

proprietary products, and the lease of the store and equipment, for all of which the franchisees pay

7-Eleven a lump-sum monthly payment referred to as “the 7-Eleven Charge.” Regarding these

services, the Store Franchise Agreement states:

       4
          Hanson calculated these amounts based on the Comptroller’s auditor’s determination that
the fair market value of the licensing fee for all of the store software was $3,628,230. From that
figure, Hanson calculated “the fair market value of individual copies of the software” by dividing
“the licensing fee attributed to the store software by the total number of store copies made.” The
286 copies sent to company stores in Texas, which 7-Eleven conceded would be taxable, represented
$208,620 of the total fair market value, while the 1,742 out-of-state company stores and
2,946 franchise stores represented $1,270,683 and $2,148,928 respectively. Based on these values,
7-Eleven asserted that it was entitled to a refund of $104,831 on the copies of the software sent to
out-of-state company stores and $177,287 on the copies sent to franchise stores, resulting in a total
refund sought of $282,118.

                                                  7
       If FRANCHISEE is not in breach of this Agreement, 7-ELEVEN shall: (i) provide
       Financial Summaries for FRANCHISEE for the Store prepared from the
       Bookkeeping Records in the form of an income statement and a balance sheet for
       each Accounting Period or any portion thereof as 7-ELEVEN may deem necessary
       and for each calendar year, payroll checks for FRANCHISEE’s Store employees,
       draw checks, and merchandise reports; (ii) timely pay on behalf of FRANCHISEE,
       upon approval and submission to 7-ELEVEN, bank drafts and invoices for Purchases
       (as verified by vendor statements), bills for Operating Expenses, and the payroll for
       FRANCHISEE’s Store employees; and (iii) assist FRANCHISEE in the preparation
       and filing of business tax reports and returns (except FRANCHISEE’s income
       tax and related returns) to the extent the information is available from the
       Bookkeeping Records.

The Store Franchise Agreement further provides:

       FRANCHISEE shall prepare and furnish to 7-ELEVEN, on forms and at times
       acceptable to and as requested by 7-ELEVEN: (i) daily summaries of Purchases;
       (ii) daily reports of Receipts; (iii) weekly time and wage authorizations for
       FRANCHISEE’s Store employees; (iv) all information requested by 7-ELEVEN
       regarding the vendors from which FRANCHISEE makes purchases; and (v) all such
       additional reports as 7-ELEVEN may require from time to time.

In his affidavit attached to 7-Eleven’s motion for summary judgment, Hanson averred that the

Canmax software was an integral part of the data-processing service provided by 7-Eleven “because

it provided the method and the means” by which the franchisees recorded their financial information

and transmitted it to the host computer for processing.

               The State filed a cross-motion for summary judgment, asserting that the

sale-for-resale exemption was not applicable to the software transferred to the franchise stores

because the essence of that transaction “was a purchase of stores-automation software, not a purchase

                                                 8
of software that is an integral part of data processing services.” Specifically, the State urged the

following five grounds for summary judgment:

       (1) the Canmax store software was purchased in Texas from a Texas seller, and
       therefore sales tax was due at the time of purchase;

       (2) the sale-for-resale exemption does not apply “because only a small portion of the
       Canmax software can reasonably be characterized as an integral part of taxable data
       processing services” and because “7-Eleven derives a direct benefit on an ongoing
       basis from the Canmax software that is transferred to franchise stores”;

       (3) 7-Eleven cannot prevail on its tax code section 151.011(f) “claim” because that
       statute is “definitional and inapplicable to a sales tax transaction” or, in the
       alternative, because 7-Eleven failed to substantiate its claim that the software was
       transferred out of state solely for use outside of Texas;

       (4) the “essence-of-the-transaction” test results in taxability because the
       Canmax store software was geared toward automating 7-Eleven’s retail stores, not
       data-processing services; and

       (5) 7-Eleven’s claims are barred by the doctrines of exhaustion of administrative
       remedies, ripeness, sovereign immunity, and limitations.5

               The trial court granted the State’s motion for summary judgment, denied 7-Eleven’s

motion, and ordered that the State retain the taxes at issue. 7-Eleven appeals, arguing by one issue

that it is entitled to a partial refund of the taxes paid on the copies of the software transferred to

third-party franchisees and those company stores located outside of Texas.

       5
          On appeal, the State does not raise the arguments made in its fifth summary-judgment
ground; therefore, we will not address them.

                                                  9
                                   STANDARDS OF REVIEW

                To be entitled to summary judgment, the movant must establish that no genuine issue

of material fact exists and that he is entitled to judgment as a matter of law. Tex. R. Civ. P. 166a(c).

In our de novo review of a summary judgment, “we indulge every reasonable inference 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 here, both parties move for summary judgment on overlapping issues and

the district court grants one motion and denies the other, we review the summary-judgment evidence

presented by both sides, determine all questions presented, and render the judgment that the district

court should have rendered. Texas Workers’ Comp. Comm’n v. Patient Advocates, 136 S.W.3d 643,

648 (Tex. 2004).

                The issues raised in this appeal turn primarily on the construction of the tax code and

the Comptroller’s rules. Statutory construction is a question of law that we review de novo. See

Bragg v. Edwards Aquifer Auth., 71 S.W.3d 729, 734 (Tex. 2002). In construing statutes, we

ascertain and give effect to the legislature’s intent as expressed by the language of the statute. Id.;

State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006). We use definitions prescribed by the legislature

and consider any technical or particular meaning that the words have acquired. Tex. Gov’t Code

Ann. § 311.011(b) (West 2005). Otherwise, we construe the statute’s words according to their plain

and common meaning, Texas Dep’t of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 642

(Tex. 2004), unless a contrary intention is apparent from the context, Taylor v. Firemen’s

& Policemen’s Civil Serv. Comm’n, 616 S.W.2d 187, 189 (Tex. 1981), or unless such a construction

leads to absurd results, University of Tex. Sw. Med. Ctr. v. Loutzenhiser, 140 S.W.3d 351, 356

                                                  10
(Tex. 2004); see also Texas Dep’t of Protective & Regulatory Servs. v. Mega Child Care, Inc.,

145 S.W.3d 170, 177 (Tex. 2004) (noting that when statutory text is unambiguous, courts must

adopt interpretation supported by statute’s plain language unless that interpretation would lead to

absurd results).

                “We construe administrative rules, which have the same force as statutes, in the same

manner as statutes.” Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex. 1999).

“Unless the rule is ambiguous, we follow the rule’s clear language.” Id. We defer to an agency’s

interpretation of its own rule when the rule is vague or ambiguous, unless the administrative

interpretation is “plainly erroneous or inconsistent with the regulation.” See id. at 254-55 (quoting

Public Util. Comm’n v. Gulf States Util. Co., 809 S.W.2d 201, 207 (Tex. 1991)).

                                           DISCUSSION

                On appeal, 7-Eleven urges that the software transferred to third-party franchisees

qualified for the sale-for-resale exemption. It further asserts that, because it intended to resell some

of the Canmax store software to its franchisees, it was initially entitled to purchase all of the

software—including the software that it ultimately transferred to its company stores in and outside

of Texas—without paying sales tax by putting all of the software in a “tax-free inventory.” Thus,

according to 7-Eleven, the issue regarding the software that it did not resell to its franchise stores

                                                  11
(i.e., that it transferred to its company stores) is whether that software was used in Texas.6 We will

address each argument in turn.

I. The State’s Entitlement to Summary Judgment: Franchise Stores

        (1) Sale-for-Resale Exemption

                The parties filed motions for summary judgment that joined issue on whether

7-Eleven was entitled to claim the sale-for-resale exemption for the store software it purchased for

and transferred to its franchise stores, all of which were located outside of Texas. See Tex. Tax Code

Ann. § 151.302(a) (“The sale for resale of a taxable item is exempted from the taxes imposed by this

chapter.”). The trial court granted the State’s motion, which urged that 7-Eleven was not entitled

to claim the sale-for-resale exemption as to the software that it delivered to its franchise stores and,

as a result, its initial purchase of the store software was taxable.

                The purpose of the sale-for-resale exemption is to prevent double taxation. Sharp

v. Clearview Cable TV, Inc., 960 S.W.2d 424, 426 (Tex. App.—Austin 1998, pet. denied) (“[T]he

Tax Code recognizes that the same goods should not be taxed twice; only the ultimate owner of the

goods should be burdened by the sales tax.”). Tax exemptions are to be strictly, but reasonably,

construed against the taxpayer. Id.; see North Alamo Water Supply Corp. v. Willacy County

Appraisal Dist., 804 S.W.2d 894, 899 (Tex. 1991). An exemption cannot be raised by implication,

       6
          In this regard, 7-Eleven argues that the issue is whether the software transferred to its
company stores was subject to use tax rather than sales tax. While 7-Eleven concedes that the store
software that it installed in its company stores in Texas was subject to Texas use tax, it argues that
no use tax was owed on the store software that was shipped to company stores outside of Texas
because that software was never “used” in Texas.

                                                  12
but must affirmatively appear in the statute, and all doubts are resolved in favor of the taxing

authority and against the claimant. Bullock v. National Bancshares Corp., 584 S.W.2d 268, 272

(Tex. 1979).

                Under the tax code, “sale for resale” includes a sale of “tangible personal property

to a purchaser who acquires the property for the purpose of transferring it . . . as an integral part of

a taxable service.” Tex. Tax Code Ann. § 151.006(a)(3) (West 2008).7 7-Eleven asserts, and the

State does not dispute, that its transfer of the store software to its franchisees qualifies as a sale. See

id. § 151.005(1), (2) (defining “sale” to include both “a transfer of title or possession of tangible

personal property” and “the exchange, barter, lease, or rental of tangible personal property”). A

“taxable service” is defined to include “data processing services,” see id. § 151.0101(a)(12)

(West 2008), which is in turn defined to “include[] word processing, data entry, data retrieval, data

search, information compilation, payroll and business accounting data production, the performance

of a totalisator service with the use of computational equipment required by the Texas Racing Act,

and other computerized data and information storage or manipulation,” see id. § 151.0035

(West 2008) (internal citations omitted). “‘Data processing service’ also includes the use of a

computer or computer time for data processing whether the processing is performed by the provider

of the computer or computer time or by the purchaser or other beneficiary of the service.” Id.

        7
          “Tangible personal property” is defined as “personal property that can be seen, weighed,
measured, felt, or touched or that is perceptible to the senses in any other manner,” and, “for the
purposes of this chapter, the term includes a computer program.” Tex. Tax Code Ann. § 151.009
(West 2008). It is undisputed that the Canmax store software is tangible personal property under this
definition.

                                                    13
               The tax code further provides that the Comptroller has exclusive jurisdiction to

interpret the statute defining “taxable service.” See id. § 151.0101(b). The Comptroller’s rule

interpreting section 151.0101 states that data-processing services “specifically includes word

processing, payroll and business accounting, and computerized data and information storage or

manipulation” and notes that examples of data-processing services “include entering inventory

control data for a company, maintaining records of employee work time, filing payroll tax returns,

preparing W-2 forms, and computing and preparing payroll checks.” See 34 Tex. Admin. Code

§ 3.330 (2009) (Tex. Comptroller of Pub. Accounts, Data Processing Services).

               7-Eleven argues that the record establishes that it performed data-processing services

for its franchise stores. We agree. Pursuant to the Store Franchise Agreement, for example,

7-Eleven was required to compute and provide its franchisees financial summaries, merchandise

reports, and payroll checks, all of which were based on and prepared from the store’s bookkeeping

records. In addition, the Store Franchise Agreement sets forth that 7-Eleven was required to assist

its franchisee in the preparation and filing of business tax reports and returns, “to the extent the

information is available from the Bookkeeping Records.” The bookkeeping records consist of data

that is entered, transmitted, received, and processed using the Canmax system software. 7-Eleven

thus argues that the Canmax software was an “integral part” of the data-processing services it

provided because the software offered “the method and the means by which the franchisees recorded

the financial information and transmitted it to 7-Eleven for processing.”

               The State argues in response that the transfer of the Canmax software was not, in fact,

integral to the data-processing services 7-Eleven provides to its franchisees because the evidence

                                                 14
demonstrates that the true purpose of the software was to automate 7-Eleven’s stores for 7-Eleven’s

own benefit. The State points to evidence that 7-Eleven’s corporate divisions received copies of

reports that were provided to the stores and that data collected using the store software was used by

7-Eleven in preparing its own tax returns, setting its gasoline prices, and performing corporate

accounting and audit functions. According to the State, the “purpose” requirement of section

151.006 is not met because “7-Eleven’s actual use of the Software clearly evidences a purchase for

its own use, as opposed to a transfer of Software to a third party as part of a resale transaction.”8 In

essence, the State argues that, in order for 7-Eleven’s purchase of the software to qualify as a sale

for resale under section 151.006, the transfer of the store software from 7-Eleven to its franchisees

cannot have provided any “direct benefit” to 7-Eleven. We disagree.

                In the first place, nothing in the statute indicates that the purchaser of tangible

personal property who transfers it as an integral part of a taxable service may not obtain any benefit

from the transaction. Neither the statute’s plain text nor its context within chapter 151 suggests that

       8
          More precisely, however, the evidence shows that many of the benefits 7-Eleven received
were from its own use of the host software in conjunction with the franchisees’ use of the store
software. As Hanson testified, the Canmax software functioned by having the store operator key
“data directly into a computer, a computer that resided at the store, and then a host computer would
poll that computer once a day and extract that data out of it and then upload it to this mainframe.”

        While it is clear from the summary-judgment evidence that the store software and the host
software functioned in concert with one another, the record reveals that the reports and other
processes that the State cites as evidence of a direct benefit to 7-Eleven were actually generated by
the host software—a distinct product that was assessed a separate sales tax (which, as the parties
acknowledged during oral argument, is being challenged in a separate proceeding). It is therefore
unclear why the State, having separately valued and taxed the portions of the licensing fee
attributable to the store software and the host software, appears now to conflate the two products,
citing evidence in its brief showing how 7-Eleven used the host software for its own benefit as
support for its argument that the store software was actually purchased for 7-Eleven’s own use.

                                                  15
the derivation of a “benefit” by the party performing the taxable service negates what would

otherwise qualify for the sale-for-resale exemption. See In re Bell, 91 S.W.3d 784, 790 (Tex. 2000)

(“courts should not insert words in a statute except to give effect to clear legislative intent”);

Williams v. Texas State Bd. of Orthotics & Prosthetics, 150 S.W.3d 563, 573 (Tex. App.—Austin

2004, no pet.) (“[W]e will not read into an act a provision that is not there . . . .”). Thus, evidence

that 7-Eleven’s corporate divisions also reviewed and benefited from reports that were generated

using the store software, for example, does not alter the fact that the transfer of the store software

to the franchisees was integral to 7-Eleven’s performance of data-processing services. Cf. Strayhorn

v. Raytheon E-Systems, Inc., 101 S.W.3d 558, 567 (Tex. App.—Austin 2003, pet. denied) (rejecting

Comptroller’s argument that reseller’s control over property for its own use defeated its claim for

sale-for-resale exemption, noting that nothing in tax code required sale to hinge on elements of

control and use). So long as the purchaser’s intent in acquiring the property was to transfer it as an

integral part of a taxable service, the elements of the section 151.006(a)(3) definition would appear

to be satisfied.

                   Moreover, even interpreting the statute to permit consideration of the benefits

allegedly received by the parties to the transaction, we disagree that the statute contains a

requirement that the recipient of the service be the sole benefiting party. Such a construction would

impose on the party seeking eligibility for the sale-for-resale exemption an impractical burden,

requiring a showing not only that the transfer of the property was integral to its provision of a taxable

service, but also that the transferor of the property received no benefit from the transfer beyond

receipt of the sales price. See Tex. Gov’t Code Ann. § 311.021(3) (West 2008); Old Am. County

                                                   16
Mut. Fire Ins. Co. v. Sanchez, 149 S.W.3d 111, 117 (Tex. 2004) (requiring that we reject statutory

interpretation that would lead to unreasonable result). The more reasonable interpretation of the

“purpose” requirement is that it exists to prevent parties from obtaining favorable tax treatment

premised on a sham arrangement wherein little or no taxable services are actually rendered. This

is consistent with the sale-for-resale exemption’s purpose being to avoid double taxation, because

if there were no performance of significant services subject to sales and use tax, taxing any tangible

personal property integral to the performance of those services would not result in double taxation.

               Here, even taking into account the benefits that 7-Eleven received,9 the

summary-judgment record does not show that the effects of the store software were so one-sided in

7-Eleven’s favor that its claim to have purchased the software as an integral part of its provision of

data-processing services is merely pretense. On the contrary, the record shows that the franchisees

derived a substantial actual benefit from the taxable services rendered by 7-Eleven. The evidence

is undisputed that 7-Eleven used the store software to perform payroll and accounting functions for

the franchisees; to store and manipulate the stores’ computerized data and information, including

inventory data; to maintain records of store employee work time; and to compute and prepare the

store employees’ payroll checks—all of which are identified as data-processing services in the

Comptroller’s rule defining that term. See 34 Tex. Admin. Code § 3.330.

       9
           In its reply brief, 7-Eleven acknowledges that it benefited “from all the goods and services
that it transferred to the franchisees, including the computers, store furniture, the trademarks, the
consultations, the data processing, and other items. All of these items tended to increase franchise
sales, thereby increasing the fees to 7-Eleven.”

                                                  17
                The State further argues that 7-Eleven cannot avail itself of the sale-for-resale

exemption because “only a small portion of the Canmax software can reasonably be characterized

as an integral part of a taxable data processing service.” According to the State, some aspects of the

store software—specifically Phase 2B—were “unrelated” to the performance of data-processing

services. The record shows that Phase 2B was designed to permit the stores to upload their

merchandise orders to the host computer, which processed and transmitted the order data to the

vendors for the purpose of supplying merchandise to the stores. Naumann testified that Phase 2B

included “transmission of order information” to 7-Eleven’s consolidated distribution centers and

vendors, as well as “sales trend information for the stores.”

                We reject the State’s argument for two reasons. First, as a matter of law, we do not

construe the statute to require that the tangible personal property be committed solely to the

performance of the taxable service in order for section 151.006(a)(3) to be satisfied. Rather, the

statute is phrased in terms of whether the property is “an integral part of a taxable service.” See Tex.

Tax Code Ann. § 151.006(a)(3); see also Webster’s Third New Int’l Dictionary 1173 (1986)

(“integral” means “of, relating to, or serving to form a whole; essential to completeness; constituent;

inherent”). Because the evidence confirms that the store software was important to the performance

of data-processing services that were performed by 7-Eleven, it is not relevant under the statute that

the store software may have been put to other uses as well.10 Further, as a matter of fact, the

       10
          Accordingly, we also reject the State’s assertion that the sale-for-resale definition is not
met because the stores themselves were capable of generating their own reports using the store
software. The record does not support the State’s argument that “the Stores are the ones actually
doing the data processing.”

                                                  18
evidence shows that even the Phase 2B software was integral to 7-Eleven’s “storage and

manipulation” of the Store’s computerized sales-trend and merchandise-ordering data, processes that

are expressly defined as data-processing services under the tax code. See Tex. Tax Code Ann.

§ 151.0035 (data-processing services specifically include data entry, data retrieval, data search,

information compilation, and other computerized data and information storage or manipulation).

Based on our review of the record, we disagree with the State’s contention that “only a small

portion” of the Canmax store software was used for data-processing services.11

       (2) “Essence-of-the-Transaction” Test

               In a separate but related argument, the State argued in its motion for summary

judgment that 7-Eleven was not entitled to purchase the Canmax store software tax-free because the

software purchase fails the judicially created “essence-of-the-transaction” test. According to the

State, the store software was purchased not for the purpose of providing data-processing services for

7-Eleven’s stores, but was instead done to automate 7-Eleven’s operations and to protect 7-Eleven’s

franchise fee. These purposes, the State argues, reveal that the essence of the transaction between

7-Eleven and its franchisees was not the transfer of tangible personal property as an integral part of

a taxable service, and therefore 7-Eleven is not entitled to the sale-for-resale exemption.

               The essence-of-the-transaction test was developed to address situations involving a

“mixed transaction” of both taxable and nontaxable elements. See, e.g., Bullock v. Statistical

       11
           Likewise, we disagree that 7-Eleven was required to produce evidence “to show what
percentage of the development charge was for Phase 1, pre-POS, or Phase 2B software” in order to
be entitled to summary judgment, given that all phases of the store software—not just Phase 1—are
properly seen as integral to the performance of data-processing services.

                                                 19
Tabulating Corp., 549 S.W.2d 166, 167 (Tex. 1977); Rylander v. San Antonio SMSA Ltd. P’ship,

11 S.W.3d 484, 487 (Tex. App.—Austin 2000, no pet.); Williams & Lee Scouting Serv. Inc.

v. Calvert, 452 S.W.2d 789, 792 (Tex. Civ. App.—Austin 1970, writ ref’d). In Williams & Lee, the

case in which the essence-of-the-transaction test was first applied, the Comptroller assessed sales

tax on printed reports produced by a company performing scouting services for oil companies.12
452 S.W.2d at 790. The printed materials summarized the oil and gas well data that the company

gathered and furnished to its subscribers for a monthly charge, but the record showed that the same

information was also communicated by telegraph and over the telephone, rather than in printed

reports. Id. at 790-91. The scouting company challenged the tax assessment, arguing on appeal that

“the essence of the transaction involved in this instance is the performance of a service for oil

companies, namely, a scouting service.” Id. at 792. At that time, the sales tax had not been extended

by the legislature to cover services. Id. Therefore, in order to determine whether the scouting reports

were subject to sales tax, the Williams & Lee court focused its inquiry on what was really being

sold—a scouting report, which consisted of information presented in a permanent, tangible form and

was therefore taxable, or a service, which was not taxable. Id. The court held that because the value

from the standpoint of the subscriber was in the information itself, regardless of what form the

information took, the true transaction was the selling of a service and therefore was not subject to

sales tax. Id. at 792-93.

       12
          “Scouting service is the timely procuring of statistical data on oil and gas wells, necessary
to keep oil operators informed of developments in their industry.” Williams & Lee Scouting Serv.
Inc. v. Calvert, 452 S.W.2d 789, 790 (Tex. Civ. App.—Austin 1970, writ ref’d).

                                                  20
               Subsequently, courts have applied the essence-of-the-transaction test to other

scenarios involving the bundling of a nontaxable service with a taxable sale or service.

See, e.g., Statistical Tabulating, 549 S.W.2d at 167 (holding essence of transaction was nontaxable

data-processing service, which was performed by translating raw data onto punch cards that

customers fed into computer; court therefore held that transfer of punch cards was not taxable sale);

San Antonio SMSA, 11 S.W.3d at 487 (holding that nontaxable engineering services bundled with

sale of telecommunications equipment was not taxable); Comptroller of Pub. Accounts v. Austin

Multiple Listing Serv., Inc., 723 S.W.2d 163, 165 (Tex. App.—Austin 1986, no writ) (holding

essence of transaction was processing of real-estate data, rather than printing of weekly

listing-service book).

               As this Court explained in San Antonio SMSA, the essence-of-the-transaction test

involves the following inquiry:

       If the real object of a mixed transaction is the purchase of equipment which is
       taxable, and the service element is incident to that purchase, the entire transaction is
       taxable. On the other hand, if the essence of the transaction is the purchase of a
       nontaxable service, which incidentally includes the purchase of some other service
       or equipment that is taxable, the entire transaction is nontaxable.
11 S.W.3d at 487 (citations omitted). Ultimately, this Court in San Antonio SMSA determined that

the transaction at issue, which involved the performance of nontaxable engineering services as part

of the taxable sale of telecommunications equipment, did not fall into either category because “each

transaction is independently desired and independently provided.” Id. Therefore, the Court

recognized a third category in which the two elements of a mixed transaction involving services and

                                                 21
tangible property are “‘readily separable’: ‘When there is a fixed and ascertainable relationship

between the value of the article and the value of the services rendered, and each is a consequential

element capable of a separate and distinct transaction, then the elements must be analyzed as

separate transactions for tax purposes.’” Id. at 488 (quoting New England Tel. & Tel. Co. v. Clark,

624 A.2d 298 (R.I. 1993)).

                The transaction involved in the instant case conforms even less to the traditional

essence-of-the-transaction inquiry.       The issue here is not whether the “essence” of the

7-Eleven–franchisee transaction was a taxable sale or a nontaxable service, see Statistical

Tabulating, 549 S.W.2d at 167; Austin Multiple Listing Serv., 723 S.W.2d at 165, or even whether

we can logically “unbundle” the taxable and the nontaxable elements of a single transaction, as in

San Antonio SMSA. Rather, both the tangible personal property and the services at issue in this

appeal are taxable.13 Yet the State attempts to invoke the essence-of-the-transaction doctrine to show

that any “[s]oftware that may have been transferred as an integral part of data processing services

was merely ‘incident to’ the ‘basic purpose’ of this transaction.”

                As we understand the State’s argument, it is that the essence-of-the-transaction test

proves that 7-Eleven’s motivation for transferring the store software to its franchisees was to obtain

a financial benefit for itself, not to transfer the software as an integral part of data-processing services

provided to the franchisees. In other words, the State wants to use the test to show that 7-Eleven was

        13
           We note that the Comptroller has argued in previous administrative hearings that, because
the essence-of-the-transaction test was developed prior to the imposition of the sales tax on services,
it is not applicable in a case involving taxable services. See Comptroller Decision No. 30,394
(Oct. 28, 1997).

                                                    22
not engaged in “a true resale transaction.” The State has cited no authority, and we have found none,

indicating that the essence-of-the-transaction doctrine has ever been applied in this manner. We

conclude that it does not apply here, and that the function of that test has effectively been

incorporated into the definition of “sale for resale” regarding whether tangible personal property is

“an integral part of a taxable service.” See Tex. Tax Code Ann. § 151.006(a)(3).14

        (3) Other Policy Considerations

                The State further argues that allowing the store software purchase to escape sales tax

would contravene the purpose of the sale-for-resale exemption, which is to prevent double taxation.

In this case, as the State points out, there is no evidence that 7-Eleven charged or collected sales tax

for any of the data-processing services it performed for out-of-state franchise stores. Therefore, the

State urges that, as a matter of public policy, 7-Eleven should be precluded from claiming the

exemption in the absence of evidence that it actually charged sales tax to its franchisees “for the

provision of these asserted taxable data processing services.”

       14
           Even if the test were applicable in these circumstances, we disagree with the State’s
assertion that 7-Eleven’s alleged purpose in acquiring the store software from Canmax is material
to the inquiry regarding the taxability of the software that 7-Eleven transferred to its franchisees.
The essence-of-the-transaction test is intended to determine the essence of what the purchaser
received. See Sharp v. Direct Res. for Print, Inc., 910 S.W.2d 535, 538 (Tex. App.—Austin 1995,
writ denied) (citing Statistical Tabulating, 549 S.W.2d at 169). Thus, in order to determine the
essence of the transaction between 7-Eleven and its franchisees, we must consider from the
franchisees’ perspective whether they received taxable data-processing services. As discussed
previously, the evidence establishes that such services enabled the franchisees to use the store
software to transmit electronic data to 7-Eleven, where it was processed.                        The
essence-of-the-transaction doctrine, even if applicable, would not support the State’s position.

                                                  23
               7-Eleven responds that the sale-for-resale exemption does not require that the reseller

actually collect sales tax on the taxable item, analogizing to resale transactions between contractors

and the federal government. See Day & Zimmerman, Inc. v. Calvert, 519 S.W.2d 106, 110-11

(Tex. 1975) (holding that contractor who transferred title of items to federal government could claim

sale-for-resale exemption even though ultimate resale would not actually be taxed, based on

constitutional prohibition against states taxing federal government); see also Ratheon E-Systems,
101 S.W.3d at 568, 570 (applying Day & Zimmerman analysis to contractor’s purchase of tangible

overhead materials allocated as indirect costs to contracts with federal government and holding that

purchase qualified for sale-for-resale exemption).

               We find 7-Eleven’s analogy to these cases to be apt. The sale-for-resale statute

simply requires that the service to which the transfer of tangible personal property is integral be a

taxable service—not that it actually be taxed in the particular instance in question. See Tex. Tax

Code Ann. § 151.006(a)(3). While it may be true that 7-Eleven will avoid paying sales tax on some

of the software that it purchased for transfer to its stores, this is the result mandated by the

plain language of the tax code exemption. The courts have long refused to enforce strained

readings of tax-exemption statutes for the purpose of preventing lost revenue to the State.

See, e.g., Schlusselberg v. Calvert, 443 S.W.2d 695, 697 (Tex. 1969) (holding that such claims

“should be addressed to the Legislature, because it is our opinion that the statute as written is too

plain to admit any construction other than that adopted by the trial court” and permitting application

of sale-for-resale exemption to goods sold out of state, despite Comptroller’s contention that such

                                                 24
an interpretation would render it “virtually impossible for him to determine whether the goods are

actually resold” and result in “the loss of much revenue”). We likewise decline to do so here.

        (4) Partial Conclusion: The State Was Not Entitled to Summary Judgment With Respect to
        Franchise Store Software

                In view of the foregoing, we hold that the trial court erred in granting the State’s

motion for summary judgment on the two grounds asserted to defeat 7-Eleven’s claims with respect

to the sale of Canmax store software to its franchise stores—i.e., that the sale-for-resale exemption

does not apply and that the “essence-of-the-transaction” test results in taxability because the Canmax

store software was geared toward automating 7-Eleven’s retail stores, not data-processing services.15

II. The State’s Entitlement to Summary Judgment: Out-of-State Company Stores

                With respect to the software sent to its out-of-state company stores, 7-Eleven argued

that because some of the Canmax store software was purchased to be resold to its out-of-state

franchisees, it was entitled to initially put all of the software into a “tax-free inventory.” Therefore,

7-Eleven reasoned, it could later remove the software that it intended to transfer to its out-of-state

        15
           In its motion for rehearing, the State for the first time contends that the fact that 7-Eleven
performed these data-processing services for its franchisees as a part of an “interrelated bundle” of
goods and services in exchange for a lump-sum royalty payment defeats 7-Eleven’s sale-for-resale
claim, based on the Comptroller’s longstanding policy that a royalty payment made under a franchise
agreement is not subject to tax. While acknowledging that “[t]he Comptroller failed to state her
policy relating to nontaxable royalty payments and their applicability to the undisputed facts,” the
State nonetheless urges us to “give deference to the Comptroller’s policy and conclude that the
lump-sum royalty payments made by the franchisees . . . are considered nontaxable payments for an
intangible.” Because the State did not present this argument to the trial court, however, we are
prohibited from affirming the summary judgment on this ground. Stiles v. Resolution Trust Corp.,
867 S.W.2d 24, 26 (Tex. 1993). We express no opinion on the merits of this argument.

                                                   25
company stores without having to pay Texas sales tax on those items, based on its interpretation of

Comptroller rule 3.285.16 Rule 3.285 provides:

        When an item is removed from a valid tax-free inventory for use in Texas, Texas
        sales tax is due. Texas sales tax is not due on items removed from a valid tax-free
        inventory for use outside the state. When an item purchased under a resale certificate
        is used for any purpose other than retention, demonstration, or display, the purchaser
        is liable for sales tax based on the fair market rental value of the item for the period
        of time used.

34 Tex. Admin. Code § 3.285(e)(1) (2009) (Tex. Comptroller of Pub. Accounts, Resale Certificate;

Sale for Resale) (emphasis added). According to 7-Eleven, the determinative issue with respect to

the copies of the store software that were transferred to its company stores is whether the software

was “used” in Texas, as “use” is defined in section 151.011 of the tax code. For software that was

installed in its company stores in Texas, 7-Eleven concedes that it owes sales tax. As to the software

that was transferred to its out-of-state company stores, however, 7-Eleven argues that no sales tax

is due because there was no use in Texas.

                The State sought summary judgment as to the software transferred to 7-Eleven’s

out-of-state company stores on two grounds: (1) 7-Eleven cannot prevail on its tax code section

        16
            The State does not take issue with 7-Eleven’s reading of this rule or its applicability to
these facts. The Comptroller’s tax-policy division expert, Nancy Prosser, testified that the
Comptroller, as a matter of practice, has interpreted the sale-for-resale statute to require that a vendor
only intend to sell or transfer at least some of the items that it purchased for its tax-free inventory;
it did not necessarily have to know that it would sell or transfer every single item that it put into its
tax-free inventory. See also, e.g., Tex. Comptroller of Pub. Accounts, STAR Document
No. 8908L0952E01 (effective Aug. 8, 1989) (“A tax-free inventory of out-of-state purchases may
be kept if separate records are maintained on the out-of-state purchases and it is not known whether
the items purchased will be used in Texas.”).

                                                   26
151.011(f) “claim” because that statute is “definitional and inapplicable to a sales tax transaction”;

or, in the alternative, (2) 7-Eleven failed to substantiate its claim that the software was transferred

out of state solely for use outside of Texas. We will address each argument in turn.

        (1) Tax Code Section 151.011(f)

                In general, “use” refers to “the exercise of a right or power incidental to the ownership

of tangible personal property over tangible personal property.”             See Tex. Tax Code Ann.

§ 151.011(a). Use does not include “the exercise of a right or power over or the keeping or retaining

of tangible personal property for the purpose of transporting the property outside the state for use

solely outside the state.” Id. § 151.011(f). It is on this exclusion from the definition of use that

7-Eleven relies in asserting that it did not use the store software in Texas when it removed the store

software from its tax-free inventory and transported it to its company stores outside of Texas.

                The State’s first ground for summary judgment with respect to the software for the

out-of-state company stores asserted that 7-Eleven was not entitled to craft “a sales-tax exemption”

from section 151.001(f), a statute that is “definitional” and “solely applicable to the use tax—not the

sales tax.” In the State’s view, it is not necessary to determine whether the taxpayer makes a use of

the property in Texas; so long as the taxpayer purchases the property from a Texas seller and takes

possession of the property in Texas, sales tax is due. “Use tax is not applicable if the purchaser paid

sales tax to a Texas retailer or owes sales tax to a Texas retailer who failed to collect it.” See 34 Tex.

Admin. Code § 3.346(c)(2) (2009) (Tex. Comptroller of Pub. Accounts, Use Tax); see also Tex.

Comptroller of Pub. Accounts, STAR Document No. 7712L0100A02 (effective Dec. 1, 1977)

(“When a sale is consummated between a Texas seller and his customer and the customer takes

                                                   27
possession of the items in Texas, the transaction is subject to sales tax; not use tax [sic].”).

According to the State, the Comptroller’s understanding that the definition of “use” is

immaterial to whether sales tax is due represents a long-standing, uniformly enforced Comptroller

policy that should be entitled to deference by this Court. See Sergeant Enters., Inc. v. Strayhorn,

112 S.W.3d 241, 250-51 (Tex. App.—Austin 2003, no pet.) (“The consistent construction by

an administrative agency charged with effectuating the policy of an enactment carries very

considerable weight.” (quoting Felix Frankfurter, Some Reflections on the Reading of Statutes,

47 Colum. L. Rev. 527, 543 (1947))).

               As noted above, there was no dispute before the trial court concerning whether

7-Eleven was entitled to and in fact did establish a tax-free inventory for the store software that it

purchased, some of which it intended to resell to its franchise stores. Accordingly, the only issue

before us is whether, upon removing the software intended for its company stores from its tax-free

inventory, 7-Eleven owed sales tax on those items. See 34 Tex. Admin. Code § 3.285 (providing

that when property is removed from tax-free inventory for use in Texas, Texas sales tax is due). In

deciding this question, we agree with 7-Eleven that the statutory definition of “use” is material

insofar as the plain language of the Comptroller’s own rule requires a determination of whether the

software was “used” in Texas. See id. We therefore hold that summary judgment in favor of the

State was improper on the basis that section 151.011(f) of the tax code is immaterial to whether the

Canmax software delivered to out-of-state company stores was taxable.

                                                 28
       (2) “Divergent Use”

               As an “alternative” basis for summary judgment, the State argued that 7-Eleven

“ha[d] not presented any evidence to show that the software was transported ‘outside the state for

use solely outside the state.’” Noting that 7-Eleven is statutorily required to keep records to

substantiate each claimed deduction or exclusion, see Tex. Tax Code Ann. § 151.025(a)(3), and that

the record is devoid of such evidence, the State maintained that it was entitled to judgment as a

matter of law. In a related argument, the State claimed that 7-Eleven had made a “divergent use”

of the store software by purchasing it tax-free and then using it for a non-exempt purpose.

               The “alternative” grounds raised in the State’s motion are not proper bases for a rule

166a(c) summary judgment. “When both parties move for summary judgment, each party must carry

its own burden and neither can prevail due to the other’s failure to meet its burden.” Tribble

& Stephens Co. v. RGM Constructors, L.P., 154 S.W.3d 639, 649 (Tex. App.—Houston [14th Dist.]

2004, pet. denied) (citing W.H.V., Inc. v. Associates Hous. Fin., LLC, 43 S.W.3d 83, 87-88

(Tex. App.—Dallas 2001, pet. denied)) (emphasis added). Accordingly, even if 7-Eleven failed to

establish as a matter of law that it was entitled to a sales-tax exemption for the software that it

transferred to its out-of-state company stores by conclusively showing that it did not “use” the

software in Texas or make a “divergent use” of the software, that failure did not, ipso facto, entitle

the State to summary judgment. See id. at 650.

                                                 29
        (3) Partial Conclusion: The State Was Not Entitled to Summary Judgment With Respect to
        Out-of-State Company Stores

                In light of the foregoing, we hold that the trial court erred in granting the State’s

motion for summary judgment as to 7-Eleven’s out-of-state company stores on the grounds asserted.

III. 7-Eleven’s Entitlement to Summary Judgment: Out-of-State Company Stores

                7-Eleven maintains, and we agree, that whether property is removed from a tax-free

inventory for “use” outside the state implicates the statutory definition of “use” found in section

151.011(f) of the tax code. Under that definition, any copies of the store software over which

7-Eleven exercised control solely for the purpose of transport out-of-state were not “used” in Texas.

See Tex. Tax Code Ann. § 151.011(f). Accordingly, to be entitled to summary judgment on

this issue, 7-Eleven had to conclusively prove that when it removed the software destined for its

out-of-state company stores from its tax-free inventory, it did not exercise a right or power over,

keep, or retain the software for any purpose other than to transport it “outside the state for use solely

outside the state.” See id. Furthermore, under the plain language of rule 3.285, 7-Eleven was also

required to conclusively establish that the software was not used for any purpose other than retention,

demonstration, or display.

                7-Eleven asserts that it met this burden, having produced uncontroverted evidence

that the store software was installed in 1,742 out-of-state company stores in Texas; therefore, it

argues, “proof of the number and type of stores and their locations outside the State of Texas proved

the number and location of store software copies that were used out-of-state.” 7-Eleven further

                                                   30
argues that the State failed to produce contraverting evidence showing that any of the store software

transported to 7-Eleven’s out-of-state company stores was used in Texas.

               We disagree with 7-Eleven that the mere fact that the store software was eventually

installed in 1,742 out-of-state company stores proves as a matter of law that such software was never

used in Texas. The record contains little, if any, evidence regarding what 7-Eleven did with the

software during the intervening period of time after it was removed from 7-Eleven’s tax-free

inventory and before it was installed in the out-of-state company stores. Rule 3.285 suggests that

tax liability accrues, at least, for the period of time that items taken from a tax-free inventory are

used “for any purpose other than retention, demonstration, or display” while the items are being held

for transfer or resale as an integral part of a taxable service.17 The record contains scant evidence

as to what was done with the store software after 7-Eleven took delivery of it and how it was actually

transferred to the stores. The attorneys for the parties indicated in their briefs and during oral

argument that copies of the store software were made, either by 7-Eleven or at 7-Eleven’s direction,

in Texas and installed on computers in Texas, and that these computers were then shipped to the

out-of-state company stores. According to the Comptroller, “use” occurred at the moment that the

software was installed on computers in Texas at 7-Eleven’s direction, regardless of whether the

computers loaded with the store software were intended to be shipped out of state to be “used” by

       17
           Although the rule refers specifically to items purchased under a resale certificate and the
record here does not conclusively establish that 7-Eleven used a resale certificate for its initial
purchase of the software from Canmax, neither party argues that rule 3.285 does not apply to the sale
at issue in this case.

                                                 31
the out-of-state store operators. But the present record does not conclusively prove or disprove use

in Texas.18

                We will not speculate as to how 7-Eleven might have used the original gold master

of the store software or how it disseminated the store software to its out-of-state company stores in

an effort to determine whether such conduct constitutes “use” for purposes of rule 3.285. To be

entitled to summary judgment, 7-Eleven had the burden to prove as a matter of law that it did not

use the store software in Texas when it removed the software from its tax-free inventory to be

transferred to its out-of-state company stores. We conclude that the present summary-judgment

record does not meet this burden. Because the summary-judgment record does not conclusively

establish that the store software for the out-of-state company stores was used in Texas or that it was

not used in Texas, we hold that neither party was entitled to summary judgment on this issue. We

overrule 7-Eleven’s issue in part as to the store software that was transferred to its out-of-state

company stores.

IV. 7-Eleven’s Entitlement to Summary Judgment: Franchise Stores

                In its motion for summary judgment, 7-Eleven asserted that, because it had shown

that its transfer of store software to its franchisees satisfied the definition of a sale for resale, it

       18
          In its motion for rehearing, the State argues for the first time that “[t]he record shows that
7-Eleven tested the Golden Masters for general compliance in its own Texas stores prior to any
copies being sent to the franchisees,” and that the Comptroller has long held that testing software
constitutes a taxable use, citing two Comptroller rulings that were not previously cited in its trial
court pleadings or appellate briefing. Although we are not permitted to address this heretofore
unasserted ground as a basis for affirming the State’s summary judgment, see Stiles, 867 S.W.2d at
26, we note that, on remand, such evidence would arguably be relevant in the trial court’s
determination of whether 7-Eleven’s activities constituted “use” of the software in Texas.

                                                  32
proved as a matter of law that its purchase of store software for its franchise stores qualified for the

sale-for-resale exemption under section 151.302 of the tax code. 7-Eleven then pointed to its

uncontroverted summary-judgment evidence, which established that the fair market value of the

Canmax store software that it transferred to its franchise stores was $2,148,928, thereby entitling it

to a sales-tax refund of $177,287. 7-Eleven further argued that, with respect to the copies of the

software that were sent to 7-Eleven’s out-of-state company stores, it conclusively established that

the software it removed from its tax-free inventory and shipped to its out-of-state company stores

was not “used” in Texas and were therefore exempt from Texas sales tax under Comptroller

rule 3.285. As discussed above, rule 3.285 provides that “Texas sales tax is not due on items

removed from a valid tax-free inventory for use outside the state.” 34 Tex. Admin. Code

§ 3.285(e)(1). “When an item purchased under a resale certificate is used for any purpose other than

retention, demonstration, or display, the purchaser is liable for sales tax based on the fair market

rental value of the item for the period of time used.” Id.

                We recognize that, in reviewing cross-motions for summary judgment when the trial

court has granted one motion and denied the other, we are to review the summary-judgment evidence

presented by both sides and determine all questions presented, rendering the judgment the trial court

should have rendered. See Texas Workers’ Comp. Comm’n, 136 S.W.3d at 648. Accordingly, in our

original opinion, we held that 7-Eleven was entitled to judgment as a matter of law as to software

sent to its franchisees, having conclusively shown that its purchase of store software for its

third-party franchise stores qualified for the sale-for-resale exemption. We now hold, however, in

light of the State’s motion for rehearing, that the interests of justice would best be served by

                                                  33
remanding the cause to the trial court for a fuller development of the potentially dispositive issues

that the State has raised. See Tex. R. App. P. 43.3(b).

IV. The State’s Motion for Rehearing

                In its motion for rehearing, the State argues for the first time that the software-

development charges for the Canmax store software cannot be allocated in the manner urged by

7-Eleven because the license agreement for the software “provides for a single charge for a single

license,” rather than a price per copy. The State maintains that the Comptroller’s “longstanding

and consistent policy” has been to treat the purchase of a single computer program

license—notwithstanding any right to make copies of the program—as the purchase of a single piece

of tangible personal property. The State further argues that this Court’s decision, by accepting

7-Eleven’s allocation theory, could give rise “to a constantly reducing tax liability as a taxpayer, over

time, continues to make more copies of its single computer program for use out of state.” As a

result, the State argues, 7-Eleven’s in-state use of any of the store software—including that which

it admittedly installed and used in its corporate stores in Texas—subjects the entire purchase of store

software to sales tax based on 7-Eleven’s divergent use. Thus, a threshold question arises as to

precisely what 7-Eleven purchased and whether that purchase could properly be allocated between

7-Eleven’s franchise and company stores.

                To accept the State’s position in its motion for rehearing would require us to abandon

the analytical framework that has informed this dispute at every stage of the litigation thus far, which

posits that the software used in 7-Eleven’s franchise stores can and should be treated differently from

the software used in its company stores. At no time before its motion for rehearing has the State

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argued that what 7-Eleven purchased was a single, indivisible item, the use of which by 7-Eleven’s

corporate offices and its company stores in Texas subjected the entire purchase to sales tax. Not

surprisingly, 7-Eleven responds to the State’s motion for rehearing by urging that we cannot consider

this argument on appeal, as it represents an entirely new basis for affirming the summary

judgment and relies on authorities that the State did not previously cite in its trial court pleadings or

appellate briefing.

                Like 7-Eleven, we are troubled by the fact that the State has never taken the position

during this years-long process that it now asserts on motion for rehearing. Yet we are also cognizant

that, by declaring that the State has waived its right to complain of this allocation, this Court’s

decision could create potentially confusing precedent in an unsettled area of the law based on a

record that is largely undeveloped as to these and other important questions now raised by the State.

We conclude, therefore, that the interests of justice require us to remand the cause for a

determination of these threshold issues raised by the State and, as necessary, any further proceedings

to resolve the fact issues regarding 7-Eleven’s alleged use of the store software before and after

removing it from its tax-free inventory. See Tex. R. App. P. 43.3(b); Mike Norgaard, LPC v. Pingel,

296 S.W.3d 284, 290 & n.39 (Tex. App.—Fort Worth 2009, no pet.); Scott Bader, Inc. v. Sandstone

Prods., Inc., 248 S.W.3d 802, 822 (Tex. App.—Houston [1st Dist.] 2008, pet. denied).

                                           CONCLUSION

                We reverse the trial court’s summary judgment in favor of the State and remand the

cause to the trial court for further proceedings consistent with this opinion.

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                                           J. Woodfin Jones, Chief Justice

Before Chief Justice Jones, Justices Puryear and Henson
  Concurring and Dissenting Opinion by Justice Henson

Reversed and Remanded on Motion for Rehearing

Filed: April 22, 2010

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