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Texas Court of Appeals Finds Resale Exemption Applicable to Purchases of Hotel Consumables

Tax Development Jun 28, 2013

On April 11, 2013, the Texas Court of Appeals (“Court”) reversed the district court’s decision and held that items placed in hotel rooms for use by hotel guests such as soap, shampoo, conditioner, mouthwash, shower caps, pens, and notepads (“hotel consumables”) may be purchased exempt from sales tax under the resale exemption. DTWC Corp. v. Combs, No. 03-10-00801-CV (Tex. Ct. App. April 11, 2013).

The taxpayer, DTWC Corporation (“DTWC”), operates a hotel and charges guests a specific fee for overnight hotel accommodations. As part of the hotel accommodation, DTWC provides hotel consumables to its guests in their hotel rooms. Texas law exempts from sales and use tax the sale for resale of a taxable item. A “sale for resale” includes a sale of tangible personal property to a purchaser who acquires the property for the purpose of reselling it in the normal course of business in the form or condition in which it is acquired. Having paid sales tax on the purchase of hotel consumables, DTWC sought a refund arguing that these items were exempt as purchases for resale under Texas Tax Code §§ 151.302(a), 151.005(1), and 151.006(a)(1). The Texas Comptroller of Public Accounts (“Comptroller”) put forth multiple arguments as to why she believed DTWC was not entitled to the resale exemption for these items.

The Comptroller argued that the purpose of the resale exemption is to prevent an item from being twice subject to sales tax. Since the hotel consumables were subject to sales tax when they were purchased and the hotel occupancy tax later when a guest pays for a hotel room, the Comptroller argued that double taxation did not occur because sales tax was not charged twice. The Comptroller also argued that there was no actual resale of the hotel consumables to hotel guests. The Court disagreed. It determined that the plain language of the resale exemption applied because the taxpayer effectively resells the hotel consumables to its guests. Although sales tax on the hotel consumables is not imposed on the hotel guests, the cost of the hotel consumables is built into the room rate charged to hotel guests; therefore, the hotel consumables are effectively resold to the guests for consideration. The Court found it irrelevant that the hotel consumables are resold and taxed to guests under the hotel occupancy tax rather than the sales tax.

Additionally, the Comptroller argued that DTWC needed to be in the business of selling the hotel consumables in order for the resale exemption to apply. Again, the Court disagreed. Under the plain meaning of the statute, the purchase and resale of items must be in the normal course of the purchaser’s business. The statute does not require, as the Comptroller argued, that DTWC be in the business of selling the particular item purchased for resale. Since DTWC purchases and resells the hotel consumables in the normal course of its business (selling guest accommodations), the resale exemption applied.

Finally, the Comptroller argued that DTWC was subject to Texas use tax because it actually used the hotel consumables as marketing tools since each item had the hotel’s name and logo printed on it. Yet again, the Court disagreed with the Comptroller. The Taxpayer simply stored the hotel consumables in a locked storeroom—the hotel name and logo were not marketed to anybody. The hotel consumables are simply provided to guests for their use.

Finding in favor of DTWC, the Court held that hotel consumables may be purchased exempt from sales tax under the resale exemption. The holding in DTWC Corp. v. Combs represents an ongoing judicial trend of adhering to the plain meaning of the tax law and criticizing the Comptroller for forced and unreasonable interpretations of tax exemptions. Because the Comptroller did not file a petition for review with the Supreme Court of Texas by the June 27, 2013 deadline, the Court’s decision is final.