News and Insights

Texas Supreme Court Affirms Resale Exemption for “Plush” Items

Tax Development Mar 08, 2013

In a new decision styled Combs v. Roark Amusement & Vending, L.P., No. 11-0261 (Tex. – March 8, 2013), the Texas Supreme Court (“Court”) has determined that the resale exemption applies to purchases of plush toys used in coin-operated amusement machines. This decision affirms an earlier decision of the Austin-based Third Court of Appeals. Click here to read the decision.

Roark Amusement & Vending, L.P. (“Roark”) owns coin-operated amusement machines of the type commonly found in grocery stores, restaurants, and shopping malls. The machines consist of a glass tank filled with plush toys with a suspended mechanical claw. By inserting coins into these machines, customers may activate and control the claw to pick up and move a plush toy to a dispensing area from which successful customers receive toys.

Texas law exempts from sales and use tax tangible property or taxable services that will be resold as an integral part of a taxable service. Roark claimed this resale exemption on the purchase of plush toys to stock the machines.

Unlike amusement services generally, coin-operated amusement services are exempt from Texas sales and use tax. In addition, only customers who “win” the game will actually receive a plush toy. For these reasons, the Comptroller argued that Roark owed tax on the plush toys.

The Court firmly rejected the Comptroller’s contentions. First, the Court agreed with Roark that coin-operated amusement services are “taxable” within the meaning of the resale exemption. It does not matter that such services are elsewhere exempted from the tax. Furthermore, the Court observed that the object of the game is to “win” a plush toy; otherwise, customers would not play. Therefore, the plush toys are personal property that is “integral” to the performance of the taxable service.

Roark Amusement & Vending is one of the most significant tax decisions to emerge from the Texas Supreme Court in recent years. It admonishes the Comptroller to avoid strained and unreasonable interpretations of tax exemptions. It expressly states that the courts (and the Comptroller) may not impose “extra-statutory” requirements and may not “[revise] the statute under the guise of interpreting it.” Finally, it affirms the bedrock principle that “the Comptroller cannot through rulemaking impose taxes that are not due under the Tax Code…”