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CEC Entertainment, Inc. v. Hegar

Court of Appeals of Texas, Third District, Austin

December 5, 2019

CEC Entertainment, Inc., Appellant
v.
Glenn Hegar, Comptroller of Public Accounts of The State of Texas; and Ken Paxton, Attorney General of The State of Texas, Appellees

          FROM THE 126TH DISTRICT COURT OF TRAVIS COUNTY NO. D-1-GN-16-004422, THE HONORABLE ORLINDA NARANJO, JUDGE PRESIDING

          Before Chief Justice Rose, Justices Kelly and Smith

          MEMORANDUM OPINION

          Jeff Rose, Chief Justice

         This is a sales-tax refund case. CEC Entertainment, Inc. sued Glen Hegar, Comptroller of Public Accounts of The State of Texas, and Ken Paxton, Attorney General of The State of Texas (collectively, the "State") seeking refund, under the Tax Code's sale-for-resale exemption, of sales taxes that it paid on purchases of coin-operated gaming equipment for its Texas Chuck E. Cheese restaurants. The district court rendered a take-nothing judgment against CEC. On appeal, CEC raises three issues relating to the Tax Code's sale-for-resale exemption, the principal and dispositive issue being CEC's argument that it "transfers" gaming equipment to its customers while those customers are playing the games on the equipment. We will affirm the judgment.

         BACKGROUND

         The facts are undisputed, having been established below by stipulation. CEC owns and operates Chuck E. Cheese restaurants in Texas. These restaurants provide food, beverages, and entertainment. The entertainment includes coin-operated machines-video games, redemption games, skill games, kiddie rides, and big-attraction games-that, as the name suggests, restaurant patrons can play or ride by inserting a coin or token in the machines.

         Between March 2007 and April 2013, CEC purchased and paid sales taxes on coin-operated game equipment and component parts for use in its Texas restaurants. CEC later filed claims with the Comptroller for refund of those sales, arguing that its purchases of coin-operated machines and component parts are exempt from the imposition of the sales tax under the Tax Code's "sale for resale" exemption discussed below. The Comptroller disputed that the exemption applied and denied CEC's refund claims. CEC then timely filed the underlying suit in Travis County district court, seeking a refund of $2, 411, 522.89, plus statutory interest on that amount. After a bench trial, the district court rendered a take-nothing judgment against CEC. CEC perfected this appeal, asserting in three issues that its purchase of the coin-operated gaming equipment is exempt from sales tax under the Tax Code's sale-for-resale exemption.

         DISCUSSION

         Because the facts in this case are not in dispute, our decision turns on construction of various provisions of Chapter 151 of the Tax Code.[1] Section 151.051(a) imposes a sales tax "on each sale of a taxable item in this state." Tex. Tax Code § 151.051(a).[2] "'Taxable item' means tangible personal property and taxable services." Id. § 151.010. There is no dispute that the coin-operated gaming equipment and component parts are "tangible personal property," a term that captures "personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner." Id. § 151.009.

         Provisions found in subchapter H set forth numerous exemptions to the sales tax imposed by Chapter 151. Relevant here, section 151.302(a) states: "The sale for resale of a taxable item is exempted from the taxes imposed by this chapter." Id. § 151.302(a). "Sale for resale" includes, at issue here, the sale of tangible personal property to a purchaser who acquires the property:

• "for the purpose of reselling it . . . in the normal course of business . . . as an . . . integral part of . . . a taxable service," id. 151.006(a)(1) (defining "sale for resale) (emphasis added); or
• "for the purpose of transferring it . . . as an integral part of a taxable service," id. § 151.006(a)(3) (emphasis added).

         With regard to subsection 151.006(a)(1), the Tax Code does not define "resell," but it does define "sale or purchase" as "a transfer of title or possession of tangible personal property" "when done or performed for consideration." Id. § 151.005. "Transfer" is not defined in the Tax Code.

         CEC argues that reading these provisions together-i.e., subsections 151.006(a)(1)'s and (3)'s descriptions of "sale for resale" and section 151.005's definition of "sale or purchase"-an item is exempt from the sales tax under the sale-for-resale exemption if the item is "transferred" to a downstream consumer as an integral part of a service. CEC argues in its first issue that it is entitled to the sale-for-resale exemption because it "transfers" the ...


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