Texas Court Addresses Application of the Sale for Resale Exemption to Taxable Services

May 5, 2020

Providers of taxable services may be able to avoid sales tax by claiming the “sale for resale” exemption for certain purchases of tangible personal property used in the business, but it is important to understand the scope of that exemption.

By: Betsy Tuck, SALT Manager

One of the more well-known sales tax principles is the “sale for resale” exemption, which exempts the sale of tangible personal property or taxable services that will be resold by the purchaser to another party. The purpose of this exemption is to ensure that sales tax is imposed only on the purchase of such items by the ultimate consumer or end user. As such, providers of non-taxable services are generally viewed as the consumers of tangible personal property purchased and used as part of performing a service. For example, a lawyer will pay sales tax on the purchase of printer paper, even though that paper may be provided to a client for whom the lawyer has drafted a will.

However, when a company is in the business of selling a service that is subject to sales tax, the application of the sale or resale exemption is more complex and may vary by state. Can a seller of taxable services claim a sale for resale exemption on its purchase of tangible personal property?  A recent Texas Court of Appeals decision offers insight into this issue.[1]

Gold’s Texas Holdings Group (“Gold’s”), sells health club memberships, which are subject to sales tax in Texas.[2] Gold’s purchased and paid sales tax on items for its clubs, and later filed suit for a refund for the sales and use tax paid on various items purchased from July 1, 2007 to August 31, 2010.

The items were divided by the parties and court into three categories:

  1. Large equipment – Examples include cardio machines, Pilates equipment, and locker room equipment.
  2. Small equipment – Examples include fitness balls and kids’ club supplies.
  3. Locker room supplies – Examples include toilet paper and body wash.[3]

Texas provides a sale for resale exemption that 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.”[4]  However, for the exemption to apply, “the care, custody, and control of the tangible personal property [must be] transferred to the purchaser of the services.”[5]

Applying those rules, the Court denied the exemption for the large equipment. Based on the language in the membership agreement that each Gold’s members must sign, the Court did not find that the “care, custody and control” of the large equipment is “transferred” to the purchaser of the service. The agreement states that Gold’s “reserves the right to add, eliminate, or alter any program, equipment, or furniture or fixture when deemed necessary or desirable in its sole and absolute discretion” and that membership “does not confer on Member any ownership interest in Gold’s Gym or any of its property.” In addition, Gold’s sets the hours of operation.  Thus, the Court determined that while members can use and access equipment as part of the membership, Gold’s did not show that it transferred possession or control.

As for the small equipment, the Court decision was split. It denied the exemption for small equipment such as free weights and fitness balls, applying similar reasoning as used for the large equipment. The members, while allowed to use the small equipment during their time at the club, were not allowed to remove the items from the premises and were governed by their membership agreements, which included additional restrictions such as not dropping weights or using chalk

However,  the Court did allow the sale for resale exemption on some of the small equipment supplies for the gym’s kids club such as crayons and stickers, which the club allowed the children to take home with them.

A state may have different rules regarding the application of a sale for resale exemption, particularly with regard to a business that provides a taxable services  Aprio’s SALT team is experienced with these sales for resale rules and can assist you to ensure that you are minimizing the amount of sales tax paid. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the  Aprio  SALT Newsletter.

Contact Betsy Tuck, SALT Manager at betsy.tuck@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the April 2020 SALT Newsletter.

[1] Texas vs. Gold’s Texas Holdings Group, No. 03-19-00121-CV (Tex. Ct. of App., 3rd Dist., February 28, 2020).

[2] Texas subjects these services to tax as “amusement services,” which are defined to include “membership in a private club or organization that provides entertainment, recreational, sports, dining, or social facilities to its members.  See Texas Tax Code Ann. §§ 151.0101(a)(1) and 151.0028(b); 34 Tex. Admin. Code § 3.298(a)(1)(D).

[3] These items were not at issue in this appeal since neither party challenged the lower court’s ruling that these items qualified for the sale for resale exemption.

[4] Texas Tax Code Ann. § 151.006(a)(3).

[5] Texas Tax Code Ann. § 151.302(b).

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