Texas: Purchases of Coin-operated Gaming Machines Not Exempt as Sale for Resale

A Texas appeals court recently addressed whether a taxpayer was entitled to a sales tax refund related to purchases of coin-operated gaming equipment used by patrons of its pizza restaurants. In addition to serving food and beverages, the taxpayer’s restaurants provided family fun entertainment through coin-operated machines, such as video games, skill games, and kiddie rides. Under Texas law, a sales and use tax exemption applies to sales for resale, which include sales of tangible personal property “for the purpose of transferring it … as an integral part of a taxable service.” The taxpayer argued that because it transferred the coin-operated machines to its customers as part of its provision of amusement services, its purchases of the coin-operated machines and component parts were exempt. The court disagreed, noting that “transfer” means “to make over or negotiate the possession or control of…” the transferred item. In the court’s view, the taxpayer did not provide its customers with possession or control over the gaming equipment. Although a customer might have some control while playing a game, the taxpayer controlled the volume, length of play time, and skill level of the gaming equipment. Customers were not allowed to change equipment settings, nor did they have access to the internal components of the equipment. Finally, the taxpayer’s employees were in charge of cleaning, maintaining, and repairing the machines and generally supervised a customer’s use of the equipment. As the taxpayer did not give possession or control of the coin-operated gaming equipment to its customers, the court concluded that it was not entitled to a sales tax refund. For more information on CEC Entertainment, Inc. v. Hegar, please contact Teddy Karcasinas at 214-840-2431.