Court Case Summary: Plush Toy Prizes Used to Stock Coin-Operated Amusement Crane Machines May Qualify for Resale Exemption

Roark Amusement & Vending, L.P. v. Combs, et al., Cause No. D-1-GN-06-004725

Roark Amusement & Vending, L.P. (Roark) owns and leases coin-operated amusement crane machines that customers operate to try to grab a toy prize. Roark filed a refund claim for Texas sales and use tax paid under protest on its purchases of plush toys used in its coin-operated amusement crane machines, arguing that the plush toy purchases qualified for the sale for resale exemption.

Roark alleged that the toys it purchased for the machines should be exempt from sales tax because:

  • the toys were purchased for resale to the customers who operate the amusement machine;
  • the toys were purchased for resale as part of a taxable service; and
  • the toys were effectively resold to those customers who operated the machines because care, custody and control of the toys was transferred to those customers.

The Comptroller denied the refund request and Roark filed a protest suit in district court. The district court ruled for the Comptroller, but the Third Court of Appeals reversed the district court’s judgment for the Comptroller and rendered judgment for Roark. On March 8, 2013, the Texas Supreme Court upheld the Third Court of Appeals’ ruling for Roark, holding that Roark’s purchase of plush toys for its coin-operated amusement machines qualified for the sale for resale exemption.

The Supreme Court reasoned that, under the plain text of Tax Code Sections 151.006 and 151.302, Roark’s plush toys were resold to the customers and integral to the sale of a taxable amusement service because:

  • all of the toys were eventually transferred to customers who played the games; and
  • no one would play the games if there were no potential to win a prize.

The Court also explained that, even though services provided through coin-operated amusement crane machines were exempt from sales tax under Tax Code Section 151.335, they were not considered a non-taxable service. The amusement service was still a taxable service, even though it was exempted from sales and use tax.

As a result, the policy set out in Comptroller’s Decision Nos. 102,354 (2010) and 47,857 (2006), and in relevant Comptroller rules, will be revised and amended to conform to the Supreme Court’s decision.

*Originally published in Tax Policy News; a monthly newsletter about Texas tax policy at http://www.window.state.tx.us/taxinfo/taxpnw/tpn2013/tpn1304.html#issue7.