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Jamie C. Yesnowitz
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The Texas Court of Appeals recently upheld a District Court decision finding that a hotel operator’s purchases of certain consumables such as shampoo, toothpaste, and Styrofoam dishes do not qualify for the Texas resale exemption if they are held out to the public as free and not separately invoiced.1
The taxpayer, Alamo National Building Management, LP (“Alamo”), owns a hotel located in San Antonio, Texas. In operating the business, Alamo regularly purchases consumable items for use by guests including coffee, toilet paper, shampoo and cups, which are placed directly in guest rooms. Further, Alamo purchases other consumable items including razors, shaving cream, aspirin, toothpaste and toothbrushes which are kept behind the front desk and available only upon customer request.
Alamo does not explicitly charge hotel guests for the use of consumable items placed in its guest rooms. To recover these costs, Alamo includes $1.57 in each room rate, but does not separately state the charge on guest invoices. On its website, Alamo advertises that the “extras aren’t extra,” and the extras are “free.” Guests using a larger quantity of the consumable items are not charged a higher amount, and guests who choose not to use the items do not get a discount. For the consumable items available at the front desk upon request, however, Alamo charges customers a separately stated fee.
During the period from January 2015 through September 2016, all of the consumable items (both those placed in guest rooms and those available at the front desk) were purchased pursuant to a resale certificate, and no sales tax was remitted with respect to these purchases. Alamo did not invoice or collect sales tax from its customers on the consumables provided. However, Alamo eventually paid sales tax under protest on the consumable items placed in guest rooms before filing suit against the Comptroller seeking a refund. The trial court ruled in favor of the Comptroller and Alamo appealed the decision.
Court of Appeals analysis
The Court of Appeals considered whether Alamo was properly subject to tax with respect to the consumable items placed in guest rooms for customer use. Specifically, Alamo argued that: (i) the consumables qualified for the resale exemption;2
(ii) Alamo was not required to collect or remit sales tax from its guests on the resale of the hotel consumables; and (iii) the Comptroller’s rule requiring collection of hotel occupancy tax for the consumables was invalid.
Texas requires the collection of sales tax “on each sale of a taxable item,”3
which includes tangible personal property and taxable services.4
Texas provides a “sale for resale” exemption for purchases made with the intention of reselling the property.5
A sale for resale is defined to include a sale of “tangible personal property . . . to a purchaser who acquires the property . . . for the purpose of reselling it with or as a taxable item . . . in the normal course of business in the form or condition in which it is acquired or as an attachment to or integral part of other tangible personal property or taxable service.”6
In support of its position, Alamo cited DTWC Corp. v. Combs
in which a hotel operator taxpayer was granted a refund of sales tax paid for consumables placed in hotel rooms including soap and shampoo based on the plain meaning of the term “sale for resale.” The Court distinguished DTWC
from the present case, noting that both parties in DTWC
stipulated to the fact that the hotel operator charged an all-inclusive fee for the room and the consumables. In the instant case, there was no such stipulation and Alamo did not address this distinction. Instead, the Court determined that Alamo did not conclusively establish that the consumables were purchased with the intention of reselling them. To reach this end, the Court relied in part upon Alamo’s own advertising that “extras aren’t extra” and that the consumables at issue were considered “extras.” Therefore, the Court concluded that Alamo was not entitled to the resale exemption with respect to the consumables placed in guest rooms.8
Texas’ sales tax treatment of hotel consumables has resulted in several significant controversies. This decision clarifies that taxpayers must pay sales tax on their original purchases of items which are held out as “free” when provided to customers. Further, it provides direct evidence that advertising language should be scrutinized to consider possible unintended tax consequences.
A ruling addressing a similar dispute was issued in 2018 by the State Office of Administrative Hearings (SOAH).9
In that instance, a hotel operator taxpayer requested a refund of sales and use tax paid on the purchase of hotel consumables purchased for resale to guests (including both items placed in guest rooms and maintained at the front desk). However, the taxpayer was unable to establish that the cost of items kept at the front desk was ultimately included in the guest room charges. Thus, its refund request with respect to those items was denied. Notably, the SOAH also referenced the decision in DTWC
and stated that for consumables to qualify for resale, the hotel must prove that the property was actually transferred to the guests.
In another case focused on the resale exemption, the Texas Supreme Court ruled on its applicability to items available to customers in a crane operated amusement game.10
In that instance, the Court concluded that since the items were provided as part of a taxable service, even though that taxable service (amusement) was exempt, the items qualified for resale. A similar argument could be made with respect to hotel room rentals. In other words, since the hotel rental is a taxable service subject to hotel occupancy tax, the consumables in the hotel room should likewise qualify for the resale exemption. It will be interesting to see whether any taxpayers pursue this position which has not yet been tested in the courts.
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