Jessica M. Karmasek Mar. 28, 2013, 4:15pm

AUSTIN, Texas (Legal Newsline) -- The Texas Supreme Court this month ordered state Comptroller Susan Combs to refund hundreds of thousands of dollars in sales tax that a company paid on plush toy prizes used to stock its coin-operated amusement machines.

Roark Amusement & Vending LP's crane or "claw" machines were located in supermarkets, restaurants and shopping malls throughout Texas.

Roark sought a refund of the sales taxes it paid on the toys it purchased to stock its machines from Oct. 1, 2000 through Feb. 29, 2004. Combs had disputed that a state sales tax exemption applied.

However, the state Court of Appeals held that the toys were exempt from sales tax under the state tax code's sale-for-resale exemption.

The state's high court agreed in a ruling March 8, affirming the appeals court's judgment.

"The machines provide a taxable amusement service under sections 151.0028 and 151.0101, in that they provide for 'amusement, entertainment or recreation' under section 151.0028. The toys are subject to the sale-for-resale exemption because under section 151.006(3), the toys are 'tangible personal property' acquired by Roark 'for the purpose of transferring' the toys 'as an integral part of a taxable service,'" Justice Don Willett wrote for the court.

"Indeed, the toys are more than integral to the machines' amusement service -- they are indispensable."

Willett continued, "There would be no point (or profit) to the game -- and thus no game -- if customers had no chance of winning a toy. Roark contends in its principal brief, and the Comptroller does not dispute, that '[c][/c]ustomers would not pay to play an empty machine (i.e., they would not pay to move a crane's claw around an empty glass case), nor would they pay to play if the machines contained toys that were impossible to retrieve.'"

Austin-based Martens, Todd & Leonard, which represented Roark in the case, said this week that the company's victory may result in "significant" refunds for taxpayers who paid Texas sales tax on items they gave to customers with the services they provided.

The ruling also may result in these taxpayers paying no Texas sales tax on future purchases, the firm said in a statement.

"While the facts of Roark's case are narrow, the Texas Supreme Court's opinion has potential implications for large numbers of taxpayers," the firm said.

In its nine-page opinion, the court held that whether the taxpayer actually collects tax on its services doesn't matter to qualify for the exemption.

Martens, Todd & Leonard contend, as a result, the ruling may affect potential refund claims by hotels, government contractors, exempt entities service businesses, and agriculture and manufacturing services businesses.

The court's opinion also holds that a taxpayer doesn't need to provide the item every time it provides the service.

This, Martens, Todd & Leonard says, may affect life vests, floats and similar items provided to amusement park patrons; light bulbs, floor wax, toilet paper and similar items provided to janitorial service customers; and bowling balls and bowling shoes provided to bowling alley customers.

From Legal Newsline: Reach Jessica Karmasek by email at

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