December was a bit of a slow month on the Texas tax front. Hopefully everyone was out of their respective offices and enjoying the holidays/resting up for the upcoming legislative session. Still, we got an interesting opinion from the Austin Court of Appeals on the sales and use tax treatment of certain sweepstakes offerings and a private letter ruling from the Comptroller on the application of sales and use tax to medical records retrieval services. Let's see what happened!

Court Cases

Sales Tax

Amusement Services

Sidetracked Bar, LLC v. Hegar, No. 03-21-00335-CV (Tex. App-Austin Dec. 29, 2022, no pet. h.)-The Texas Third Court of Appeals affirmed the trial court's summary judgment determining that the taxpayer in question wasn't entitled to a refund of sales tax that it had paid under protest to Comptroller, because taxpayer's provision of a sweepstakes constituted the sale of taxable amusement services and that taxpayer hadn't shown that it was entitled to any applicable exemption.

Taxpayer had argued that it was entitled to a refund, because it wasn't providing amusement services or, alternatively, that it qualified for an exemption either because a charity provided the amusement services or the services were provided through coin-operated machines.

The following facts were undisputed:

  • Taxpayer was a for-profit limited liability company that reported on its federal income tax returns that its "principal business activity" was "gambling activities" and that its "business activity" was "sweepstakes."
  • In 2012, the sole owner of taxpayer ("Owner") approached the commander of a nonprofit organization supporting veterans and proposed an arrangement whereby taxpayer would run a sweepstakes and give 10% of the proceeds to the nonprofit. Taxpayer and the nonprofit entered into a letter of intent that stated that the nonprofit would not be responsible for any expenses incurred by taxpayer and that neither party was committing to any financial obligation.
  • Taxpayer leased facilities in its name to run the sweepstakes, owned or leased the equipment used in the sweepstakes, and employed all necessary personnel.
  • When entering taxpayer's facilities, patrons would receive a magnetic card with 100 free entries to participate in the sweepstakes. Patrons could load additional entries on their card and continue to participate in the sweepstakes in exchange for "donations" paid to taxpayer.
  • Patrons could choose to reveal their entries by either instantly revealing them through "instant validation terminals" or by using an "entertainment validation terminal" that displayed a slot-machine gaming simulation that patrons could play by clicking a mouse.
  • The software on the validation terminals was developed and maintained by software vendors with whom taxpayer contracted and negotiated the prices for their services.
  • A patron with winning entries was eligible to receive cash prizes or sometimes to participate in a drawing where taxpayer would give away items.
  • At the end of each business day, taxpayer would deposit the day's proceeds into the nonprofit's bank account. Taxpayer would direct the nonprofit to pay the software vendors about 40% of the sweepstakes proceeds. The nonprofit would keep 10% of the proceeds and return about 50% of the proceeds to taxpayer.
  • Signs posted in taxpayer's facilities, which were drafted by taxpayer, thanked patrons for their "donations" to the nonprofit.
  • The nonprofit didn't take any action to promote the sweepstakes and none of its members needed to be present for the sweepstakes or had access to taxpayer's facilities outside of the sweepstakes operating hours.
  • Taxpayer didn't obtain any licenses or display the required decals for the terminals as "coin-operated machines" and didn't pay any occupation tax on these machines.
  • Owner admitted that taxpayer's aim with the sweepstakes was to provide entertainment value for patrons and that patrons were drawn to its facilities because of the entertainment value being offered.

The court of appeals determined the sweepstakes was an amusement service. The court noted that Owner admitted that the aim of the sweepstakes was to provide entertainment value and that the Tax Code defines "amusement services" as "the provision of amusement, entertainment, or recreation."1 The court also observed that the Comptroller has exclusive jurisdiction to interpret what's included in the term "taxable services," which includes amusement services.2 Thus, based on the undisputed evidence, the court held that the patrons' swiping of their magnetic cards at the validation terminals and playing slot machine games to discover whether any of their entries were winners constituted amusement. The court also determined that taxpayer, rather than the nonprofit, was the provider of the amusement service based on the undisputed facts, which indicated that taxpayer, and not the nonprofit, was responsible for virtually all aspects of the operation of the sweepstakes.

The court of appeals next turned to the question of whether taxpayer made any taxable sales of the amusement services that were provided. The court observed that the Tax Code defines the "sale" or "purchase" of amusement service in part as "the collection of an admission fee . . . . "3 The court noted that "admission fee" was not defined in the Tax Code. Looking to its plain and common meaning, the court construed the term to mean a payment in exchange for another's provision of amusement services. Because "donations" were required in order for patrons to continue participating in the sweepstakes, the "donations" were found to be taxable admission fees.

For the reasons stated above, the court of appeals further held that taxpayer was not entitled to an exemption, because the nonprofit wasn't the provider of the amusement services, let alone the "exclusive" provider of the services, as required for exemption.4 The court also rejected the taxpayer's argument that it was entitled to the exemption for coin-operated machines, because even though the validation terminal met the definition of "coin-operated machines," taxpayer admitted that it illegally owned and operated these machines.5 Finally, the court refused to countenance taxpayer's alternative argument that taxpayer shouldn't be taxed on that portion of the proceeds of the sweepstakes that it remitted to the nonprofit, because it was undisputed that taxpayer received all of the proceeds and taxpayer couldn't point to any provision that would exempt proceeds from taxable sales that were subsequently paid to other entities, including charities.

Notable Additions to the State Tax Automated Research (STAR) System

Sales and Use Tax

Medical Record Retrieval and Copy Fees

STAR Accession No. 202212003L (Dec. 2, 2022)-In this private letter ruling, the Comptroller ruled that a company that retrieved medical records for insurance companies and attorneys in connection with lawsuits didn't have to charge sales or use tax on its "custodian fee" or "authorization fee" but did have to charge sales or use tax on its "copy fee."

According to the letter, the "custodian fee" was a charge to reimburse the company for the amount that medical service providers charged the company to provide medical records. The Comptroller cited past guidance to the effect that charges by a medical service provider to copy medical records for a patient, a patient's authorized representative, or to provide records under subpoena are not taxable because they are part of a medical service provider's nontaxable professional service.6

The company's "authorization fee" was a charge for preparing requests for medical records from medical service providers, for reviewing the records produced to ensure compliance with the requests and regulations, and for transferring records to customers. The Comptroller observed that none of these activities were a taxable service under Tex. Tax Code § 151.0101(a) ("Taxable Services").

However, the company's "copy fee" was a charge for optical character recognition ("OCR"), electronic Bates labeling, bookmarking of records, providing additional copies of records in either hard copy form or on CDs or DVDs, and/or making copies of x-rays and other medical imaging. The Comptroller cited to guidance stating that OCR, electronic Bates labeling, and bookmarking of records involve data entry, compilation, and manipulation and therefore are taxable as data processing.7 In addition, the sale of additional copies of medical records, copies of x-rays and other medical imaging, and copies of CDs and DVDs were taxable sales of tangible personal property.8

Tax Collected Not Remitted

Comptroller's Decision No. 117,264 (2022)-The ALJ found that that a taxpayer that collected sales and use tax from a customer but didn't remit the tax to the Comptroller didn't establish error with regards to an assessment of tax collected not remitted. The taxpayer claimed that the tax was collected in error because the taxpayer and its customer had a joint venture and that it credited the tax back to its customer, the taxpayer but didn't provide any corroborating documentary evidence to establish these claims.9 The ALJ also found that the taxpayer didn't establish that the 50% additional penalty was unwarranted, because the overall error rate in the audit in question was over 44% and the taxpayer didn't provide a plausible explanation for this underreporting.10

Amusement Services and Sexually Oriented Business Fee

Comptroller's Decision Nos. 117,791, 117,792 (2022)-The ALJ determined that a sexually-oriented business's cover charges were charges for an amusement service and therefore subject to Texas sales or use tax.11 The ALJ also found that the business didn't show that there was any error in the auditor's estimated assessment of the sexually oriented business fee.12

Franchise Tax

Reliance on Past Audits

Comptroller's Decision No. 114,736 (2022)-The Administrative Law Judge ("ALJ") determined that a taxpayer claiming a refund of Texas franchise tax for 2012 and 2013 hadn't bet its burden of proof of showing that it had erroneously paid tax for those years merely by relying on the Comptroller's partial refund of franchise tax for 2014. The partial refund for 2014 came with the standard disclaimer that taxpayers can't rely on the result as approval of its tax reporting system, and the ALJ found that it was "well settled that taxpayers cannot rely on the results of one audit to determine the results of a subsequent examination."13

Officer Liability

Comptroller's Decision Nos. 117,662, 117,663, 117,664, 117,665 (2022)-The ALJ found that officers of a company whose corporate privileges were forfeited at various periods for failure to file franchise tax reports or pay franchise tax were liable for sales and use tax that the company for which the company was liable during those periods of forfeiture.14 The officers didn't provide any evidence to dispute the facts giving rise to personal liability. Moreover, the ALJ found that the officers couldn't challenge the underlying corporate liability unless they paid the liability and requested a refund within the applicable limitations period, which the officers failed to do.


1. Citing Tex. Tax Code § 151.0028(a) ("Amusement Services"); 34 Tex. Admin. Code § 3.298(a)(1) (Amusement Services) (defining "amusement services" as "[e]ntertainment, recreation, sport, pastime, diversion, or enjoyment that is a pleasurable occupation of the senses").

2. Citing Tex. Tax Code § 151.0101(b) ("Taxable Services").

3. Quoting id. § 151.005(3) ("Sale" or "Purchase").

4. Citing id. § 151.3101(a)(3) (Amusement Services Exemptions).

5. See Tex. Occ. Code ch. 2153.

6. STAR Accession No. 9605L1409B13 (May 13, 1996).

7. See Comptroller's Decision No. 103,099 (2010); STAR Accession No. 9401L1282B08 (Jan. 10, 1994); see also Tex. Tax Code § 151.0035(a) ("Data Processing Service") (defining a "data processing service" as including "word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation . . . .").

8. See Tex. Tax Code §§ 151.009 ("Tangible Personal Property") (defining "tangible personal property" as "personal property that can be seen, weighed, measured, felt, or touched or that is perceptible to the senses in any other manner . . . .", 151.010 (Taxable Item) (defining "taxable item" as including tangible personal property), 151.051 (Sales Tax Imposed) (imposing a sales tax on the sale of a taxable item in the state).

9. See 34 Tex. Admin. Code § 3.2(c) (Offsets and Application of Credits and Payments to Liabilities; Unjust Enrichment) (requiring that if amounts are collected as tax in transactions on which tax is not due, these amounts must be remitted to the state or refunded to the customers from whom they were collected, and documentary evidence must be retained establishing the transaction, the amount collected, the party from whom collected, the amount refunded, and the party to whom refund is made); see also Tex. Tax Code § 111.016(a) (Payment to the State of Tax Collections) ("Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected.").

10. See Tex. Tax. Code § 111.061(b) (Penalty on Delinquent Tax or Tax Reports) (imposing an additional penalty of 50% if it is determined that a failure to pay tax or file a report was a result of fraud or intent to waive tax).

11. See Tex. Tax Code §§ 151.0028 ("Amusement Services") (defining "amusement services" as including "the provision of amusement, entertainment, or recreation . . . ."), 151.0101(a)(1) ("Taxable Services") (including amusement services as taxable services); see also 34 Tex. Admin. Code § 3.298(a)(1)(F)(i) (Amusement Services) (including as amusement services cover charges for night clubs).

12. See Tex. Bus. & Com. Code § 102.052 (Fee Based on Admissions; Records") (imposing a fee on a sexually oriented business in an amount equal to $5 for each entry by each customer to the business and requiring the business to keep daily records of the number of customers admitted to the business); 34 Tex. Admin. Code § 3.722(d), (i) (Sexually Oriented Business Fee) (requiring the same).

13. Citing as examples Comptroller's Decision Nos. 117,420 (2021) and 104,832 (2011).

14. See Tex. Tax Code §§ 171.252(2) (Effects of Forfeiture), 171.255 (Liability of Director and Officers). For more information check out our blog post, Forfeiture and Reinstatement under the Texas Franchise Tax.

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