Texas Court of Appeals Denies Taxpayer Claim for Resale Exemption

The Texas Court of Appeals has ruled that Fitness International, LLC (Fitness / Appellant) has been denied part of its refund claim for alleged overpayment of sales taxes for certain items purchased for use by its health club members.

Under Texas law, taxpayers who purchase items under the “Sale for Resale” exemption in section 151.302 of the Tax Code are entitled to a refund of taxes paid in error on purchases that qualify. The Court rendered a final judgement allowing the exemption for some of the items claimed and disallowed other items. Items allowed were those items such as towels and basketballs, and the items disallowed included equipment such as cardio machines and weight racks. 

The Court examined the exemption in detail with relation to Fitness’ claim for refunds that it purchased items for resale in the performance of a taxable service. In Texas “amusement services” are defined as taxable services under Tax Code 151.0101. The ultimate question in this case was: “Did Fitness purchase the items at issue (1) for the purpose of “reselling” or “transferring” them to its members or (2) as an integral part of a taxable service?”

The Court examined the statutory text establishing the exemption that Fitness claimed and determined that there is no reasonable conclusion that “Fitness purchased the exercise equipment and other items at issue for the purpose of (1) reselling them, (2) transferring (i.e., legally conveying) them, (3) transferring legal possession of them, or (4) offering them for lease or rental.” The Texas Court of Appeals disagreed with the taxpayer in this case and ruled in favor of the Comptroller.

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