Sweepstakes are Taxable Amusement Service, Texas Court Rules

“We decline to hold that Sidetracked ‘clearly showed’ its entitlement to a sales- tax exemption for coin operated machines it admittedly illegally owned and operated,”  the Texas Court of Appeals, Third District noted in its opinion in the case Sidetracked Bar LLC v Hegar, flatly denying an exemption Sidetracked Bar requested for an event held in 2012. The opinion by the court, dated 29 December, 2022, said that even though a portion of the proceeds from a sweepstakes went to a non- profit, the company had received taxable admission fees on amusement services.

In 2012, Sidetracked Bar, a for- profit LLC that reported primary business activity of gambling/ gaming on both federal and state tax returns, approached a non-profit that supports veterans and proposed a sweepstakes which would grant the non- profit 10% of gross proceeds. Patrons would receive a card with 100 free entries upon paid entry to the event and could purchase additional entries. The patrons would then use validation terminals to instantly learn if they had won a cash prize or they could “play” a slot machine simulation on the terminal to learn the same. The proceeds from the event were deposited in the nonprofit’s bank account, then distributed to software vendors and Sidetracked Bar, except the 10 percent which was promised to the non-profit.

After the state comptroller of public accounts audited Sidetracked Bar for periods between July 2011 and December 2017, the comptroller’s office assessed sales tax, penalties, and interest, totaling about $400,000, which Sidetracked paid under protest. Sidetracked filed a refund suit for this total, claiming they qualified for an exemption because the charity provided these services or because the services were provided through coin-operated machines.

However, the court rejected those claims and upheld the initial assessment. First, the court noted, it was Sidetracked Bar who was in the business of providing these amusement services, not the charity. While Sidetracked Bar claimed the nonprofit had held the event, the court found that Sidetrack Bar contracted with the software vendors, employed the staff, owned or leased both the venue and equipment, and held responsibility for all expenses related to the event.  The “donations” Sidetracked was claiming exemption based on were, according to the court, taxable admission fees, since those fees were what gave patrons access to the facility and amusement services at issue. Further, patrons were charged for additional entries into the sweepstakes. Second, the sweepstakes was meant as a form of entertainment, a fact admitted by the owner of Sidetracked himself.  In addition to this, Sidetracked Bar did not have the necessary licenses for or pay occupation tax required for coin-operated machines on the machines used as validation terminals, negating the company’s claims of exemption based on coin- operated machines.

(Muse, Andrea. “Texas Court Rules Sweepstakes Are Taxable Amusement Service.” Tax News, Tax Articles and Information – Tax Notes, 9 Jan. 2023)

Posted on January 18, 2023