Texas Exempts Software Transferred to Out-of-State Franchise Stores

A taxpayer, who operates retail convenience stores (company stores) and franchises others to third parties (franchise stores), was entitled to a partial refund of sales tax paid on its purchase of financial software for its out-of-state stores. The taxpayer contended that the software was used to provide the franchise stores data processing services like payroll and should therefore qualify for the resale exemption. The Court agreed that the transfer of the software to the franchise stores would qualify for the resale exemption because a “sale for resale” includes the sale of tangible personal property to a purchaser who acquires the property for the purpose of transferring it as an integral part of a taxable service. The State argued that the taxpayer should not be allowed the resale exemption because the taxpayer cannot derive any direct benefit and must show evidence that tax was actually charged to the franchise stores. Both arguments were rejected because the resale exemption statute does not restrict a taxpayer from obtaining benefit when tangible personal property is transferred as an integral part of a taxable service. In addition, the statute does not require that the reseller actually collect sales tax on the taxable item, noting the resale transactions that occur between contractors and the federal government.

As far as the software transferred to company stores out-of-state, neither the state nor the taxpayer was granted a summary judgment in its favor. Both parties were unable to establish what happened to the software between the time it was removed from the tax-free inventory to the time it was installed in an out-of-state location. Evidence that the software was eventually installed out-of-state was not proof that it was never used in Texas. Therefore, this portion of the case was remanded to the trail court for further proceedings. (7-Eleven, Inc v. Combs, Texas Court of Appeals, Third District, No. 03-08-00212-CGV, August 31, 2009)

Posted on October 5, 2009