Texas Sales tax / Use Tax: Retailer's software transfer to out-of-state franchisees qualifies for resale exemption

7-Eleven, Inc. v. Comptroller , Tex. Ct. App. (8/31/09). A Texas Court of Appeals held that a retailer's purchase of financial software was eligible for the State's resale exemption on the portion of the price that was transferred to stores operated by third-party franchisees, because the software was supplied to the franchisees as an integral part of the retailer's provided taxable data-processing services. The comptroller unsuccessfully argued that the retailer's software transfer to the franchisees did not constitute a "resale," because the true purpose (i.e. the "essence-of-the-transaction") of the software transfer was to automate the retailer's stores for its own benefit. The Court explained that there is nothing in the State's resale exemption statute indicating that the purchaser of tangible personal property that subsequently transfers it as an integral part of a taxable service cannot obtain any benefit from the transaction. So long as the purchaser's intent in acquiring the property is to transfer it as an integral part of a taxable service, the resale exemption applies.

Additionally, the Court explained that the resale exemption only requires that the service to which the transfer of tangible personal property is integral be a "taxable service" under Texas law - not that it actually be taxed in another jurisdiction. In the case at hand, the third-party franchisees were all located outside of Texas, and it was unclear from the facts whether the retailer's subsequently provided data-processing services were actually taxed in the out-of-state locations.

As to the portion of software that was transferred to the retailer's own out-of-state company stores, the Court held that the retailer may be eligible for exemption on the basis that such software was not used in Texas given that Texas sales tax is not due on items removed from a "valid tax-free inventory" for use outside Texas. In this case, the software was deemed placed into tax-free inventory upon purchase, because a portion was purchased for resale to the retailer's out-of-state franchisees. Accordingly, on this issue, the Court remanded the case to conclusively establish on a factual basis whether the software for the out-of-state company stores was used within or outside of Texas after removal from inventory.