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A Texas Court of Appeals has determined that a hospitality company’s purchases of hotel consumables, such as soap, shampoo, conditioner, mouthwash, shower caps, pens, and notepads (the “hotel consumables”), that were placed in the hotel room for the use of its guests, were entitled to the sale-for-resale exemption for Texas sales and use tax (DTWC Corp. v. Combs, Texas Court of Appeals, Third District, Austin, No. 03-10-008-CV, April 11, 2013). This ruling reverses the Comptroller’s long-held position that such hotel consumables are not resold to guests, but are instead used by the taxpayer and subject to sales tax. Based on this case, taxpayers purchasing hotel consumables should consider whether it would be beneficial to file a refund claim if they previously paid sales tax on such purchases.


Both parties stipulated to the facts of this case. DTWC Corporation, successor-in-interest to Red Lion Hotels, Inc. (“Red Lion”), operated a hotel in Austin, Texas. Red Lion charged each of its guests a set fee for overnight lodging, which was subject to state and local hotel-occupancy taxes. The cost of the hotel consumables was factored into the lodging fee. Guests who did not use or want the hotel consumables did not receive a reduced fee for foregoing the use of the hotel consumables. Red Lion stored the hotel consumables in a locked area on its hotel property until such items were needed to replace any hotel consumables used or taken by its guests.

Sale-for-resale exemption

Section 151.302(a) of the Texas Tax Code (the “Code”) provides for an exemption from sales tax for the “sale for resale of a taxable item.” For the tax periods at issue, a “sale for resale” was defined in Section 151.006(a)(1) of the Code to include a sale of “tangible personal property … to a purchaser who acquires the property … for the purpose of reselling it … in the normal course of business in the form or condition in which it is acquired.” A “sale” or “purchase” includes “a transfer of title or possession of tangible personal property” when “done or performed for consideration.” Section 151.005(1) of the Code.

Application of sale-for-resale exemption to hotel consumables

The Court determined that under a plain reading of the statute, Red Lion’s use of the hotel consumables qualifies for the sale-for-resale exemption. The Court stated that the hotel consumables were tangible personal property that were placed in the form or condition in which Red Lion acquired them in the hotel rooms for its guests to use, not use, or take, were included as part of the fee charged for such hotel room and were transferred to its guests in the normal course of Red Lion’s business.

The Comptroller made four unsuccessful arguments in support of its position that the hotel consumables did not qualify for the sale-for-resale exemption.

  1. The Comptroller argued that the purpose of such exemption was to avoid having the same goods subject to sales tax twice. In this case, the sale of a hotel room is subject to a hotel-occupancy tax, not a sales tax. The Court disagreed with this position, explaining that they are bound to apply the exemption the legislature has written. The Court stated that if the plain language of the sale-for-resale exemption applies to the taxpayer’s purchase of hotel consumables, then the Court must conclude that the taxpayer is entitled to this exemption regardless of whether the ultimate consumer pays sales tax on such items.
  2. The Comptroller argued that the hotel consumables were a gift because the hotel’s guests only paid for lodging, not the other incidentals associated with the room. The Court found this argument unpersuasive because the parties had stipulated that part of the fee charged for the lodging included the cost of the hotel consumables. Even in the absence of such stipulation, the Court noted that the undisputed evidence established that the cost of the hotel consumables was included as a factor in setting the room rate.
  3. The Comptroller argued that in order to be eligible for the sale-for-resale exemption, the taxpayer must be in the business of selling the hotel consumables. The Court disagreed, stating the sale-for-resale exemption only requires that the hotel consumables have been bought and resold in the normal course of Red Lion’s business. The Court explained that Red Lion’s business is to provide its guests with the type of overnight lodging its guests demand, which includes the provision of certain in-room amenities, such as the hotel consumables.
  4. The Comptroller argued that even if the sale-for-resale exemption applies, Red Lion is liable for at least some use tax because the hotel consumables bore Red Lion’s name and logo and were used by Red Lion as marketing tools. The Court disagreed, explaining that the hotel consumables were only used for the convenience of the guests and not for marketing purposes because Red Lion kept such hotel consumables in a locked storage room until they were placed in the hotel room, at which point, the guests had already agreed to stay at the hotel.


Status of the controversy

As of the date of this article, the docket for this case indicates that the Comptroller is planning to appeal this case to the Texas Supreme Court. Even if the Comptroller is unsuccessful in this litigation, it could take the position that the decision only applies prior to the amendment to the sale-for-resale exemption effective January 1, 2012, which provides that such exemption only applies to tangible personal property that is resold “with or as a taxable item” as defined under the sales and use tax laws. However, that position could also be challenged.



Click here for the link to the Court’s docket for the full text of this case.