Combs v. Entertainment Publications, Inc.
| Decision Date | 12 June 2009 |
| Docket Number | No. 03-08-00474-CV.,03-08-00474-CV. |
| Citation | 292 S.W.3d 712 |
| Parties | Susan COMBS, Comptroller of Public Accounts of the State of Texas, Appellant v. ENTERTAINMENT PUBLICATIONS, INC., Appellee. |
| Court | Texas Court of Appeals |
William E. Storie, Assistant Attorney General, Austin, TX, for Appellant.
Carl R. Galant, McGinnis, Lochridge & Kilgore, LLP, Austin, TX, for Appellee.
Before Chief Justice JONES, Justices PURYEAR and HENSON.
Appellee Entertainment Publications, Inc. ("Entertainment") sued Susan Combs, Comptroller of Public Accounts of the State of Texas (the "Comptroller"), for declaratory and injunctive relief to prevent the Comptroller from implementing a new rule that would require Entertainment to collect and remit tax on the sales of products sold through school fundraising activities. The trial court denied the Comptroller's plea to the jurisdiction and granted a temporary injunction in favor of Entertainment, enjoining the Comptroller from implementing and enforcing a new rule governing the tax treatment of fundraising sales. In this interlocutory appeal, the Comptroller complains of the denial of her plea to the jurisdiction, see Tex. Civ. Prac. & Rem.Code Ann. § 51.014(a)(8) (West 2008), and the grant of the temporary injunction, see id. § 51.014(a)(4). The Comptroller argues that the policy statement Entertainment complains of is not a "rule" that may be challenged under the Administrative Procedures Act ("APA"), see Tex. Gov't Code Ann. §§ 2001.021-.041 (West 2008); that the court lacked jurisdiction to grant declaratory relief under the Uniform Declaratory Judgments Act ("UDJA"), see Tex. Civ. Prac. & Rem.Code Ann. §§ 37.001-.011 (West 2008); and that injunctive relief is improper. We will affirm the orders of the district court.
Entertainment is a brochure-fundraising firm that contracts with schools and related organizations, some tax-exempt, to sell merchandise and food products in order to raise funds for student groups. The fundraising products are sold by the school groups to third-party consumers using Entertainment's brochures and order forms at retail prices suggested by Entertainment in its catalogs. According to Entertainment, its initial sales to the school groups are separate transactions from the ultimate sales of items by the school groups to the end consumers. In Entertainment's view, this "two-sale transaction" system dictates that the school groups themselves are the actual "sellers" of goods for the following reasons:
The school [group] purchases sales inventory from a vendor [such as Entertainment] for a certain price (first transaction) and then resells the taxable items at its own profit or loss for a price the organization determines (second transaction).
The school [group] assumes the responsibility and risk.
The school [group] does not receive a commission on sales, nor does it share or split the proceeds with the vendor in any way.
Thus, Entertainment argues that the school groups, not Entertainment, are the "sellers" and therefore are responsible for collecting and remitting any sales tax due on the items sold to the end consumers. See Tex. Tax Code Ann. § 151.052(a)-(b) (West 2008) (). Furthermore, when the school groups claim an intention to resell the fundraising products, Entertainment maintains that, based on the "sale for resale" exemption in section 151.302 of the tax code, it is not responsible for collecting sales tax on its initial sales to the school groups. See id. § 151.302(a) (); see also id. § 151.006(a)(1) (). Accordingly, Entertainment asserts that it accepts resale or exemption certificates in lieu of charging sales tax to schools that claim an intention to resell the fundraising products. Only when schools do not provide a resale or exemption certificate does Entertainment charge sales tax, based on the "wholesale" price that schools pay Entertainment for the products.
In marketing itself to school groups, Entertainment relies on a further exemption in the tax code, which provides that a tax-exempt organization such as a school may hold two one-day, tax-free sales per year, at which the sale of an item priced $5,000 or less is exempted from sales tax. See id. § 151.310; 34 Tex. Admin. Code § 3.322(h)(2) (2008). Such sales are permissible, however, only if the school—not Entertainment—is regarded as the actual "seller" of the fundraising products. According to Entertainment, its business model "allows schools to utilize the tax advantages of the two-sale scenario" because the schools can resell the fundraising products without having to calculate the sales tax due on the items or collect sales tax from the end consumers.
The alternative to viewing these types of transactions as two distinct sales is to characterize them as a single sale, wherein the fundraising firm is the seller and the school or school group acts as the seller's agent. In these circumstances, the fundraising firm bears the responsibility of collecting and remitting sales tax on the products, which may not be sold tax-free during one of the school's tax-free sales days.
Entertainment asserts that it developed its understanding that the transactions at issue were two distinct sales from what it refers to as the Comptroller's "long-standing rule" stated in a 2007 letter ruling identified as Accession No. 200704926L. The so-called Factual Criteria Rule, as described in that letter,1 provided the following guidelines for determining whether the fundraising firm or the school organization was the "seller" for purposes of collecting sales tax:
The PTA is the seller when it purchases sales inventory from a vendor for a certain price (first transaction) and then resells the taxable items at its own profit or loss for a price the PTA determines (second transaction). The PTA assumes all responsibility and risk.
The PTA is the seller when it does not share/split the proceeds with the vendor/distributor.
. . . .
The PTA is not the seller when it takes orders for the vendor and receives a commission from the vendor, such as a share or split of the proceeds. This is true regardless of who is setting the sales price.
. . . .
Whether the payment, such as a check, is made to the PTA or the vendor may not be an indicator of the seller. For example, a check could be made to the PTA, but if the PTA is receiving a commission from a vendor, the PTA is not the seller.2
According to the testimony of the Comptroller's representative, this letter accurately stated, at that time, the Comptroller's policy as to brochure fundraising.
On March 18, 2008, the Comptroller sent a letter to the Executive Director of the Association of Fundraising Distributors and Suppliers (the "March 2008 letter"), stating the following:
The Comptroller's office has consistently held that sales will not qualify as one of a non-profit organization's tax-free sales days when a school group raises funds by acting as sales representatives or agent for a for-profit retailer. In these cases, the retailer is the seller of the goods.
The March 2008 letter, which was signed by the Comptroller, Susan Combs, went on to explain that her office had conducted a review of fundraising firms and found that a number of them had not been following the applicable statutes and guidelines her office had promulgated. The letter stated, "Our office has reviewed the situation and determined that fundraising firms should not be allowed to mischaracterize their relationships with the schools." Specifically, the Comptroller expressed concern that fundraising firms had been modifying their contracts with schools to "include language concerning sellers' responsibilities and recharacterizing commission payments as markup." As a result, "non-profit school groups would be forced to analyze and review each contract with its vendors to determine who is responsible for collecting and remitting sales tax and whether it must expend one of its tax-free sales days for the sales under that contract."
The March 2008 letter further stated that section 151.024 of the tax code had been "applied to direct marketing firms operating in Texas for several years." Section 151.024, entitled "Persons Who May Be Regarded As Retailers," provides:
If the comptroller determines that it is necessary for the efficient administration of this chapter to regard a salesman, representative, peddler, or canvasser as the agent of a dealer, distributor, supervisor, or employer under whom he operates or from whom he obtains the tangible personal property that he sells, whether or not the sale is made in his own behalf or for the dealer, distributor, supervisor, or employer, the comptroller may so regard the salesman, representative, peddler, or canvasser, and may regard the dealer, distributor, supervisor, or employer as a retailer or seller for purposes of this chapter.
Tax Code § 151.024. The March 2008 letter concluded, "For the efficient administration of the tax and to create certainty for the non-profits that tax would be collected and paid by the fundraising firm and not the school organization, we believe we need to utilize this section of the statute."
According to the Comptroller's witness, the effect of "utilizing" section 151.024 was to do away with the fundraising firm's ability On cross-examination, the Comptroller's representative further testified:
Q. But under what we call the old rule, you went through these factors and you could make a determination ...
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