American Multi-Cinema, Inc.// Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas// Cross-Appellee, American Multi-Cinema, Inc. ( 2015 )

ACCEPTED
03-14-00397-CV
5567564
THIRD COURT OF APPEALS
AUSTIN, TEXAS
6/5/2015 3:02:35 PM
JEFFREY D. KYLE
CLERK
No. 03-14-00397-CV
____________________________________________________
FILED IN
In the Court of Appeals 3rd COURT OF APPEALS
AUSTIN, TEXAS
for the Third Judicial District 6/5/2015 3:02:35 PM
JEFFREY D. KYLE
Austin, Texas Clerk
____________________________________________________
American Multi-Cinema, Inc.,
Appellant/Cross-Appellee,
v.
Glenn Hegar, Comptroller of Public Accounts of the State of Texas, and
Ken Paxton, Attorney General of the State of Texas,
Appellees/Cross-Appellants.
____________________________________________________
On Appeal from the 200th Judicial District Court
Travis County, Texas
____________________________________________________
APPELLEES’/CROSS-APPELLANTS’
MOTION FOR REHEARING AND
FOR RECONSIDERATION EN BANC
____________________________________________________
KEN PAXTON CYNTHIA A. MORALES
Attorney General of Texas Assistant Attorney General
State Bar No. 14417420
CHARLES E. ROY
First Assistant Attorney General CHARLES K. ELDRED
Assistant Attorney General
JAMES E. DAVIS
Deputy Attorney General OFFICE OF THE ATTORNEY GENERAL
For Civil Litigation P.O. Box 12548
512-475-1743
ROBERT O’KEEFE 512-477-2348 (fax)
Division Chief cynthia.morales@texasattorneygeneral.gov
Financial Litigation, Tax, and
Charitable Trusts Division COUNSEL FOR APPELLEES/CROSS-APPELLANTS
The Court’s opinion made this case about much more than just the franchise
tax implications of exhibiting movies. Rehearing or reconsideration en banc should
be granted because the opinion’s construction of the statutory terms “tangible
personal property,” “goods sold,” and “sale,” throws into doubt a half-century of
established interpretation of Texas tax statutes, creates significant confusion in the
application of both franchise and sales tax law, and threatens the loss of billions of
dollars to the State.
ARGUMENT
Since 1961, the Texas Legislature has established a strict and careful
distinction between tangible personal property and services. This distinction has
been established in both the franchise and sale tax statutes since the taxes were
enacted. The Court’s broad construction of the term “tangible personal property” to
include any perceptible human experience, essentially extinguishes that distinction,
potentially converting the sales of most services into sales of tangible personal
property. The Court’s construction of the terms “goods sold” and “sale” also departs
significantly from traditional legal principles underlying the sales of goods,
potentially affecting not only the interpretation of state tax laws, but that of any state
law involving the sale of goods.
Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 1
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
I. THE COURT’S CONSTRUCTION OF THE TERM “TANGIBLE PERSONAL
PROPERTY” AFFECTS BOTH THE FRANCHISE TAX AND THE SALES AND USE
TAX.
Because the term “tangible personal property” is also used in Tax Code
Chapter 151 concerning the sales and use tax (“Chapter 151”), the construction of
this term implicates not only the calculation of costs of goods sold under the
franchise tax (“Chapter 171”), but also the scope and application of Chapter 151.
The use of identical language for the definition of “tangible personal property”
in Chapters 151 and 171, signals a legislative intent that this term have a consistent
meaning in state taxation. See Hegar v. Ryan LLC, No. 03-13-00400-CV, 2015
WL3393917, at *10 (Tex. App.—Austin April 30, 2015, no pet. h.). The relevant
language in Chapter 171 was enacted in 2006 and provides:
[“Tangible personal property” means] personal property that can be
seen, weighed, measured, felt, or touched, or that is perceptible to the
senses in any other manner[.]
TEX. TAX CODE §171.1012(a)(3)(A)(i). This language is identical to the first clause
of the relevant language in Chapter 151:
“Tangible personal property” means personal property that can be seen,
weighed, measured, felt, or touched or that is perceptible to the senses
in any other manner . . . [.]
TEX. TAX CODE §151.009. That portion of the sales and use tax definition of tangible
personal property is a long-standing one, existing in essentially the same form since
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the adoption of the sales and use tax in 1961. See Act of August 8, 1961, 57th Leg.,
1st C.S., ch. 24, art. I, §1, 1961 TEX. GEN. LAWS 71, 76.1
II. THE COURT’S OPINION EXPANDS THE DEFINITION OF “TANGIBLE
PERSONAL PROPERTY” TO INCLUDE ANY PERCEPTIBLE EXPERIENCE, AND
THE DEFINITION OF “SALE” TO NOT REQUIRE THE TRANSFER OF EITHER
POSSESSION OF OR TITLE TO A GOOD, CONTRARY TO LEGISLATIVE
INTENT AND TRADITIONAL LEGAL PRINCIPLES.
A. The Provision Of Entertainment Is A “Service,” Not The Sale Of
“Tangible Personal Property.”
1. The sale of tangible personal property and the sale of
services are treated distinctly under Section 171.1012,
consistent with the sales tax treatment of such sales.
Section 171.1012 clearly distinguishes between sellers of goods and sellers of
services, allowing a business that sells tangible personal property to make a
subtraction for costs of goods sold in calculating taxable margin, but not permitting
a business that sells services to claim a subtraction for the costs of providing services.
TEX. TAX CODE §§171.1012(a)(1), (a)(3)(A)(i), (a)(3)(B)(ii), (b). Services are
explicitly excluded from the definition of tangible personal property under the
franchise tax. TEX. TAX CODE §171.1012(a)(3)(B)(ii).
This distinction in the franchise tax is consistent with that found in the sales
tax. From the time of the creation of the sales and use tax in 1961, the legislature has
1
Art. 20.01(P): “Tangible personal property” means personal property which may be seen,
weighed, measured, felt, or touched or which is in any other manner perceptible to the senses.
Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 3
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
made a clear and strict distinction between tangible personal property and services.
See Act of August 8, 1961, 57th Leg., 1st C.S., ch. 24, art. I, §1, 1961 TEX. GEN.
LAWS 71, 76. (Art. 20.01(T); Art. 20.02). That distinction continues in the current
separate identification of taxable personal property and taxable services in the
definition of “taxable items,” and in the restriction of the application of the sales tax
to tangible personal property and only a limited number of specific services. See
TEX. TAX CODE §§151.010, 151.0101(a)(1)-(17).
The determination of whether a sale is of a service or of tangible personal
property is therefore fundamental to how the transaction and seller are treated under
both the sales tax and franchise tax laws.
2. At the time of the enactment of Section 171.1012, the
Legislature was aware of existing sales tax statutes that
define the provision of entertainment as a service, not the
sale of tangible personal property.
By 2006, it was well established that the provision of entertainment is a
service, not the sale of tangible personal property; a movie ticket is merely a license
for entry to an entertainment; and the sale of a movie ticket is the sale of an admission
document to an amusement service. It was against this legal landscape that Section
171.1012 was enacted.
Since 1984, the provision of a sight, sound, or other sensible entertainment
experience, has been classified as a taxable amusement service, notwithstanding the
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American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
already existing “seen . . . or that is perceptible to the senses in any other manner”
language of Tax Code section 151.009 defining tangible personal property. See TEX.
TAX CODE §§151.0101(a)(1) (listing taxable services; including amusement
services); 151.0028(a) (defining amusement services, in relevant part, as “the
provision of amusement, entertainment, or recreation”);2 151.009 (defining taxable
personal property). This classification of the provision of entertainment—which is
undoubtedly perceptible to the senses—as a service, indicates both legislative intent
and recognition that the provision of a perceptible experience is not a sale of
“personal property that can be seen . . . or that is perceptible to the senses in any
other manner.” Had that not been the case, the legislature’s enactment of statutes
imposing sales and use taxes on services that provide any type of sensory experience
would have been unnecessary.
This classification is also consistent with the traditional judicial treatment of
the sale of an admission ticket as a mere license providing only a right of entry. See
Jordan v. Concho Theaters, Inc., 160 S.W.2d 275, 276 (Tex. Civ. App.—El Paso
1941, no writ); Kelly v Dent Theater, 21 S.W.2d 592, 593 (Tex. Civ. App.—Waco
1929, no writ); see also Sells v. Six Flags over Texas, No. Civ.A.3:96–CV–1574–D,
2
Comptroller Rule 3.298(a)(1)(A), effective July 8, 1985, and adopted to administer Sections
151.0101(a)(1) and 151.0028, recognized motion pictures as amusements and movie theaters as
places that offer amusement services. 34 TEX. ADMIN. CODE § 3.298(a)(1)(A)(iv), (viii); 10 TEX.
REG. 2074–75, 2077 (1985).
Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 5
American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
1997 WL 527320, at *1 (N.D. Tex. Aug.14, 1997) (amusement park not strictly
liable under DTPA because it provided entertainment service and did not sell
product; park did not sell rides). Consistent with that legal principle, the sale of a
movie ticket is considered a transfer of title to, or possession of, an admission
document to an amusement service. TEX. TAX CODE §§151.005(3), 151.0028,
151.0101(a)(1).
It is presumed that the 2006 Legislature was aware of the existing law and
acted in reference to it when enacting Section 171.1012. See Acker v. Texas Water
Comm’n, 790 S.W.2d 299, 301 (Tex. 1990); Canal Ins. Co. v. Hopkins, 238 S.W.3d
549, 564–65 (Tex. App.—Tyler 2007, pet. denied) (legislature presumed to know
prior state of the law, including prior interpretation of term, and to have intended
that new law be subject to prior consistent definition). Nothing in Section
171.1012(a)(3)(A)(i) provides that “personal property that can be seen . . . or that is
perceptible to the senses in any other manner” is to have a more expansive
interpretation than the identical pre-existing language in Section 151.009.
Nor does any language in Section 171.1012(a) support extending the
definition of tangible personal property to include any experience or action that can
be seen, heard, felt, smelled, or tasted, regardless of whether it has historically been
viewed as a service, and in direct contravention of sale tax statutes classifying
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American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
experiences or actions that can be perceived by the senses, as services. See, e.g., TEX.
TAX CODE §§151.0028 (amusement services); 151.0033 (cable television services);
151.0035 (data processing service); 151.0038 (information service); 151.00394
(internet access services); 151.0045 (personal services); 151.0047 (real property
repair and remodeling); 151.0048 (real property services).
Chapter 171 itself describes as services the provision of experiences or actions
that can be perceived by the senses, including telecommunication services, legal
services, data processing services, accounting services, internet hosting services,
transportation services, health care services, and emergency medical services. See
TEX. TAX CODE §§171.002(c)(3), 171.1012(f), 171.106(g), 171.1011(v),
171.1011(p)(3), 171.083. The mere fact that something can be perceived by the
senses does not ipso facto render it “tangible personal property,” nor disqualify the
provision of such sensible experience or action from being a “service.”
3. AMC’s provision of entertainment is the sale of a service,
not the sale of tangible personal property.
The Court’s opinion holds that the evidence was legally sufficient to support
the trial court’s finding that AMC produces tangible personal property, and
concludes that AMC was therefore entitled to include its exhibition costs in its costs-
of-goods-sold subtraction. American Multi-Cinema, Inc. v. Hegar, 03-14-00397-
CV, 2015 WL 1967877, at *6 (Tex. App.—Austin April 30, 2015, no pet. h.)
Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 7
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(“opinion”). However, the opinion does not explicitly describe the tangible personal
property produced by AMC and sold to the moviegoers, instead implying that it is
either the: (1) film experience as perceived by the moviegoer (“the sights and
sounds” of the film); (2) AMC’s modified film reel consisting of the film, film
trailer, advertisements, and light and curtain cues; or (3) the actual film itself. Id. at
*5, *6, *9. The opinion rejects arguments that the movie exhibition was actually a
sale of a service or a sale of a license (intangible property), citing to Section
171.1012(a)(3)(A)(ii), which provides that films are tangible personal property.3
While the film itself is undoubtedly tangible personal property, as is AMC’s
modified film reel, neither is sold to the moviegoer, as discussed infra, and so their
production costs cannot be subtracted as costs of goods sold. See discussion infra.
3
Section 171.1012(a)(3)(A)(ii) provides:
[“Tangible personal property” means . . .] films, sound recordings, videotapes, live
and prerecorded television and radio programs, books, and other similar property
embodying words, ideas, concepts, images, or sound, without regard to the means
or methods of distribution or the medium in which the property is embodied, for
which, as costs are incurred in producing the property, it is intended or is reasonably
likely that any medium in which the property is embodied will be mass-distributed
by the creator or any one or more third parties in a form that is not substantially
altered[.]
TEX. TAX CODE §171.1012(a)(3)(A)(ii). This provision seems to be in response to earlier
arguments by theater companies—including AMC—to avoid paying a use tax by asserting that
theaters were not acquiring tangible personal property, but rather only the incorporeal right to
exhibit the film. See American Multi-Cinema, Inc. v. City of Westminster, 910 P.2d 64, 65
(Colorado App. 1995, cert. denied). These arguments have been uniformly rejected by various
state appellate courts, id., including this Court. Bullock v. ABC Interstate Theaters, Inc., 577
S.W.2d 337, 342 (Tex. Civ. App.—Austin 1977, writ ref’d n.r.e.).
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Moreover, Section 171.1012(a)(3)(A)(ii) does not convert the service of projecting
film images onto a screen for a patron’s entertainment into a sale of tangible personal
property because: (1) services are not tangible personal property; (2) AMC never
has ownership of the film;4 and (3) it never transfers any ownership rights in the
film to the moviegoer.5 See TEX. TAX CODE §§151.0028; 151.0101(a)(1);
171.1012(a)(3)(A)(ii); see also §§171.1012(a)(3)(B)(i); 171.1012(i).
The Court’s conclusion that a business produces tangible personal property
by producing a “film experience” or the “sights and sounds” experienced by the
moviegoer, effectively construes “tangible personal property” to include any sensory
experience. Under this construction, the provision of any amusement that can be
sensed—although explicitly classified as a taxable service under Section 151.0028—
is a sale of “tangible personal property.” If this construction stands, the provision for
consideration of any sight, sound, touch, smell, or taste experience—such as
professional sporting events, art exhibitions, and music concerts—presumptively
becomes a sale of tangible personal property.
4
AMC never owns the film it presents. DX4 at 2; DX5 at 6; DX6 at 6; DX7 at 2. Rather, it rents
films from film distributors; when a film is no longer making money, AMC returns it. RR.82-83,
86-87, 121-22, 126-28, 166. Moreover, AMC has no copyright in the films and is not allowed to
change the content of the films. RR.166; DX4 at 1; DX5 at 1; DX6 at 6; DX7 at 2.
5
It is illegal for AMC’s moviegoers to make copies of the films, and if caught doing so, the
moviegoer will be arrested. RR.74. AMC’s contracts with distributors provide that AMC will not
allow customers to make copies of the films. DX4 at 2; DX5 at 6-7; DX6 at 6; DX7 at 2.
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Further, because the definition of “tangible personal property” in Chapter 151
includes identical language to that construed by this Court, a provision of any
services that can be perceived by the senses—e.g., medical treatment, legal
representation, architectural services—would all be presumptively taxable as the
sale of tangible personal property, despite the legislature’s express limitation of sales
tax on services to seventeen specific categories.
Finally, the expansion of the definition of “tangible personal property” to
include anything that can be perceived through the senses will effectively result in
writing the exclusion for “services” out of Section 171.1012, and likely result in
traditional service providers claiming “costs of goods sold” for the costs of providing
services (e.g., examination rooms, legal offices, professional sports facilities), so
long as their services are perceptible to the senses.
Such a construction of tangible personal property all but erases the distinction
between the sale of tangible personal property and the sale of services—a distinction
that the legislature has long maintained in the sale and use tax and carried over to
the franchise tax. While the legislature may certainly choose to provide a narrow
exception to the general rule,6 the opinion’s expansive construction of “tangible
6
In 2013, the legislature granted movie theaters the ability to prospectively subtract movie
exhibition costs as cost-of-goods-sold. See TEX. TAX CODE §171.1012(t).
Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 10
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personal property” will affect the application of the sales and franchise taxes far
beyond the question of movie exhibitions, potentially cause billions of dollars of
losses to the public fisc,7 and obliterate the clear distinction between services and
tangible personal property that has been a part of Texas tax law for over fifty years.
B. No “Sale” Of Tangible Personal Property Takes Place When A
Moviegoer Purchases An Admission Ticket.
In order for a business to have “costs of goods sold,” a priori, it must sell
goods. “Goods” are defined in Section 171.1012 as “real or tangible personal
property sold in the ordinary course of business of a taxable entity.” TEX. TAX CODE
§171.1012(a)(1). While franchise tax statutes do not provide a definition of the word
“sold” or “sale,” the traditional legal definition of sale requires the transfer of
property or title for a price, and so includes as an element, property that is “capable
of being transferred.” BLACK’S LAW DICTIONARY (“Sale”) (10th edition, 2014). Thus
an actual transfer of possession of, or title to, property which is capable of being
transferred, is an inherent part of a sale of property.
This element of transfer of title or possession is also incorporated in the
definition of “sale” in Section 151.005, which provides in relevant part that a sale of
7
The Comptroller has estimated that the opinion’s construction of the term “tangible personal
property” could cost the State up to $6 billion from tax refunds and reduce the State’s annual
revenue by $1.5 billion. LETTER FROM GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS, TO
HON. GREG ABBOTT, GOVERNOR, HON. DAN PATRICK, LIEUTENANT GOVERNOR, AND JOSEPH R.
STRAUS, III, SPEAKER OF THE HOUSE, June 3, 2015, p.1.
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tangible personal property is a “transfer of title or possession of tangible personal
property” for consideration.8 TEX. TAX CODE § 151.005(1). By contrast, the sale of
a movie ticket is considered a transfer of title to or possession of a ticket for
admission to a taxable amusement service. Cf. TEX. TAX CODE §151.005(1) to
§151.005(3); see also §§151.0028, 151.0101(a)(1).
Yet, under the Court’s opinion, the sale of an admission ticket to an
entertainment—which is explicitly not a sale of tangible personal property under
sales tax statutes—is the sale of tangible personal property. Opinion at *6. In holding
that a theater has made a “sale” of “tangible personal property” by exhibiting a film,
the Court has advanced a definition of a “sale” that contravenes both traditional legal
principles and the definition of a sale in Section 151.005(1).
The opinion does not directly address the requirement that a transfer of title
to or possession of tangible personal property is necessary for a sale, other than to
note the lack of a “take-home” requirement in the definition of tangible personal
property. Opinion at *5. However, a “sale” of tangible personal property requires
that the buyer take physical or legal possession of the property so as to exercise the
8
Other subsections of Section 151.005 provide other methods of sale, but none would be
applicable to the issues in this appeal.
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rights of ownership, including the right of control, exclusive possession, disposal,
and taking the property where the buyer choses.
A moviegoer’s one-time experience of a movie’s sights and sounds is a
transitory perception created within the moviegoer as her eyes, ears, and mind
process the sights and sounds presented. Neither title nor possession of such
perception is ever owned by the theater nor could the theater transfer title or
possession of such perception/experience to the moviegoer.
Nor does a theater transfer either title to or possession of: (1) of the actual film
that it leases; (2) the modified film reel with trailers and advertisements displayed in
the theater; or (3) the actual images or sounds as displayed in the theater. The
moviegoer never receives possession of or title to any of these and enjoys no rights
of ownership as to any film reel or film images or sounds.9
Instead, the only transfer of title or possession is to an admission ticket, which
provides a license to enter the theater for a single viewing of a single film. Texas
sales tax law recognizes this as a sale of services, not the sale of tangible personal
property. TEX. TAX CODE §§151.005(3); 151.0028; 151.0101(a)(1). A movie theater
9
See footnote 5, supra.
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does not sell a “film” by selling tickets to a movie viewing any more than a museum
sells works of art by selling tickets to an art exhibit.10
The opinion’s decoupling of the “transfer of possession of or title to”
requirement from a “sale of tangible personal property,” would mean that any sort
of presentation, activity, or exhibition, where consideration was provided, could
constitute a sale of tangible personal property, even though no actual transfer of any
property takes place. This expansion of the term “sale” of property to include
situations where no actual possession of or title to any property is transferred would
be a significant departure from traditional legal principles underlying the definition
of “sale,” potentially affecting not only sales and franchise tax law, but other areas
of Texas law involving “sales.”
C. Other States Have Rejected The Contention That A Movie
Exhibition Is The Sale Of “Tangible Personal Property” To
Moviegoers.
Besides Texas, thirty-three states include the phrase “personal property that
can be seen, weighed, measured, felt, or touched or that is perceptible to the senses
10
The language of Section 171.1012(a)(3)(A)(ii) “without regard to the means or method of
distribution or the medium in which the property is embodied” does not alter this analysis. The
medium in which the films are embodied are reels, which are not mass distributed to the
moviegoers. Even considering, arguendo, the screen as the medium in which film images are
embodied, see Opinion at *6, that would not make the images tangible personal property, because:
images are not films; images are only temporarily present on the screen, not embodied in it; and
because the screen is not intended to be, nor is it reasonably likely that it will be, mass distributed.
See TEX. TAX CODE §§171.1012(a)(3)(A)(ii).
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in any other manner,” or one substantially similar to it, in their statutory definition
of tangible personal property for sales and/or use tax purposes.11 However, no other
state appellate court has ever held that the exhibition of a movie is a sale of tangible
personal property to moviegoers. Prior attempts by AMC and other movie theater
companies to convince other state appellate courts to adopt such a position have been
roundly rebuffed.
For example, the Vermont Supreme Court rejected an argument that a theater
was not subject to use tax because it was merely renting films for resale to
moviegoers. In re Merrill Theatre Corporation Sales and Use Tax, 138 Vt. 397, 400
(Vt. 1980). In its analysis, the court held that the “tangible personal property” was
the film itself, not the image produced by it, and that the moviegoer, while possibly
being “‘sold’ or ‘leased’ some right to view and enjoy the product of the film's
projection,” acquired “no right whatever to the tangible property itself.” Id.
11
ARIZ. REV. STAT. §40-5001(17); ARK. CODE §26-53-102(16A); CAL. REV. & TAX CODE §6016;
CONN GEN. STAT. §12-407(13); FL. STAT. §212.02(19); GA. CODE §48-8-2(37); ID. CODE §63-
3616(a); IND. CODE §6-2.5-1-27; IOWA CODE §423.1(59); KAN. STAT. §79-3602(pp); KY. REV.
STAT. §139.010(33); LA. REV. STAT. §47:301(16)(a); ME. REV. STAT. §1752(17); MI. COMP.
LAWS §205.92(k); MINN. STAT. §297A.61(Subd.10(a)); NEB. REV. STAT. §77-2701.39; NEV. REV.
STAT. §372.085; N.J. STAT. §54:32B-2(g); N.C. GEN. STAT. §105-164.3(46); N.D. CENT. CODE
§57-39.2-01(25); OHIO REV. CODE §5739.01(YY); 68 OK. STAT. §1352(YY); R.I. GEN. LAWS §44-
18-16; S.C. CODE §12-36-60; S.D. CODIFIED LAWS §10-45-1(14); TENN. CODE §67-6-102(89)(A);
UTAH CODE §59-12-102(123)(a)(i-ii); 32 VT. STAT. §9701(7); VA. CODE §58.1-602; REV. CODE
WASH. §82.08.010(7); W.VA. CODE §11-15B-2(60); WIS. STAT. §77.51(20); WY. STAT. §39-15-
101(ix).
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The court also noted that: “No transfer occurs to the patron in any reasonably
acceptable sense. He takes nothing into the theatre, neither does he take anything
out.” It rejected the contention that any “resale” of the film to the moviegoer took
place, holding that
Under the tortured logic which the taxpayer would have us apply here,
the light bulbs, the seats, and the projectors would be “used” by the
patrons, with the use constituting a “resale” and exempting their
original purchase from tax. Recoupment of cost undoubtedly enters into
the price paid by every consumer, including overhead expense. But
recoupment is not equivalent to resale.
Id. The court further rejected the argument that the film was part of a product created
by the theater and “consumed” by the moviegoer, stating
As we have already ruled, the product of the projection, whatever it
may be, is not “tangible personal property.” The film itself does not
become an ingredient or component part of the product; it remains
unchanged and unaffected. It is not consumed or destroyed; it does not
lose its identity.
Id. at 401.
AMC attempted to assert that a film exhibition is a resale of the film to the
moviegoers in Colorado. See American Multi-Cinema, Inc. v. City of Westminster,
910 P.2d 64, 66 (Colorado App. 1995, cert. denied). The court rejected AMC’s
argument, noting that moviegoers were not given, nor did they seek, possession of
the film. Id. at 67. Rather, they paid a fee in order “to be able to view images from
the film as they are projected onto the screen.” Id. The court concluded that “the
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American Multi-Cinema, Inc. v. Glenn Hegar, et al.; 03-14-00397-CV
charge made by plaintiff for the privilege of viewing such images does not constitute
a re-sale of the film; it is [AMC], not its customers, who is the ultimate ‘user’ of
such tangible personal property.” Id. at 67.
More recently, the same court re-affirmed City of Westminster, noting that the
“‘conversion’ to a ‘useable medium’ that may occur when a film's images are
projected onto a movie screen is merely the right to use the product as it was
intended, that is, to exhibit the film by projecting it onto a movie screen,” and
holding that “[m]ovie viewers are no more consumers of film reels than they are of
seats, screens, or projectors used in movie theaters.” Cinemark USA, Inc. v. Seest,
190 P.3d 793, 797, 799 (Colorado App. 2008).
III. CONCLUSION
The expansion of the term “tangible personal property” to include any sensory
experience effectively dismantles the legislature’s deliberate separation between
services and tangible personal property first established in Texas tax law over fifty
years ago. It further potentially renders a nullity not only the exception for services
in Section 171.1012(a)(3)(B)(ii), but also a host of sales tax statutes distinguishing
taxable personal property from services, and enumerating and describing taxable
services. See TEX. TAX CODE §§151.010, 151.0101(a)(1)-(17), 151.0028–.0048.
Such a broad construction would create widespread uncertainty regarding the
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application of both the sales tax and franchise tax, cause major difficulties in the
administration of taxes and the calculation of revenue estimates, and potentially
result in a massive loss of revenue to the State.
This Court should issue a new opinion to harmonize its construction of the
terms “tangible personal property,” “goods sold”, and “sale” with the general
legislative intent expressed in Chapters 151 and 171 and traditional legal principles.
This Court should also hold that AMC provides an amusement service, accessed
through the sale of a license embodied in a ticket; its provision of movie images and
sounds for a one-time experience is not the sale of tangible personal property; and it
may not deduct its movie exhibition costs at issue as costs of goods sold. See TEX.
TAX CODE §§151.0028; 151.005(3); 171.1012(a)(1), (a)(3)(B)(ii).
PRAYER
The Court should grant this motion for rehearing and motion for
reconsideration en banc.
Respectfully submitted,
KEN PAXTON
Attorney General
CHARLES E. ROY
First Assistant Attorney General
JAMES E. DAVIS
Deputy Attorney General for Civil Litigation
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ROBERT O’KEEFE
Division Chief
Financial Litigation, Tax, and
Charitable Trusts Division
/s/ Cynthia Morales
CYNTHIA A. MORALES
Attorney in Charge
State Bar No. 14417420
CHARLES K. ELDRED
State Bar No. 00793681
Financial Litigation, Tax, and
Charitable Trusts Division
P.O. Box 12548
Austin, Texas 78711-2548
512-475-1743
512-477-2348 (fax)
cynthia.morales@texasattorneygeneral.gov
charles.eldred@texasattorneygeneral.gov
ATTORNEYS FOR APPELLEES/CROSS-APPELLANTS,
GLENN HEGAR AND KEN PAXTON
CERTIFICATE OF COMPLIANCE
In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), this motion
contains 4418 words, excluding the portions of the motion exempted by Rule
9.4(i)(1), according to Word 2013.
/s/ Cynthia Morales
Cynthia A. Morales
Assistant Attorney General
Comptroller’s Motion for Rehearing and Reconsideration En Banc– Page 19
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CERTIFICATE OF SERVICE
I certify that a copy of this Appellees’/Cross-Appellants’ Motion for
Rehearing was served on opposing counsel, Doug Sigel,
doug.sigel@ryanlawllp.com, on June 5, 2015, via File & ServeXpress.
/s/ Cynthia Morales
Cynthia A. Morales
Assistant Attorney General
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