Rent-A-Center, Inc. v. Hegar
2015 Tex. App. LEXIS 5865
| Tex. App. | 2015Background
- Rent-A-Center (RAC) operates rent-to-own showrooms selling furniture, electronics, appliances, and computers; all merchandise is offered for immediate cash/credit purchase, but most revenue derives from rental-purchase agreements.
- Rental-purchase agreements allow weekly/semimonthly/monthly prepayments, automatically renew each term, and convert to ownership if the customer completes required payments (average full term ~18 months; average time in system ~20 months).
- Customers can acquire items earlier via a 90-day “same as cash” option or an early-purchase option; returned/repossessed items are refurbished and resold.
- Ninety-seven percent of RAC’s merchandise is ultimately sold (accounting for ~90% of revenue); over 90% of RAC’s revenue in 2007 came from payments under rental-purchase agreements.
- Comptroller audited RAC’s 2008 franchise-tax return, reclassified RAC as a service (not retail) business, disallowed cost-of-goods-sold deduction, assessed a deficiency (~$1.07M). RAC paid under protest and sued for refund.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether RAC is “primarily engaged in retail trade” under Tax Code (measured by SIC Division G activities). | RAC: rental-purchase transactions are sales; majority revenue stems from retail sales activity, so RAC qualifies for 0.5% tax rate. | Comptroller: transactions are rentals (services); SEC filing labels revenue as "rentals and fees," so activity is not retail. | Court held RAC is primarily engaged in retail trade; rental-purchase activities are more like sales than leases and RAC is entitled to the 0.5% rate. |
| Whether form (labels in agreements/SEC filings) controls characterization of transactions. | RAC: substance controls over form; multiple facts show sales character. | Comptroller: terms like "rental," "lease," and SEC characterization indicate rental business. | Court held substance controls; labels not dispositive—undisputed facts show sale-like character. |
| Whether RAC is entitled to cost-of-goods-sold deduction as claimed (and whether federal depreciation reduces it). | RAC: no statute explicitly reduces COGS deduction by federal depreciation; entitled to claimed deduction. | Comptroller: disallowed COGS deduction (trial court did not decide specifics). | Court did not decide amount/limits of COGS deduction; remanded to trial court for factual determination. |
| Remedy/remand question. | RAC: refund of overpayment computed using 0.5% rate and determination of COGS deduction. | Comptroller: contested classification and deductions. | Court reversed trial court, rendered judgment RAC entitled to refund based on 0.5% rate, and remanded to determine refund amount and COGS issues. |
Key Cases Cited
- First Am. Title Ins. Co. v. Combs, 258 S.W.3d 627 (Tex. 2008) (statutory construction reviewed de novo; legislative intent from text)
- City of Rockwall v. Hughes, 246 S.W.3d 621 (Tex. 2008) (plain-meaning rule and statutory context)
- State v. $1,760.00 in U.S. Currency, 406 S.W.3d 177 (Tex. 2013) (choose definition consistent with statutory context)
- Destec Energy, Inc. v. Houston Lighting & Power Co., 966 S.W.2d 792 (Tex.App.-Austin 1998) (substance of transaction controls over form)
- Southgate Master Fund, L.L.C. v. United States, 659 F.3d 466 (5th Cir. 2011) (tax consequences depend on substance rather than form)
- Texas Utils. Elec. Co. v. City of Waco, 919 S.W.2d 436 (Tex.App.-Waco 1995) (when issue is legal, appellate court may render judgment rather than remand)