7-ELEVEN, INC., Appellant, v. Susan COMBS, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas, Appellees.
No. 03-08-00212-CV.
Court of Appeals of Texas, Austin.
April 22, 2010.
Rehearing Overruled May 19, 2010.
311 S.W.3d 676
Paul H. Masters, Assistant Attorney General, Austin, TX, for Appellees.
Before Chief Justice JONES, Justices PURYEAR and HENSON.
OPINION
J. WOODFIN JONES, Chief Justice.
We withdraw our opinion and judgment dated August 31, 2009, and substitute the following opinion in place of the earlier one.
Appellant 7-Eleven, Inc. brought suit against Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas (collectively, the “State“) seeking a partial refund of sales tax that the Comptroller assessed on 7-Eleven‘s purchase of financial software for its retail stores. The parties filed cross-motions for summary judgment; the trial court granted the State‘s motion and denied 7-Eleven‘s. On appeal, 7-Eleven asserts that it was entitled to recover taxes assessed on the portion of the sales price of the software that was (1) transferred to stores operated by third-party franchisees, all of which were outside of Texas, and (2) delivered to those 7-Eleven-operated stores (“company stores“) that were located outside of Texas. We will reverse the summary judgment in favor of the State and remand the cause to the trial court for further proceedings.
FACTUAL AND PROCEDURAL BACKGROUND
7-Eleven is a Texas corporation that operates retail convenience stores, and franchises others, throughout the United States. In 1993, 7-Eleven purchased a nonexclusive, perpetual license to “use, reproduce, and possess” custom computer software developed by Canmax Retail Systems, Inc. and designed to manage and automate 7-Eleven‘s stores. The Canmax software was developed and implemented in several phases. In the initial phase, “host software” was installed on 7-Eleven‘s corporate mainframe, referred to as the “host” computer, while “store software” was installed on the in-store computers. According to Paul Hanson, who managed 7-Eleven‘s Internal Audit Division during the relevant period, Canmax delivered separate “gold masters” of the host software and the store software. As Hanson explained in his deposition testimony, the host software permitted the corporate mainframe to communicate directly with the store computers, allowing the
Hanson testified extensively concerning the functionality and use of the Canmax software, both by the 7-Eleven corporate office and by the stores themselves. Hanson stated that the Canmax software was the “backbone” of 7-Eleven‘s financial records because it captured the data necessary to conduct and monitor sales and other store functions. The software‘s “data-capture” function replaced the system of manually submitting data from a store to 7-Eleven‘s corporate office on written forms. He also explained how 7-Eleven then used the software to perform “data-processing services” for the stores based on the information that was entered at the store level and transmitted electronically to the host computer.1 In one example, Hanson discussed the preparation of a payroll report, which would be generated by the host computer and provided to the stores on a weekly basis, showing the “gross to net pay calculation” for each employee during each pay period. In another example, Hanson explained how the Canmax store software could be used “as a tool to help control the receipts or cash in the store and assign that to individual shifts, to individual employees, to hold them accountable.” Such data, Hanson explained, would not necessarily be transmitted “up to the mainframe,” but rather would be used in “purely a store-level report to help the store manage its operation.”
Kathy Naumann, 7-Eleven‘s information systems manager during the relevant period, also testified by deposition about the Canmax software‘s functionality and how it permitted the store computers to interface with the corporate host computer. Referring specifically to phase one of the Canmax store software, Naumann stated that it “processed—collected the information for—and created the cash report” and allowed for “the gathering of timesheet data for payroll purposes, the gathering of gasoline inventory measurements, the gathering of gasoline delivery invoice information, the gathering of detail sales data for money orders and the gathering of transaction information for credit card sales.”
The next phase of the store software, according to Naumann, “ran on a scanning cash register” and fed information that it collected from the cash register to the in-store computer. She testified that this phase of the store software (referred to as “Pre-POS“) was installed only in franchise stores located outside of Texas; it was not installed on the host computer or at any company stores.
The final software phase relevant to this appeal, Phase 2B, included “scanning point-of-sale registers,” designed to replace non-scanning, Pre-POS software in the stores. The Phase 2B software‘s “key
The stores have in their store software their inventory items and the software allows them to place an order for each vendor for each merchandise item and then that order is uploaded to the host software and from there sent to the vendors and the CDCs [consolidated distribution centers] so that they can deliver that merchandise to the stores.
Like the Pre-POS software, the Phase 2B software was installed only in the stores, not at the host.2 By 1996, 7-Eleven had installed Canmax software at 286 company stores in Texas, 1,742 company stores outside of Texas, and 2,946 franchise stores. All of the franchise stores were outside of Texas.
Before installation of the Phase 2B store software was underway, the Comptroller audited 7-Eleven for sales-tax compliance for the period of April 1, 1993, through September 30, 1996. The auditor determined that the amount of the software-licensing fee attributable to the retail store software during the audit period was $3,628,230, and assessed sales tax on the store software in the amount of $299,328.98.3 7-Eleven filed a petition for a redetermination and obtained a hearing, see
The Administrative Hearings Section moved for rehearing, arguing that the resale exemption did not apply “because (1) the software was not purchased solely for resale, citing [tax code] section 151.006 (i.e., Petitioner also used the software in its company stores)” and “(2) there was no showing that the software was held in inventory for resale.” Based on this first ground, the Comptroller reversed her original decision, finding that because 7-Eleven‘s transfer of the software to its franchisees “was incidental to the real property rental,” the purchase was “specifically excluded from the resale exemption” by section 151.006(a)(2).
After paying the tax under the statutory protest procedures, 7-Eleven filed suit for a tax refund under chapter 112 of the tax code. See id.
7-Eleven moved for summary judgment, attaching to its motion, among other evidence, Hanson‘s calculation that 7-Eleven would be entitled to a refund of $282,118 in the event the court concluded that the copies of the software delivered to out-of-state company and franchise stores were not taxable.4
7-Eleven also attached a copy of a Store Franchise Agreement, which indicates that 7-Eleven provides data-processing services to its franchisees—including bookkeeping, payroll, and accounts payable—as part of the bundle of services, the license of 7-Eleven‘s service mark and proprietary products, and the lease of the store and equipment, for all of which the franchisees pay 7-Eleven a lump-sum monthly payment referred to as “the 7-Eleven Charge.” Regarding these services, the Store Franchise Agreement states:
If FRANCHISEE is not in breach of this Agreement, 7-ELEVEN shall: (i) provide Financial Summaries for FRANCHISEE for the Store prepared from the Bookkeeping Records in the form of an income statement and a balance sheet for each Accounting Period or any portion thereof as 7-ELEVEN may deem necessary and for each calendar year, payroll checks for FRANCHISEE‘s Store employees, draw checks, and merchandise reports; (ii) timely pay on behalf of FRANCHISEE, upon approval and submission to 7-ELEVEN, bank drafts and invoices for Purchases (as verified by vendor statements), bills for Operating Expenses, and the payroll for FRANCHISEE‘s Store employees; and (iii) assist FRANCHISEE in the preparation and filing of business tax reports and returns (except FRANCHISEE‘s income tax and related returns)
to the extent the information is available from the Bookkeeping Records.
The Store Franchise Agreement further provides:
FRANCHISEE shall prepare and furnish to 7-ELEVEN, on forms and at times acceptable to and as requested by 7-ELEVEN: (i) daily summaries of Purchases; (ii) daily reports of Receipts; (iii) weekly time and wage authorizations for FRANCHISEE‘s Store employees; (iv) all information requested by 7-ELEVEN regarding the vendors from which FRANCHISEE makes purchases; and (v) all such additional reports as 7-ELEVEN may require from time to time.
In his affidavit attached to 7-Eleven‘s motion for summary judgment, Hanson averred that the Canmax software was an integral part of the data-processing service provided by 7-Eleven “because it provided the method and the means” by which the franchisees recorded their financial information and transmitted it to the host computer for processing.
The State filed a cross-motion for summary judgment, asserting that the sale-for-resale exemption was not applicable to the software transferred to the franchise stores because the essence of that transaction “was a purchase of stores-automation software, not a purchase of software that is an integral part of data processing services.” Specifically, the State urged the following five grounds for summary judgment:
- the Canmax store software was purchased in Texas from a Texas seller, and therefore sales tax was due at the time of purchase;
- the sale-for-resale exemption does not apply “because only a small portion of the Canmax software can reasonably be characterized as an integral part of taxable data processing services” and because “7-Eleven derives a direct benefit on an ongoing basis from the Canmax software that is transferred to franchise stores“;
- 7-Eleven cannot prevail on its tax code section 151.011(f) “claim” because that statute is “definitional and inapplicable to a sales tax transaction” or, in the alternative, because 7-Eleven failed to substantiate its claim that the software was transferred out of state solely for use outside of Texas;
- the “essence-of-the-transaction” test results in taxability because the Canmax store software was geared toward automating 7-Eleven‘s retail stores, not data-processing services; and
- 7-Eleven‘s claims are barred by the doctrines of exhaustion of administrative remedies, ripeness, sovereign immunity, and limitations.5
The trial court granted the State‘s motion for summary judgment, denied 7-Eleven‘s motion, and ordered that the State retain the taxes at issue. 7-Eleven appeals, arguing by one issue that it is entitled to a partial refund of the taxes paid on the copies of the software transferred to third-party franchisees and those company stores located outside of Texas.
STANDARDS OF REVIEW
To be entitled to summary judgment, the movant must establish that no genuine issue of material fact exists and that he is entitled to judgment as a matter of law.
The issues raised in this appeal turn primarily on the construction of the tax code and the Comptroller‘s rules. Statutory construction is a question of law that we review de novo. See Bragg v. Edwards Aquifer Auth., 71 S.W.3d 729, 734 (Tex.2002). In construing statutes, we ascertain and give effect to the legislature‘s intent as expressed by the language of the statute. Id.; State v. Shumake, 199 S.W.3d 279, 284 (Tex.2006). We use definitions prescribed by the legislature and consider any technical or particular meaning that the words have acquired.
“We construe administrative rules, which have the same force as statutes, in the same manner as statutes.” Rodriguez v. Service Lloyds Ins. Co., 997 S.W.2d 248, 254 (Tex.1999). “Unless the rule is ambiguous, we follow the rule‘s clear language.” Id. We defer to an agency‘s interpretation of its own rule when the rule is vague or ambiguous, unless the administrative interpretation is “plainly erroneous or inconsistent with the regulation.” See id. at 254-55 (quoting Public Util. Comm‘n v. Gulf States Util. Co., 809 S.W.2d 201, 207 (Tex.1991)).
DISCUSSION
On appeal, 7-Eleven urges that the software transferred to third-party franchisees qualified for the sale-for-resale exemption. It further asserts that, because it intended to resell some of the Canmax store software to its franchisees, it was initially entitled to purchase all of the software—including the software that it ultimately transferred to its company stores in and outside of Texas—without paying sales tax by putting all of the software in a “tax-free inventory.” Thus, according to 7-Eleven, the issue regarding the software that it did not resell to its franchise stores (i.e., that it transferred to its company stores) is whether that software was used in Texas.6 We will address each argument in turn.
I. The State‘s Entitlement to Summary Judgment: Franchise Stores
(1) Sale-for-Resale Exemption
The purpose of the sale-for-resale exemption is to prevent double taxation. Sharp v. Clearview Cable TV, Inc., 960 S.W.2d 424, 426 (Tex.App.-Austin 1998, pet. denied) (“[T]he Tax Code recognizes that the same goods should not be taxed twice; only the ultimate owner of the goods should be burdened by the sales tax.“). Tax exemptions are to be strictly, but reasonably, construed against the taxpayer. Id.; see North Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804 S.W.2d 894, 899 (Tex.1991). An exemption cannot be raised by implication, but must affirmatively appear in the statute, and all doubts are resolved in favor of the taxing authority and against the claimant. Bullock v. National Bancshares Corp., 584 S.W.2d 268, 272 (Tex.1979).
Under the tax code, “sale for resale” includes a sale of “tangible personal property to a purchaser who acquires the property for the purpose of transferring it ... as an integral part of a taxable service.”
The tax code further provides that the Comptroller has exclusive jurisdiction to interpret the statute defining “taxable service.” See id.
7-Eleven argues that the record establishes that it performed data-processing services for its franchise stores. We agree. Pursuant to the Store Franchise Agreement, for example, 7-Eleven was required to compute and provide its franchisees financial summaries, merchandise reports, and payroll checks, all of which were based on and prepared from the store‘s bookkeeping records. In addition, the Store Franchise Agreement sets forth that 7-Eleven was required to assist its franchisee in the preparation and filing of business tax reports and returns, “to the extent the information is available from the Bookkeeping Records.” The bookkeeping records consist of data that is entered, transmitted, received, and processed using the Canmax system software. 7-Eleven thus argues that the Canmax software was an “integral part” of the data-processing services it provided because the software offered “the method and the means by which the franchisees recorded the financial information and transmitted it to 7-Eleven for processing.”
The State argues in response that the transfer of the Canmax software was not, in fact, integral to the data-processing services 7-Eleven provides to its franchisees because the evidence demonstrates that the true purpose of the software was to automate 7-Eleven‘s stores for 7-Eleven‘s own benefit. The State points to evidence that 7-Eleven‘s corporate divisions received copies of reports that were provided to the stores and that data collected using the store software was used by 7-Eleven in preparing its own tax returns, setting its gasoline prices, and performing corporate accounting and audit functions. According to the State, the “purpose” requirement of section 151.006 is not met because “7-Eleven‘s actual use of the Software clearly evidences a purchase for its own use, as opposed to a transfer of Software to a third party as part of a resale transaction.”8 In essence, the State argues that, in order for 7-Eleven‘s purchase of the software to qualify as a sale for resale under section 151.006, the transfer of the store software from 7-Eleven to its franchisees cannot have provided any “direct benefit” to 7-Eleven. We disagree.
In the first place, nothing in the statute indicates that the purchaser of tangible personal property who transfers it as an integral part of a taxable service may not obtain any benefit from the transaction. Neither the statute‘s plain text nor its
Moreover, even interpreting the statute to permit consideration of the benefits allegedly received by the parties to the transaction, we disagree that the statute contains a requirement that the recipient of the service be the sole benefiting party. Such a construction would impose on the party seeking eligibility for the sale-for-resale exemption an impractical burden, requiring a showing not only that the transfer of the property was integral to its provision of a taxable service, but also that the transferor of the property received no benefit from the transfer beyond receipt of the sales price. See
Here, even taking into account the benefits that 7-Eleven received,9 the summary-judgment record does not show that the effects of the store software were so one-sided in 7-Eleven‘s favor that its claim to have purchased the software as an integral part of its provision of data-processing services is merely pretense. On the contrary, the record shows that the franchisees derived a substantial actual benefit from the taxable services rendered by 7-Eleven. The evidence is undisputed that 7-Eleven used the store software to perform payroll and accounting functions for the franchisees; to store and manipulate the stores’ computerized data and information, including inventory data; to maintain records of store employee work time; and to compute and prepare the store employees’ payroll
The State further argues that 7-Eleven cannot avail itself of the sale-for-resale exemption because “only a small portion of the Canmax software can reasonably be characterized as an integral part of a taxable data processing service.” According to the State, some aspects of the store software—specifically Phase 2B—were “unrelated” to the performance of data-processing services. The record shows that Phase 2B was designed to permit the stores to upload their merchandise orders to the host computer, which processed and transmitted the order data to the vendors for the purpose of supplying merchandise to the stores. Naumann testified that Phase 2B included “transmission of order information” to 7-Eleven‘s consolidated distribution centers and vendors, as well as “sales trend information for the stores.”
We reject the State‘s argument for two reasons. First, as a matter of law, we do not construe the statute to require that the tangible personal property be committed solely to the performance of the taxable service in order for section 151.006(a)(3) to be satisfied. Rather, the statute is phrased in terms of whether the property is “an integral part of a taxable service.” See
(2) “Essence-of-the-Transaction” Test
In a separate but related argument, the State argued in its motion for summary judgment that 7-Eleven was not entitled to purchase the Canmax store software tax-free because the software purchase fails the judicially created “essence-of-the-transaction” test. According to the State, the store software was purchased not for the purpose of providing data-processing services for 7-Eleven‘s stores, but was instead done to automate
The essence-of-the-transaction test was developed to address situations involving a “mixed transaction” of both taxable and nontaxable elements. See, e.g., Bullock v. Statistical Tabulating Corp., 549 S.W.2d 166, 167 (Tex.1977); Rylander v. San Antonio SMSA Ltd. P‘ship, 11 S.W.3d 484, 487 (Tex.App.-Austin 2000, no pet.); Williams & Lee Scouting Serv. Inc. v. Calvert, 452 S.W.2d 789, 792 (Tex.Civ.App.-Austin 1970, writ ref‘d). In Williams & Lee, the case in which the essence-of-the-transaction test was first applied, the Comptroller assessed sales tax on printed reports produced by a company performing scouting services for oil companies.12 452 S.W.2d at 790. The printed materials summarized the oil and gas well data that the company gathered and furnished to its subscribers for a monthly charge, but the record showed that the same information was also communicated by telegraph and over the telephone, rather than in printed reports. Id. at 790-91. The scouting company challenged the tax assessment, arguing on appeal that “the essence of the transaction involved in this instance is the performance of a service for oil companies, namely, a scouting service.” Id. at 792. At that time, the sales tax had not been extended by the legislature to cover services. Id. Therefore, in order to determine whether the scouting reports were subject to sales tax, the Williams & Lee court focused its inquiry on what was really being sold—a scouting report, which consisted of information presented in a permanent, tangible form and was therefore taxable, or a service, which was not taxable. Id. The court held that because the value from the standpoint of the subscriber was in the information itself, regardless of what form the information took, the true transaction was the selling of a service and therefore was not subject to sales tax. Id. at 792-93.
Subsequently, courts have applied the essence-of-the-transaction test to other scenarios involving the bundling of a nontaxable service with a taxable sale or service. See, e.g., Statistical Tabulating, 549 S.W.2d at 167 (holding essence of transaction was nontaxable data-processing service, which was performed by translating raw data onto punch cards that customers fed into computer; court therefore held that transfer of punch cards was not taxable sale); San Antonio SMSA, 11 S.W.3d at 487 (holding that nontaxable engineering services bundled with sale of telecommunications equipment was not taxable); Comptroller of Pub. Accounts v. Austin Multiple Listing Serv., Inc., 723 S.W.2d 163, 165 (Tex.App.-Austin 1986, no writ) (holding essence of transaction was processing of real-estate data, rather than printing of weekly listing-service book).
As this Court explained in San Antonio SMSA, the essence-of-the-transaction test involves the following inquiry:
If the real object of a mixed transaction is the purchase of equipment which is taxable, and the service element is incident to that purchase, the entire transaction is taxable. On the other hand, if the essence of the transaction is the purchase of a nontaxable service, which
incidentally includes the purchase of some other service or equipment that is taxable, the entire transaction is nontaxable.
11 S.W.3d at 487 (citations omitted). Ultimately, this Court in San Antonio SMSA determined that the transaction at issue, which involved the performance of nontaxable engineering services as part of the taxable sale of telecommunications equipment, did not fall into either category because “each transaction is independently desired and independently provided.” Id. Therefore, the Court recognized a third category in which the two elements of a mixed transaction involving services and tangible property are ” ‘readily separable‘: ‘When there is a fixed and ascertainable relationship between the value of the article and the value of the services rendered, and each is a consequential element capable of a separate and distinct transaction, then the elements must be analyzed as separate transactions for tax purposes.’ ” Id. at 488 (quoting New England Tel. & Tel. Co. v. Clark, 624 A.2d 298 (R.I.1993)).
The transaction involved in the instant case conforms even less to the traditional essence-of-the-transaction inquiry. The issue here is not whether the “essence” of the 7-Eleven-franchisee transaction was a taxable sale or a nontaxable service, see Statistical Tabulating, 549 S.W.2d at 167; Austin Multiple Listing Serv., 723 S.W.2d at 165, or even whether we can logically “unbundle” the taxable and the nontaxable elements of a single transaction, as in San Antonio SMSA. Rather, both the tangible personal property and the services at issue in this appeal are taxable.13 Yet the State attempts to invoke the essence-of-the-transaction doctrine to show that any “[s]oftware that may have been transferred as an integral part of data processing services was merely ‘incident to’ the ‘basic purpose’ of this transaction.”
As we understand the State‘s argument, it is that the essence-of-the-transaction test proves that 7-Eleven‘s motivation for transferring the store software to its franchisees was to obtain a financial benefit for itself, not to transfer the software as an integral part of data-processing services provided to the franchisees. In other words, the State wants to use the test to show that 7-Eleven was not engaged in “a true resale transaction.” The State has cited no authority, and we have found none, indicating that the essence-of-the-transaction doctrine has ever been applied in this manner. We conclude that it does not apply here, and that the function of that test has effectively been incorporated into the definition of “sale for resale” regarding whether tangible personal property is “an integral part of a taxable service.” See
(3) Other Policy Considerations
7-Eleven responds that the sale-for-resale exemption does not require that the reseller actually collect sales tax on the taxable item, analogizing to resale transactions between contractors and the federal government. See Day & Zimmermann, Inc. v. Calvert, 519 S.W.2d 106, 110-11 (Tex.1975) (holding that contractor who transferred title of items to federal government could claim sale-for-resale exemption even though ultimate resale would not actually be taxed, based on constitutional prohibition against states taxing federal government); see also Raytheon E-Systems, 101 S.W.3d at 568, 570 (applying Day & Zimmermann analysis to contractor‘s purchase of tangible overhead materials allocated as indirect costs to contracts with federal government and holding that purchase qualified for sale-for-resale exemption).
We find 7-Eleven‘s analogy to these cases to be apt. The sale-for-resale statute simply requires that the service to which the transfer of tangible personal property is integral be a taxable service—not that it actually be taxed in the particular instance in question. See
(4) Partial Conclusion: The State Was Not Entitled to Summary Judgment With Respect to Franchise Store Software
In view of the foregoing, we hold that the trial court erred in granting the State‘s motion for summary judgment on the two grounds asserted to defeat 7-Eleven‘s claims with respect to the sale of Canmax store software to its franchise stores—i.e., that the sale-for-resale exemption does not apply and that the “essence-of-the-transaction” test results in taxability because the Canmax store software was geared toward automating 7-Eleven‘s retail stores, not data-processing services.15
II. The State‘s Entitlement to Summary Judgment: Out-of-State Company Stores
When an item is removed from a valid tax-free inventory for use in Texas, Texas sales tax is due. Texas sales tax is not due on items removed from a valid tax-free inventory for use outside the state. When an item purchased under a resale certificate is used for any purpose other than retention, demonstration, or display, the purchaser is liable for sales tax based on the fair market rental value of the item for the period of time used.
The State sought summary judgment as to the software transferred to 7-Eleven‘s out-of-state company stores on two grounds: (1) 7-Eleven cannot prevail on its tax code section 151.011(f) “claim” because that statute is “definitional and inapplicable to a sales tax transaction“; or, in the alternative, (2) 7-Eleven failed to substantiate its claim that the software was transferred out of state solely for use outside of Texas. We will address each argument in turn.
(1) Tax Code Section 151.011(f)
In general, “use” refers to “the exercise of a right or power incidental to the ownership of tangible personal property over tangible personal property.” See
The State‘s first ground for summary judgment with respect to the software for the out-of-state company stores asserted that 7-Eleven was not entitled to craft “a sales-tax exemption” from section 151.011(f), a statute that is “definitional” and “solely applicable to the use tax—not the sales tax.” In the State‘s view, it is not necessary to determine whether the taxpayer makes a use of the property in Texas; so long as the taxpayer purchases the property from a Texas seller and takes possession of the property in Texas, sales tax is due. “Use tax is not applicable if the purchaser paid sales tax to a Texas retailer or owes sales tax to a Texas retailer who failed to collect it.” See
As noted above, there was no dispute before the trial court concerning whether 7-Eleven was entitled to and in fact did establish a tax-free inventory for the store software that it purchased, some of which it intended to resell to its franchise stores. Accordingly, the only issue before us is whether, upon removing the software intended for its company stores from its tax-free inventory, 7-Eleven owed sales tax on those items. See
(2) “Divergent Use”
As an “alternative” basis for summary judgment, the State argued that 7-Eleven “ha[d] not presented any evidence to show that the software was transported ‘outside the state for use solely outside the state.’ ” Noting that 7-Eleven is statutorily re
The “alternative” grounds raised in the State‘s motion are not proper bases for a rule 166a(c) summary judgment. “When both parties move for summary judgment, each party must carry its own burden and neither can prevail due to the other‘s failure to meet its burden.” Tribble & Stephens Co. v. RGM Constructors, L.P., 154 S.W.3d 639, 649 (Tex.App.-Houston [14th Dist.] 2004, pet. denied) (citing W.H.V., Inc. v. Associates Hous. Fin., LLC, 43 S.W.3d 83, 87-88 (Tex.App.-Dallas 2001, pet. denied)) (emphasis added). Accordingly, even if 7-Eleven failed to establish as a matter of law that it was entitled to a sales-tax exemption for the software that it transferred to its out-of-state company stores by conclusively showing that it did not “use” the software in Texas or make a “divergent use” of the software, that failure did not, ipso facto, entitle the State to summary judgment. See id. at 650.
(3) Partial Conclusion: The State Was Not Entitled to Summary Judgment With Respect to Out-of-State Company Stores
In light of the foregoing, we hold that the trial court erred in granting the State‘s motion for summary judgment as to 7-Eleven‘s out-of-state company stores on the grounds asserted.
III. 7-Eleven‘s Entitlement to Summary Judgment: Out-of-State Company Stores
7-Eleven maintains, and we agree, that whether property is removed from a tax-free inventory for “use” outside the state implicates the statutory definition of “use” found in section 151.011(f) of the tax code. Under that definition, any copies of the store software over which 7-Eleven exercised control solely for the purpose of transport out-of-state were not “used” in Texas. See
7-Eleven asserts that it met this burden, having produced uncontroverted evidence that the store software was installed in 1,742 out-of-state company stores; therefore, it argues, “proof of the number and type of stores and their locations outside the State of Texas proved the number and location of store software copies that were used out-of-state.” 7-Eleven further argues that the State failed to produce controverting evidence showing that any of the store software transported to 7-Eleven‘s out-of-state company stores was used in Texas.
We disagree with 7-Eleven that the mere fact that the store software was eventually installed in 1,742 out-of-state company stores proves as a matter of law that such software was never used in Texas. The record contains little, if any, evidence regarding what 7-Eleven did with
We will not speculate as to how 7-Eleven might have used the original gold master of the store software or how it disseminated the store software to its out-of-state company stores in an effort to determine whether such conduct constitutes “use” for purposes of rule 3.285. To be entitled to summary judgment, 7-Eleven had the burden to prove as a matter of law that it did not use the store software in Texas when it removed the software from its tax-free inventory to be transferred to its out-of-state company stores. We conclude that the present summary-judgment record does not meet this burden. Because the summary-judgment record does not conclusively establish that the store software for the out-of-state company stores was used in Texas or that it was not used in Texas, we hold that neither party was entitled to summary judgment on this issue. We overrule 7-Eleven‘s issue in part as to the store software that was transferred to its out-of-state company stores.
IV. 7-Eleven‘s Entitlement to Summary Judgment: Franchise Stores
In its motion for summary judgment, 7-Eleven asserted that, because it had shown that its transfer of store software to its franchisees satisfied the definition of a sale for resale, it proved as a matter of law that its purchase of store software for its franchise stores qualified for the sale-for-resale exemption under section 151.302 of the tax code. 7-Eleven then pointed to its uncontroverted summary-judgment evidence,
We recognize that, in reviewing cross-motions for summary judgment when the trial court has granted one motion and denied the other, we are to review the summary-judgment evidence presented by both sides and determine all questions presented, rendering the judgment the trial court should have rendered. See Texas Workers’ Comp. Comm‘n, 136 S.W.3d at 648. Accordingly, in our original opinion, we held that 7-Eleven was entitled to judgment as a matter of law as to software sent to its franchisees, having conclusively shown that its purchase of store software for its third-party franchise stores qualified for the sale-for-resale exemption. We now hold, however, in light of the State‘s motion for rehearing, that the interests of justice would best be served by remanding the cause to the trial court for a fuller development of the potentially dispositive issues that the State has raised. See
V. The State‘s Motion for Rehearing
In its motion for rehearing, the State argues for the first time that the software-development charges for the Canmax store software cannot be allocated in the manner urged by 7-Eleven because the license agreement for the software “provides for a single charge for a single license,” rather than a price per copy. The State maintains that the Comptroller‘s “longstanding and consistent policy” has been to treat the purchase of a single computer program license—notwithstanding any right to make copies of the program—as the purchase of a single piece of tangible personal property. The State further argues that this Court‘s decision, by accepting 7-Eleven‘s allocation theory, could give rise “to a constantly reducing tax liability as a taxpayer, over time, continues to make more copies of its single computer program for use out of state.” As a result, the State argues, 7-Eleven‘s in-state use of any of the store software—including that which it admittedly installed and used in its corporate stores in Texas—subjects the entire purchase of store software to sales tax based on 7-Eleven‘s divergent use. Thus, a threshold question arises as to precisely what 7-Eleven purchased and whether that purchase could properly be allocated between 7-Eleven‘s franchise and company stores.
To accept the State‘s position in its motion for rehearing would require us to abandon the analytical framework that has informed this dispute at every stage of the litigation thus far, which posits that the software used in 7-Eleven‘s franchise stores can and should be treated differently from the software used in its company stores. At no time before its motion for rehearing has the State argued that what 7-Eleven purchased was a single, indivisible item, the use of which by 7-Eleven‘s
Like 7-Eleven, we are troubled by the fact that the State has never taken the position during this years-long process that it now asserts on motion for rehearing. Yet we are also cognizant that, by declaring that the State has waived its right to complain of this allocation, this Court‘s decision could create potentially confusing precedent in an unsettled area of the law based on a record that is largely undeveloped as to these and other important questions now raised by the State. We conclude, therefore, that the interests of justice require us to remand the cause for a determination of these threshold issues raised by the State and, as necessary, any further proceedings to resolve the fact issues regarding 7-Eleven‘s alleged use of the store software before and after removing it from its tax-free inventory. See
CONCLUSION
We reverse the trial court‘s summary judgment in favor of the State and remand the cause to the trial court for further proceedings consistent with this opinion.
Concurring and Dissenting Opinion by Justice HENSON.
DIANE M. HENSON, Justice, concurring & dissenting.
I join the majority‘s opinion on rehearing in all respects but one. The State argued for the first time in its motion for rehearing that the software-development charges at issue in this case cannot be allocated because they represent the purchase of a single piece of tangible personal property. Because I would hold that the State waived this issue by raising it for the first time in its motion for rehearing on appeal, I respectfully dissent from the majority‘s opinion remanding the issue to the trial court for further proceedings. Based on the record and the issues that are properly before us in this appeal, I would deny the motion for rehearing and leave in place our initial opinion holding that 7-Eleven is entitled to a refund for sales-tax amounts assessed on its purchase of Canmax store software for resale and delivery to its franchise stores, plus penalties and interest assessed as authorized by the tax code.
The State‘s new argument regarding allocation was not raised in the administrative proceeding, the summary-judgment proceedings in district court, its appellate briefs, or oral argument before this Court. At no point during any of these stages of the litigation did the State argue that the software-development charges cannot be allocated, despite the fact that all of the parties’ arguments were premised on the concept of allocation. It was not until after this Court issued its opinion that the State took the position that 7-Eleven‘s software-development charge should be characterized as “a single charge for a single license in the form of Golden Masters, not a price per copy.” In support of this position, the State cites the Comptroller‘s “longstanding and consistent policy” that “the purchase of a single license for a computer program for a single set price,
Furthermore, a party to an appeal is not entitled to raise new issues for the first time in a motion for rehearing. See E.F. Hutton & Co. v. Youngblood, 741 S.W.2d 363, 364 (Tex.1987) (per curiam) (op. on reh‘g) (holding that where party made argument for first time in motion for rehearing in court of appeals, “error, if any, was waived“). “[T]he sole purpose of a motion for rehearing is to provide the court an opportunity to correct any errors on issues already presented. A motion for rehearing does not afford a litigant an opportunity to raise new issues, especially after the case has been briefed, argued, and decided on other grounds.” Wentworth v. Meyer, 839 S.W.2d 766, 778 (Tex.1992) (Cornyn, J., concurring).
While the concern for establishing potentially confusing precedent in this case is understandable, this concern does not necessarily require a remand, as our holding could be expressly limited to the issues properly before us on appeal. Because I would not allow a party to start over in the trial court with a completely new legal theory after the case has been fully litigated and argued on appeal, I respectfully dissent from that portion of the majority opinion. I join the remainder of the opinion.1
Notes
All the Canmax software did was automate the capture of data that was already being captured manually. So, like, for instance, we‘ve spoken about the sales. So prior to the Canmax software, the stores would fill out a piece of paper called a cash report and send that piece of paper to an accounting office, and the accounting office would take that piece of paper and key that data directly into our mainframe computer. The Canmax software allowed the store operator—instead of filling out a piece of paper, he filled out a computer screen, if you will. So the store operator keyed the data directly into a computer, a computer that resided at the store, and then a host computer would poll that computer once a day and extract that data out of it and then upload it to this mainframe.
I agree with the remand of the issue regarding software transferred to franchise stores, and further acknowledge that even if the motion for rehearing had not been granted, the State would not be precluded from arguing its new legal theory on remand in connection with software transferred to franchise stores. See Hudson v. Wakefield, 711 S.W.2d 628, 631 (Tex.1986) (holding that if summary judgment is reversed and remanded, parties are not limited to theories asserted in original summary judgment at later trial on merits). I join in the remand of that issue only because, as we held in our original opinion, 7-Eleven has not shown on the current record that it was entitled to summary judgment. The new theory put forth by the State does not affect this holding.While it is clear from the summary-judgment evidence that the store software and the host software functioned in concert with one another, the record reveals that the reports and other processes that the State cites as evidence of a direct benefit to 7-Eleven were actually generated by the host software—a distinct product that was assessed a separate sales tax (which, as the parties acknowledged during oral argument, is being challenged in a separate proceeding). It is therefore unclear why the State, having separately valued and taxed the portions of the licensing fee attributable to the store software and the host software, appears now to conflate the two products, citing evidence in its brief showing how 7-Eleven used the host software for its own benefit as support for its argument that the store software was actually purchased for 7-Eleven‘s own use.