United States

Texas: Fitness Club Not Entitled To Sale for Resale Exemption on Certain Purchases

Jun 27, 2016
From KPMG TaxWatch

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A Texas appeals court recently addressed whether certain of a health club’s purchases were exempt sales for resale.  The club requested a refund of sales and use tax on purchases of certain items used by health club members.  The Comptroller denied the requested refund, and the matter was appealed to a trial court. The lower court ruled that the resale exemption applied to the club’s purchases of towels, basketballs, and personal sanitation consumables (e.g., body wash, shampoo, and hand sanitizer).  However, purchases of exercise machines, weight racks, scales, and promotional flyers were not considered purchases for resale.  The taxpayer subsequently appealed the trial court’s ruling with respect to the items that were considered not eligible for the resale exemption.

Before the appeals court, the key question was whether the taxpayer purchased the items at issue for the purpose of "reselling" or "transferring" them to its members.  Certain of the taxpayer’s members testified that, because they paid membership dues, they "rented" the exercise equipment and that the equipment was repeatedly "transferred" from one member to another for short periods of time. The court, however, disagreed with this position and determined that the witnesses’ testimony was at odds with the taxpayer’s operations and membership agreements. In the court’s view, the membership agreements could not reasonably be construed as leases or rental agreements, nor could the taxpayer’s  making the equipment available to its members for use while at the gyms be construed as "transferring possession."  The taxpayer, the court concluded, merely provided access to and use of the exercise equipment— that may or may not be on site at the health club and functioning at any given time—under terms and conditions completely within its own discretion for a specified monthly fee.  The court concluded that the trial court did not err in determining that the taxpayer was not entitled to the resale exemption for the items at issue. Please contact David Davis at (214) 840-6791 or Chadron Woodfork at (713) 319-3846 with questions on Fitness Int’l LLC v. Hegar.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.