For Texas sales tax, is a restaurant's monthly charge for tabletop ordering devices a taxable equipment rental or a nontaxable service, and are patron fees for premium content on those devices taxable?

Plain-English summary

A casual-dining restaurant chain contracts with a vendor for touchscreen tabletop devices — with attached card readers — placed at every table, letting patrons view the menu, order, pay, and (for a fee) access premium content like games, videos, news, sports, and music. The restaurant pays the vendor a monthly per-unit charge, labeled a "service fee" in the contract. The restaurant collects the premium-content fees from patrons and splits any excess over the monthly charge with the vendor. The restaurant asked how Texas taxes (1) its own monthly payments to the vendor, and (2) the patron premium-content fees.

The Comptroller ruled both charges are taxable, on two different legal theories:

• The restaurant's monthly device charge is a taxable equipment rental, despite the contract calling it a "service fee." Under the "essence of the transaction" test from Combs v. Chevron (Tex. App.—Austin 2010), the question is what the customer primarily wanted — here, the restaurant primarily wanted the physical devices at its tables to facilitate ordering and payment. Any content-formatting or upload services the vendor performs are incidental to that core equipment rental, not the essence of the deal, so labeling the charge a "service fee" doesn't change its taxable character as a TPP rental.
• Patron premium-content fees are taxable amusement services. Games, videos, news, sports, and music access fits the statutory definition of "amusement, entertainment, or recreation," which is a taxable service — regardless of the fact that the content happens to be delivered through a device the restaurant is separately renting.

What this means for you

Businesses labeling equipment charges as "service fees"

A contract label doesn't control the tax outcome. If what you're really paying for is the physical use of a piece of equipment — and any bundled services are incidental to that — expect the Comptroller (and courts, per Combs v. Chevron) to tax it as a TPP rental regardless of how the contract describes the charge.

Restaurants and retailers offering paid in-store content or entertainment

Charging customers to access games, videos, or other entertainment content — even through equipment you're renting for an unrelated primary purpose (order-taking, payment) — creates a separate taxable amusement-service revenue stream that needs its own sales tax collection and remittance, distinct from your equipment rental costs.

Vendors and franchisors structuring device programs

If you want a bundled hardware-plus-service offering to be taxed as a service rather than equipment rental, the contract and actual customer expectations need to show the service, not the hardware, as what the customer is primarily buying — incidental services riding along with equipment possession won't change the tax character.

Common questions

Q: Does calling a charge a "service fee" in a contract prevent it from being taxed as an equipment rental?
A: No — per this ruling and the Combs v. Chevron "essence of the transaction" test, what matters is what the customer primarily wanted (here, the physical devices), not the contract's label for the charge.

Q: Are fees patrons pay to access games or videos on a restaurant's tabletop devices taxable?
A: Yes — per this ruling, those fees are taxable amusement services under § 151.0028, separate from the restaurant's own equipment rental charge.

Q: If a vendor performs some services (like formatting content) as part of an equipment contract, does that make the whole charge a nontaxable service?
A: Not necessarily — per this ruling, services that are merely incidental to the primary purpose of the transaction (equipment possession) don't change the transaction's taxable character as a rental.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.005(2) (Sale includes the lease or rental of tangible personal property)
• Tex. Tax Code § 151.0028 (Amusement Service defined)
• Tex. Tax Code § 151.0101(a)(1) (Amusement Services are taxable services)
• 34 Tex. Admin. Code Rule 3.294(a)(2) (Lease or rental defined — possession without title transfer)

Cited case law:

• Combs v. Chevron, Inc., 319 S.W.3d 836 (Tex. App.—Austin 2010, pet. denied) — "essence of the transaction" test for distinguishing TPP rental from service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/201705005L

Original ruling text

May 16, 2017

RE: Private Letter Ruling No.170610487

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated February 28, 2017. Detrimental reliance relief is provided in accordance with Rule 3.10, the Taxpayer Bill of Rights.

You requested guidance on the taxability of charges for the use of mobile point-of-sale devices. Additionally, you requested guidance on the taxability of fees for premium content paid for by restaurant patrons.

Facts Presented

The relevant facts are based on a redacted contract provided by ** (Taxpayer) as well as various meetings, telephone conversations, and email correspondence with Taxpayer and **** (Vendor).

Taxpayer operates casual dining establishments with locations in Texas. Taxpayer contracts with Vendor to provide mobile point-of-sale devices (devices) to be used in Taxpayer’s restaurants. Vendor charges Taxpayer a per-unit monthly charge for use of the devices.

The devices include touch screens and attached credit card scanners and are placed at each table in a restaurant. The devices allow Taxpayer’s patrons to see pictures and descriptions of menu items, order food and drinks at their tables, pay their bills, and, for a fee, access premium content. Taxpayer connects the devices to the internet at night to update content on the devices while they charge.

Taxpayer submits any new content to display on the devices – for example, new menu items – to Vendor directly. Vendor formats the content and uploads the content to the devices over the internet.

All of the premium content, which includes games, videos, news, sports, and music, is stored on the device. Taxpayer’s patrons pay to access the premium content and Taxpayer is responsible for collecting the premium content fees. If in any month the premium content fees exceed the per-unit monthly charge Taxpayer owes, then Taxpayer and Vendor split the fees collected in excess of the per-unit monthly charge. If the premium content fees do not exceed the per-unit monthly charge, Taxpayer must remit the difference to Vendor.

Rulings and Analysis

Our restatement of your questions is shown below, followed by our rulings and analysis.

Question 1: Are the monthly per-unit charges Taxpayer pays to Vendor fees for the provision of a nontaxable service or the rental of tangible personal property?

Ruling: The monthly per-unit charges Vendor bills to Taxpayer for use of the mobile point-of- sale devices are taxable as payments for the rental of tangible personal property.

Analysis:

Sales tax is imposed on each sale of a taxable item in this state. See Section 151.051. A sale includes the lease or rental of tangible personal property. See Section 151.005(2). Rule 3.294(a)(2) defines “lease or rental” as “[a] transaction, by whatever name called, in which possession but not title to tangible personal property is transferred for a consideration.”

The contract between Taxpayer and Vendor provides that possession of the devices, but not title to the devices, transfers to Taxpayer in exchange for the monthly per-unit charge. However, the contract characterizes those charges as service fees.

In Combs v. Chevron, Inc., the Third Court of Appeals applied an “essence of the transaction test” to determine whether a transaction was a rental of tangible personal property or the provision of a service. Combs et al. v. Chevron, Inc., 319 S.W.3d 836 (Tex. App.–Austin 2010, pet. denied). The court evaluated the contract between Chevron and its vendor to determine what Chevron “primarily wanted.” Id. at 843. The court held, “just because services are a necessary part of a lease contract does not mean that those services are the essence of the contract.” Id.

In this case, Taxpayer is contracting with Vendor to rent the devices. The primary purpose of Taxpayer’s rental is to have the devices at its tables to facilitate patrons’ order placement and payment. Any services that Vendor provides are incidental to the rental of the property.

Question 2: Are the premium content fees Taxpayer’s patrons pay fees for the rental of tangible personal property, an internet access service, or a telecommunications service?

Ruling: The fees patrons pay for access to premium content on the mobile point-of-sale devices are taxable as amusement services.

Analysis:

Section 151.0028 defines an amusement service, in relevant part, as “the provision of amusement, entertainment, or recreation.” Amusement services are taxable services. See Section 151.0101(a)(1).

Patrons pay the premium content fee to gain access to content including games, videos, news, sports, and music, all of which are stored on the device. The fees for access to electronic games and associated content meet the definition of amusement services, and are subject to Texas sales and use tax.

The court case cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/taxhelp/ and reference Private Letter Ruling No. 170610487.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTES

Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.