Is a time-based fee for playing networked computer games (not coin-operated, charged by the hour rather than per game) a taxable amusement service in Texas?

Plain-English summary

Someone planning a new business asked whether they'd need to collect Texas sales tax under two proposed models. Model 1: a networked-computer gaming venue where customers pay by time (about $1 per 15 minutes per computer, not per game, not coin-operated) to play games against other players on the network or against each other, with the operator present to supervise, instruct, and even play as an opponent -- no admission fee, no ticket, cash collected directly. Model 2: hiring out the same computers and operator to parties/events on an hourly basis, where event attendees play for free because the event host has already paid for the time.

The Comptroller's answer: both models are taxable amusement services under Rule 3.298. That rule's definition of amusement services specifically includes participatory sports or games, and gives "domino games (including by the hour)" as an example -- the Comptroller found the proposed computer gaming businesses analogous to that. The fact that the charge is time-based rather than per-game or per-coin, and that no separate admission ticket is sold, doesn't take it outside the amusement services tax.

What this means for you

Anyone starting a pay-to-play computer/video gaming business

Don't assume that avoiding coin-operated machines or per-game charges keeps you out of the amusement services tax -- a straightforward hourly or time-based fee for playing games is still a taxable amusement service under Rule 3.298.

Event entertainment businesses (computers, games, or similar activities hired by the hour)

Hiring yourself and equipment out to parties/events on an hourly basis, where attendees play for free because the host already paid, is still a taxable amusement service -- the free-to-attendees structure doesn't exempt the underlying charge to the host.

Accountants and tax professionals

Rule 3.298's amusement services definition is broad enough to capture time-based participatory gaming regardless of the payment mechanism (coin, ticket, or straight cash) or delivery format (arcade-style venue vs. event rental).

Common questions

Q: Is charging by the hour instead of per-game enough to avoid the amusement services tax?
A: No, per this letter -- Rule 3.298 explicitly includes hourly participatory games (citing hourly domino games as an example), and time-based computer gaming fees were found analogous.

Q: Does it matter that the games aren't coin-operated and no ticket is sold?
A: No, per this letter -- neither factor removed the charges from the amusement services tax.

Q: Is hiring myself and my equipment out to a party on an hourly basis taxable, even if attendees play for free?
A: Yes, per this letter -- the charge to the event host is still a taxable amusement service.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.298 (Amusement Services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9911889L

Original ruling text

November 15, 1999

Dear Sir:

Thank you for your recent letter which is restated in part with response below.

"I would like to know if a business I wish to start (in Texas of course) would
require the collection of sales tax. The business I wish to start would
resemble one or both of the following scenarios:

1). I would have computers (starting with 4, maybe more later) connected
together in a network. I would have games installed on the computers, most of
which would be designed to be played over a computer network. I would charge
maybe $1 per 15 minutes of playing time per computer, much like a video arcade
game, but charged by the time, not by the game (and not coin operated). The
user of the computer can play against other players over the network with or
against others who are using other computers on the network (primary purpose),
or can play against multiple players on a single computer, or maybe even play
games by himself. The user could play any game that I have installed on the
computers within the time that is allotted to and paid for by the user (one
game the whole time or multiple games within the purchased time). The charge
would be on a per computer basis, so that two people playing on the same
computer (either in turns or at the same time) within the allotted time would
cost the same as for one person. I would be there to instruct and supervise
and assist in the playing of games and operations of the computers, including
the monitoring of behavior, and even to provide myself as an opponent in games.
I would be providing all hardware and software, all of which is solely for the
purpose of amusement (data or word processing would not be provided or allowed
except as directly related to playing games). I would be collecting cash, not
selling a ticket or other admission document, and I am not collecting an
admission fee for an individual performance (time based, not per game). I
would not be charging an admission to a facility.

2). Another scenario I am considering would be to contract myself and my
computers out, perhaps on a per hour basis, to parties or other events. It
would be analogous to a clown entertaining at a party. In this case I would
charge for the total time at the event, not separate charges for individuals to
play on the computers. Anyone at the event for which I was hired to entertain
would play for free, no separate charges. I would be present at all times to
instruct and supervise and monitor the activities on the computers and related
equipment at all times just as described above. Would I be required to collect
sales tax on the above described businesses?

Response: Your charges are subject to sales tax as the provision of amusement
services in both situations. Rule 3.298 defines amusement services in part to
include participatory sports or games and includes under that heading, "domino
games (including by the hour)". These appear to be an analogous situations.

This opinion is rendered based on the facts presented. If there are additional
or different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division