7-Eleven, Inc. v. Susan Combs, Comptroller of Public Accounts of the State of Texas, and Greg Abbott, Attorney General of the State of Texas

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-08-00212-CV

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

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 53RD JUDICIAL DISTRICT

NO. D-1-GN-04-003369, HONORABLE MARGARET A. COOPER, JUDGE PRESIDING

OPINION

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, render

judgment that 7-Eleven is entitled to a partial sales-tax refund with respect to the software that it

transferred to its franchise stores, and remand to the trial court the portion of the cause pertaining

to software that was delivered to its out-of-state company stores.

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 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 stores to

transmit data to the corporate mainframe for processing. Hanson testified that a distinction was

made between the host software and the store software because those were “two separate things”

“based upon where that software resided and what it did.”

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

2

on written forms. He also explained how 7-Eleven used the software to then 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, who was 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

1

Hanson testified:

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.

3

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. 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 functionality” was to automate the stores’ ordering system. As Naumann explained,

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.

2

Naumann testified that Canmax developed only the Phase 2B store software. An entirely

different company developed the Phase 2B host software.

4

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

After exhausting its administrative remedies and paying the tax under the

statutory protest procedures, 7-Eleven filed suit for a tax refund under chapter 112 of the tax code.

See Tex. Tax Code Ann. §§ 112.001-.056 (West 2008). 7-Eleven sought a partial refund in the

amount of $282,118, plus penalties and interest. According to 7-Eleven, this sum represented the

portion of the sales price attributable to the store software that was either (1) transferred to

third-party franchisees outside of Texas or (2) delivered to 7-Eleven-operated stores outside of

Texas, neither of which should be subject to Texas sales and use tax. 7-Eleven argued that the

software transferred to the franchise stores qualified for the sale-for-resale exemption in section

151.302 of the tax code. See id. § 151.302(b) (West 2008) (providing that sale for resale of taxable

item is exempted from sales and use tax); see also id. § 151.006(3) (defining “sale for resale” to

mean sale of tangible personal property to purchaser who acquires property for purpose of

transferring it in United States as integral part of taxable service). Therefore, 7-Eleven urged that

it was entitled to purchase all of the store software tax-free and place it in a “tax-free inventory”

because it intended to resell some of the software to its franchisees. With respect to the software that

3

As the parties explained during oral argument, the Comptroller separately assessed sales

tax on the host software. 7-Eleven has challenged that assessment in a separate suit unrelated to

this appeal.

5

was ultimately shipped to company stores outside of Texas, 7-Eleven asserted that the relevant

inquiry is whether use tax—not sales tax—was due; thus, because the store software shipped to

out-of-state company stores “was never used in Texas,” 7-Eleven maintained that “it was not subject

to the Texas use tax under Texas Tax Code § 151.011(f).” See id. § 151.001(f) (West 2008)

(providing that “use” does not include exercise of right or power over tangible personal property for

purpose of transporting it outside state for use solely outside Texas).

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 which the franchisees pay 7-Eleven

4

Hanson calculated these amounts based on the Comptroller’s auditor’s determination that

the fair market value of the licensing fee for all of the store software was $3,628,230. From that

figure, Hanson calculated “the fair market value of individual copies of the software” by dividing

“the licensing fee attributed to the store software by the total number of store copies made.” The

286 copies sent to company stores in Texas, which 7-Eleven conceded would be taxable, represented

$208,620 of the total fair market value, while the 1,742 out-of-state company stores and

2,946 franchise stores represented $1,270,683 and $2,148,928 respectively. Based on these values,

7-Eleven asserted that it was entitled to a refund of $104,831 on the copies of the software sent to

out-of-state company stores and $177,287 on the copies sent to franchise stores, resulting in a total

refund sought of $282,118.

6

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

7

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 argued that

(1) any franchise store who received the software did some of its own data processing using the

software; (2) the benefits provided to franchise stores using the software were not exclusively data

processing; (3) 7-Eleven received as much or more of a benefit than the stores from the store

software; and (4) 7-Eleven made a divergent use of the software. The State further asserted that

section 151.011(f), the statute defining “use,” is not a sales-tax exemption to be applied to the

software transferred to out-of-state company stores.

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 company stores 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. Tex. R. Civ. P. 166a(c).

In our de novo review of a summary judgment, “we indulge every reasonable inference and resolve

any doubts in the nonmovant’s favor.” Southwestern Elec. Power Co. v. Grant, 73 S.W.3d 211, 215

(Tex. 2002). When, as here, both parties move for summary judgment on overlapping issues and

the district court grants one motion and denies the other, we review the summary-judgment evidence

presented by both sides, determine all questions presented, and render the judgment that the district

8

court should have rendered. Texas Workers’ Comp. Comm’n v. Patient Advocates, 136 S.W.3d 643,

648 (Tex. 2004).

The issues raised in this appeal turn 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. Tex. Gov’t Code Ann.

§ 311.011(b) (West 2005). Otherwise, we construe the statute’s words according to their plain

and common meaning, Texas Dep’t of Transp. v. City of Sunset Valley, 146 S.W.3d 637, 642

(Tex. 2004), unless a contrary intention is apparent from the context, Taylor v. Firemen’s

& Policemen’s Civil Serv. Comm’n, 616 S.W.2d 187, 189 (Tex. 1981), or unless such a construction

leads to absurd results, University of Tex. Sw. Med. Ctr. v. Loutzenhiser, 140 S.W.3d 351, 356 (Tex.

2004); see also Texas Dep’t of Protective & Regulatory Servs. v. Mega Child Care, Inc., 145 S.W.3d

170, 177 (Tex. 2004) (noting that when statutory text is unambiguous, courts must

adopt interpretation supported by statute’s plain language unless that interpretation would lead to

absurd results).

“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

9

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.5 We will

address each argument in turn.

I. Franchise Stores

(A) The State’s Entitlement to Summary Judgment

(1) Sale-for-Resale Exemption

The State was granted summary judgment partly on the basis that 7-Eleven was not

entitled to claim the sale-for-resale exemption as to the Canmax store software that it purchased for

and delivered to its franchise stores, all of which were located outside of Texas. See Tex. Tax Code

5

7-Eleven argues that the issue is whether the software transferred to its company stores was

subject to use tax rather than sales tax. While 7-Eleven concedes that the store software that it

installed in its company stores in Texas was subject to Texas use tax, it argues that no use tax was

owed on the store software that was shipped to company stores outside of Texas because that

software was never “used” in Texas.

10

Ann. § 151.302(a) (“The sale for resale of a taxable item is exempted from the taxes imposed by this

chapter.”). 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.” Tex. Tax Code Ann. § 151.006(3) (West 2008).6 7-Eleven asserts, and the State

does not dispute, that its transfer of the store software to its franchisees qualifies as a sale. See id.

§ 151.005(1), (2) (defining “sale” to include both “a transfer of title or possession of tangible

personal property” and “the exchange, barter, lease, or rental of tangible personal property”). A

“taxable service” is defined to include “data processing services,” see id. § 151.0101(a)(12)

(West 2008), which is in turn defined to “include[] word processing, data entry, data retrieval, data

6

“Tangible personal property” is defined as “personal property that can be seen, weighed,

measured, felt, or touched or that is perceptible to the senses in any other manner,” and, “for the

purposes of this chapter, the term includes a computer program.” Tex. Tax Code Ann. § 151.009

(West 2008). It is undisputed that the Canmax store software is tangible personal property under this

definition.

11

search, information compilation, payroll and business accounting data production, the performance

of a totalisator service with the use of computational equipment required by the Texas Racing Act,

and other computerized data and information storage or manipulation,” see id. § 151.0035

(West 2008) (internal citations omitted). “‘Data processing service’ also includes the use of a

computer or computer time for data processing whether the processing is performed by the provider

of the computer or computer time or by the purchaser or other beneficiary of the service.” Id.

The tax code further provides that the Comptroller shall have exclusive jurisdiction

to interpret the statute defining “taxable service.” See id. § 151.0101(b). The Comptroller’s rule

interpreting section 151.0101 states that data-processing services “specifically includes word

processing, payroll and business accounting, and computerized data and information storage or

manipulation” and notes that examples of data-processing services “include entering inventory

control data for a company, maintaining records of employee work time, filing payroll tax returns,

preparing W-2 forms, and computing and preparing payroll checks.” See 34 Tex. Admin. Code

§ 3.330 (2009) (Tex. Comptroller of Pub. Accounts, Data Processing Services).

7-Eleven argues that the record establishes conclusively 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

12

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.”7 In

7

More precisely, however, the evidence shows that many of the benefits 7-Eleven received

were from its own use of the host software in conjunction with the franchisees’ use of the store

software. As Hanson testified, the Canmax software functioned by having the store operator key

“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.”

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 to conflate the two products, citing

13

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 context within chapter 151 suggests that

the derivation of a “benefit” by the party performing the taxable service negates what would

otherwise qualify for the sale-for-resale exemption. See In re Bell, 91 S.W.3d 784, 790 (Tex. 2000)

(“courts should not insert words in a statute except to give effect to clear legislative intent”);

Williams v. Texas State Bd. of Orthotics & Prosthetics, 150 S.W.3d 563, 573 (Tex. App.—Austin

2004, no pet.) (“[W]e will not read into an act a provision that is not there . . . .”). Thus, evidence

that 7-Eleven’s corporate divisions also reviewed and benefited from reports that were generated

using the store software, for example, does not alter the fact that the transfer of the store software

to the franchisees was integral to 7-Eleven’s performance of data-processing services. Cf. Strayhorn

v. Raytheon E-Systems, Inc., 101 S.W.3d 558, 567 (Tex. App.—Austin 2003, pet. denied) (rejecting

Comptroller’s argument that reseller’s control over property for its own use defeated its claim for

sale-for-resale exemption, noting that nothing in tax code required sale to hinge on elements of

control and use). So long as the purchaser’s intent in acquiring the property was to transfer it as an

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.

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integral part of a taxable service, the elements of the section 151.006(3) definition would appear to

be satisfied.

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 Tex. Gov’t Code Ann. § 311.021(3) (West 2008); Old Am. County

Mut. Fire Ins. Co. v. Sanchez, 149 S.W.3d 111, 117 (Tex. 2004) (requiring that we reject statutory

interpretation that would lead to unreasonable result). The more reasonable interpretation of the

“purpose” requirement is that it exists to prevent parties from obtaining favorable tax treatment

premised on a sham arrangement wherein little or no taxable services are actually rendered. This

is consistent with the sale-for-resale exemption’s purpose being to avoid double taxation, because

if there is no performance of significant services that would be subject to sales and use tax, taxing

any tangible personal property integral to the performance of those services would not result in

double taxation.

15

Here, even taking into account the benefits that 7-Eleven received,8 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 checks—all of which are identified as data-processing services in the

Comptroller’s rule defining that term. See 34 Tex. Admin. Code § 3.330.

The State further argues that 7-Eleven cannot avail itself of the sale-for-resale

exemption because 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.”

8

In its reply brief, 7-Eleven acknowledges that it benefited “from all the goods and services

that it transferred to the franchisees, including the computers, store furniture, the trademarks, the

consultations, the data processing, and other items. All of these items tended to increase franchise

sales, thereby increasing the fees to 7-Eleven.”

16

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(3) to be satisfied. Rather, the statute

is phrased in terms of whether the taxable service could be completed but for the tangible personal

property—i.e., whether the property is “an integral part of a taxable service.” See Tex. Tax Code

Ann. § 151.006(3); see also Webster’s Third New Int’l Dictionary 1173 (1986) (“integral” means

“of, relating to, or serving to form a whole; essential to completeness; constituent; inherent”).

Because the evidence confirms that the store software was essential to the performance of

data-processing services that were performed by 7-Eleven, it is not relevant under the statute that the

store software may have been put to other uses as well.9 Further, as a matter of fact, the evidence

shows that even the Phase 2B software was integral to 7-Eleven’s “storage and manipulation” of the

Store’s computerized sales-trend and merchandise-ordering data, processes that are expressly defined

as data-processing services under the tax code. See Tex. Tax Code Ann. § 151.0035

(data-processing services specifically include data entry, data retrieval, data search, information

compilation, and other computerized data and information storage or manipulation). Based on our

review of the record, we disagree with the State’s contention that “only a small portion” of the

Canmax store software was used for data-processing services.10

9

Accordingly, we also reject the State’s assertion that the sale-for-resale definition is not met

because the stores themselves were capable of generating their own reports using the store software.

The record does not support the State’s argument that “the Stores are the ones actually doing the data

processing.”

10

Likewise, we disagree that 7-Eleven was required to produce evidence “to show what

percentage of the development charge was for Phase 1, pre-POS, or Phase 2B software” in order to

be entitled to summary judgment, given that all phases of the store software—not just Phase 1—are

17

(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 7-Eleven’s operations and to protect 7-Eleven’s

franchise fee. These purposes, the State argues, reveal that the essence of the transaction between

7-Eleven and its franchisees was not the transfer of tangible personal property as an integral part of

a taxable service, and therefore 7-Eleven is not entitled to the sale-for-resale exemption.

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.11

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

properly seen as integral to the performance of data-processing services.

11

“Scouting service is the timely procuring of statistical data on oil and gas wells, necessary

to keep oil operators informed of developments in their industry.” Williams & Lee Scouting Serv.

Inc. v. Calvert, 452 S.W.2d 789, 790 (Tex. Civ. App.—Austin 1970, writ ref’d).

18

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 in to 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).

19

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 service 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

20

San Antonio SMSA. Rather, both the tangible personal property and the services at issue in this

appeal are taxable.12 Yet the State purports 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, nor have we found any,

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 Tex. Tax Code Ann. § 151.006(3).13

12

We note that the Comptroller has argued in previous administrative hearings that, because

the essence-of-the-transaction test was developed prior to the imposition of the sales tax on services,

it is not applicable in a case involving taxable services. See Comptroller Decision No. 30,394

(Oct. 28, 1997).

13

Even if the test were applicable in these circumstances, we disagree with the State’s

assertion that 7-Eleven’s alleged purpose in acquiring the store software from Canmax is material

to the inquiry regarding the taxability of the software that 7-Eleven transferred to its franchisees.

The essence-of-the-transaction test is intended to determine the essence of what the purchaser

received. See Sharp v. Direct Res. for Print, Inc., 910 S.W.2d 535, 538 (Tex. App.—Austin 1995,

writ denied) (citing Statistical Tabulating, 549 S.W.2d at 169). Thus, in order to determine the

essence of the transaction between 7-Eleven and its franchisees, we must consider from the

franchisees’ perspective whether taxable data-processing services were rendered. As discussed

previously, the evidence conclusively establishes that such services enabled the franchisees

to use the store software to transmit electronic data to 7-Eleven, where it was processed. The

essence-of-the-transaction doctrine, even if applicable, would not support the State’s position.

21

(3) Policy Considerations

The State further argues that allowing the store software purchase to escape sales tax

would contravene the purpose of the sale-for-resale exemption, which is to prevent double taxation.

In this case, as the State points out, there is no evidence that 7-Eleven charged or collected sales tax

for any of the data-processing services it performed for out-of-state franchise stores. Therefore, the

State urges that, as a matter of public policy, 7-Eleven should be precluded from claiming the

exemption in the absence of evidence that it actually charged sales tax to its franchisees “for the

provision of these asserted taxable data processing services.”

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 & Zimmerman, 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 Ratheon E-Systems,

101 S.W.3d at 568, 570 (applying Day & Zimmerman 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 Tex. Tax

Code Ann. § 151.006(3). While it may be true that 7-Eleven will avoid paying sales tax on some

22

of the software that it purchased for transfer to its stores, this is the result mandated by the

plain language of the tax code exemption. The courts have long refused to enforce strained

readings of tax-exemption statutes for the purpose of preventing lost revenue to the State.

See, e.g., Schlusselberg v. Calvert, 443 S.W.2d 695, 697 (Tex. 1969) (holding that such claims

“should be addressed to the Legislature, because it is our opinion that the statute as written is too

plain to admit any construction other than that adopted by the trial court” permitting application of

sale-for-resale exemption to goods sold out of state, despite Comptroller’s contention that such an

interpretation would render it “virtually impossible for him to determine whether the goods are

actually resold” and result in “the loss of much revenue”). We likewise decline to do so here.

(B) 7-Eleven’s Entitlement to Summary Judgment

In view of the preceding, we hold that 7-Eleven, having shown that its transfer of

store software to its franchisees satisfies the definition of a sale for resale, 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. We therefore sustain the portion of 7-Eleven’s issue relating

to the store software that was transferred to third-party franchisees outside of Texas.

II. Company Stores

As to the software that was transferred to 7-Eleven’s out-of-state company stores, the

parties joined issue concerning whether 7-Eleven was entitled to claim a sales-tax exemption on the

basis that such software was not used in Texas. 7-Eleven asserts—and the State does

not dispute—that because some of the Canmax store software was purchased to be resold to its

out-of-state franchisees, 7-Eleven was entitled to initially put all of the software into a “tax-free

23

inventory.”14 Accordingly, 7-Eleven argues, it could later remove the software that it intended to

transfer to its out-of-state company stores without having to pay Texas sales tax on those items,

based on its interpretation of Comptroller rule 3.285. Rule 3.285 provides:

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.

34 Tex. Admin. Code § 3.285(e)(1) (2009) (Tex. Comptroller of Pub. Accounts, Resale Certificate;

Sale for Resale) (emphasis added). Therefore, 7-Eleven asserts that the determinative issue with

respect to the copies of the store software that were transferred to its company stores is whether the

software was “used” in Texas, as “use” is defined in section 151.011 of the tax code. For software

that was installed in its company stores in Texas, 7-Eleven concedes that it owes sales tax. As to the

software that was transferred to its out-of-state company stores, however, 7-Eleven argues that no

sales tax is due because there was no use in Texas.

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 Tex. Tax Code Ann.

14

The Comptroller’s tax-policy division expert, Nancy Prosser, testified that the

Comptroller, as a matter of practice, has interpreted the sale-for-resale statute to require that a vendor

intend to sell or transfer at least some of the items that it purchased for its tax-free inventory, but it

did not necessarily have to know that it would sell or transfer every single item that it put into its

tax-free inventory. See also, e.g., Tex. Comptroller of Pub. Accounts, STAR Document

No. 8908L0952E01 (effective Aug. 8, 1989) (“A tax-free inventory of out-of-state purchases may

be kept if separate records are maintained on the out-of-state purchases and it is not known whether

the items purchased will be used in Texas.”).

24

§ 151.011(a). Use does not include “the exercise of a right or power over or the keeping or retaining

of tangible personal property for the purpose of transporting the property outside the state for use

solely outside the state.” Id. § 151.011(f). It is on this exclusion from the definition of use that

7-Eleven relies in asserting that it did not use the store software in Texas when it removed the store

software from its tax-free inventory and transported it to its company stores outside of Texas.

(A) The State’s Entitlement to Summary Judgment

The State sought summary judgment on the basis that 7-Eleven was not entitled to

craft “a sales-tax exemption” from section 151.001(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 34 Tex. Admin. Code § 3.346(c)(2) (2009) (Tex. Comptroller

of Pub. Accounts, Use Tax); see also Tex. Comptroller of Pub. Accounts, STAR Document

No. 7712L0100A02 (effective Dec. 1, 1977) (“When a sale is consummated between a Texas seller

and his customer and the customer takes possession of the items in Texas, the transaction is subject

to sales tax; not use tax.”). According to the State, the Comptroller’s understanding that the

definition of “use” is immaterial to whether sales tax is due represents a long-standing, uniformly

enforced Comptroller policy that should be entitled to deference by this Court. See Sergeant Enters.,

Inc. v. Strayhorn, 112 S.W.3d 241, 250-51 (Tex. App.—Austin 2003, no pet.) (“The consistent

construction by an administrative agency charged with effectuating the policy of an enactment carries

25

very considerable weight.” (quoting Felix Frankfurter, Some Reflections on the Reading of Statutes,

47 Colum. L. Rev. 527, 543 (1947)).

We agree with the State that the issue in this case is whether, upon removing the

software intended for its company stores from its tax-free inventory, 7-Eleven owed sales tax—not

use tax—on the items. See 34 Tex. Admin. Code § 3.285 (providing that when property is removed

from tax-free inventory for use in Texas, Texas sales tax is due). But, as we explain more fully

below, the definition of “use” is material insofar as the plain language of the Comptroller’s own rule

requires a determination of whether the software was “used” in Texas. See id. Summary judgment

in favor of the State was therefore improper on the basis that section 151.011(f) of the tax code does

not apply to the Canmax software delivered to out-of-state company stores.

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.’” The State further urged that 7-Eleven did not conclusively prove that

it established a valid, tax-free inventory from which it could remove software for transfer and use

out-of-state, noting that 7-Eleven is required by law to keep records “in the form of receipts, shipping

manifests, invoices, and other pertinent papers that substantiate each claimed deduction

or exclusion,” see Tex. Tax Code Ann. § 151.025(a)(3), and that the record contains no

such documentation.

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

26

& 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, 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, that did not, ipso facto, entitle the State to summary

judgment. See id. at 650.

(B) 7-Eleven’s Entitlement to Summary Judgment

As discussed above, Comptroller rule 3.285 provides that “Texas sales tax is not due

on items removed from a valid tax-free inventory for use outside the state.” 34 Tex. Admin. Code

§ 3.285(e)(1). 7-Eleven maintains, and we agree, that whether property is removed 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 Tex. Tax Code Ann.

§ 151.011(f). Accordingly, to be entitled to summary judgment on this issue, 7-Eleven had to

conclusively prove that when it removed the software destined for its out-of-state company stores

from its tax-free inventory, it did not exercise a right or power over, keep, or retain the software for

any purpose other than to transport it “outside the state for use solely outside the state.” See id.

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 in Texas; therefore, they

argue, “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

27

argues that the State failed to produce contraverting 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 no evidence regarding what 7-Eleven did with the software

during the intervening period of time after it was removed from 7-Eleven’s tax-free inventory and

before it was installed in the out-of-state company stores. Rule 3.285 suggests that tax liability

accrues for the period of time that items taken from a tax-free inventory are used “for any purpose

other than retention, demonstration, or display” while the items are being held for transfer or resale

as an integral part of a taxable service.15 The record contains scant evidence as to what was done

with the store software after 7-Eleven took delivery of it and how it was actually transferred to the

stores. The attorneys for the parties indicated in their briefs and during oral argument that copies of

the store software were made, either by 7-Eleven or at 7-Eleven’s direction, in Texas and installed

on computers in Texas, and that these computers were then shipped to the out-of-state company

stores. According to the Comptroller, “use” occurred at the moment that the software was installed

on computers in Texas, regardless of whether the computers loaded with the store software were

intended to be shipped out of state to be “used” by the out-of-state store operators. But the record

does not conclusively prove either use or absence of use in Texas.

15

Although the rule refers specifically to items purchased under a resale certificate and the

record here does not indicate that 7-Eleven used a resale certificate in its initial purchase of the

software from Canmax, neither party argues that rule 3.285 does not apply to the sale at issue in

this case.

28

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.

CONCLUSION

We reverse the trial court’s summary judgment in favor of the State. As to the tax

assessed on 7-Eleven’s purchase of Canmax store software for resale and delivery to its franchise

stores, we render judgment that 7-Eleven is entitled to a sales-tax refund of that amount, plus

penalties and interest assessed as authorized by the tax code. As to the sales tax assessed on

7-Eleven’s purchase of store software for its out-of-state company stores, we remand that portion

of the cause to the trial court for further proceedings consistent with this opinion.

29

J. Woodfin Jones, Chief Justice

Before Chief Justice Jones, Justices Puryear and Henson

Reversed and Rendered in Part; Reversed and Remanded in Part

Filed: August 31, 2009

30