The Claw Beats The Taxman

Written by Mark Rasch
April 11th, 2013

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today is a lawyer in Bethesda Maryland specializing in privacy and security law.

Remember as a kid going to the arcade and playing “The Claw?” You know, the machine that contained a pile of plush toys, where you would put in an endless stream of quarters, and hopefully be able to snag one of those toys? After about $10 worth of tries, you would eventually win a stuffed flounder worth about a quarter, right? Well the Texas Supreme Court has weighed in on the sales tax consequences of that transaction, which comes down ultimately to the questions of what did the consumer pay for, and what did they receive? And this might provide some limited guidance for other retailers.

When you sell something, the price is supposed to be a bargained-for negotiation between a willing purchaser and a willing seller. You are buying a product or a service. Tub of popcorn, $2. Tub of popcorn at a movie theater, $6 (but for another 25 cents you can get a jumbo!) The consumer is buying a product, the product has a specified “value,” and that transaction is called a sale. And the government gets a slice of that “sale” – maybe 6 percent of the sales price. Sales taxes typically apply to retail sales (merchant to consumer) of non-exempt tangible personal products, and to certain specified services as well.Disney Princess 1-Medium

So here’s the problem when you try to apply this law to the claw. Despite what the carnies tell you, not everyone’s a winner. It’s a game of chance and skill. What is the machine operator “selling?” A plush toy, or the experience of trying to win one? As the court points out, if there were no toys in the box, nobody would play, and if everyone won each time, the game would be no fun. And if there was a “sale,” what would be the price? The retail value of the item if sold otherwise? The cost of the item to the vendor? The amount paid by the consumer? A skilled consumer (or a lucky one) could get that stuffed Elmo for a quarter, a less skilled one could pay $20 with the same result, and a less patient one could get no toy at all. These are the kinds of issues that occupy the highest minds in Austin.

Ultimately, the Texas Supreme Court ruled that the transactions were not taxable, based upon the juxtaposition of several provisions of the tax code (what is a sale, what is a taxable service, what is tangible personal property, what is a service that is an Integral part of a taxable service, what is a sale for resale, what is the coin operated machine exemption, and the application of the (Texas Tax) Commissioner’s Rule for the operators of games or concessions). The government argued that “when each participant does not receive a prize, the game operator–or concessionaire–is not a retailer, but a consumer of the items it purchases to provide its services.”


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