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Appeals Court Upholds Half Percent Texas Franchise Tax Rate For Rent To Own Business

By David E. Colmenero on September 18, 2015

In a recent decision, the Third Court of Appeals in Texas held that Rent-A-Center, Inc. was entitled to use the .5% tax rate for Texas franchise tax purposes which is generally available to retailers and wholesalers.  Rent-A-Center, Inc. v. Hegar, 2015 Tex. App. LEXIS 5865 (Tex. App. – Austin, no pet., June 11, 2015).  The Texas Comptroller argued that Rent-A-Center, Inc. did not qualify as a retailer for purposes of the .5% tax rate because it was primarily engaged in leasing rather than selling its merchandise.  The vast majority of Rent-A-Center, Inc.’s revenue was derived from payments for merchandise made available to customers on a rent-to-own basis pursuant to rental-purchase agreements.  Acknowledging that the rental-purchase agreements were hybrids of both rentals and sales, the court concluded that, under the facts of the case, they were more like sales than leasing transactions.  The court found it particularly noteworthy that, for 97% of merchandise, title in fact passed to customers and customers could acquire title to the merchandise at any time by paying the remaining cost.  The Rent-A-Center case may provide an opportunity for many rent-to-own businesses with similar facts.  Any such businesses should consider examining their Texas franchise tax reports to determine if any changes should be made to their reporting position for past or future periods in light of this decision. Click here to read the decision.