Can a luxury movie-theater chain with dine-in food and bar service use the reduced retail/wholesale franchise tax rate for years when most of its revenue comes from food and beverage sales, and does it have to reclassify as a "dinner theater"?

Plain-English summary

Note: this ruling's specific tax-rate figures may be outdated — see the alert above for where to find current numbers.

A chain of premier luxury movie theaters — offering indoor/outdoor dining, a bar, and (at some locations) bowling — had historically filed its Texas franchise tax report under SIC Code 7832 (Motion Picture Theaters), taxed at the 1% general rate. But its revenue mix had shifted: for the year ending December 31, 2012, more than half of its total revenue came from retail food and beverage sales rather than movie tickets or bowling. The company asked the Comptroller for two rulings: (1) that its correct SIC code is actually 5812 (Eating Places) because its business resembles a "dinner theater" more than a movie theater, and (2) that it should be taxed at the reduced 0.5% wholesale/retail rate.

The Comptroller rejected the "dinner theater" argument but still gave the company a path to the reduced rate. Under industry classification standards (NAICS code 711110 and the National Dinner Theatre Association's own membership criteria), a "dinner theater" specifically means live theatrical productions (musicals, plays, comedy) combined with food service — not film exhibition. Since the company shows movies, not live theater, its entertainment revenue doesn't fit the dinner-theater description at all; instead, movie exhibition and bowling revenue are classified under Division I: Services (SIC 7832 and 7933 respectively), while its food-and-beverage sales are separately classified under Division G, SIC 5812 (Eating Places).

But that classification split creates a year-by-year test, not a single fixed answer: in any report year where the company's retail food-and-beverage revenue is GREATER than its revenue from movies/bowling/other entertainment, the company qualifies for the reduced 0.5% rate and should file under SIC 5812. In years where entertainment revenue is greater, it must file under the appropriate Division I code (7832 or 7933) at the higher 1% rate. The company must re-check and potentially switch its filing classification every single year based on that year's actual revenue mix.

What this means for you

Entertainment venues that also sell significant food and beverage (movie theaters, bowling alleys, arcades with dining)

Don't assume a fixed SIC classification or tax rate applies to your business permanently — if your revenue mix meaningfully shifts between entertainment services and retail food/beverage sales, your correct classification (and applicable rate) can change from year to year, and you need to re-test annually.

Businesses considering reclassifying as a "dinner theater" to access a better tax rate

This ruling shows the Comptroller applies established industry definitions (NAICS codes, trade association membership standards) rather than a business's own preferred label — a venue focused on film exhibition, however dining-forward, isn't a "dinner theater" just because it serves dinner alongside a show.

Accountants and tax professionals

Note the two supersession flags on this document: the specific Tax Rates, Compensation Deduction Limits, No Tax Due Thresholds, and Total Revenue Thresholds referenced (or contemporaneous with) this 2013 ruling may be outdated — check current STAR Accession No. 202112002L or 202308006L for up-to-date figures before advising a client based on this ruling's numbers, though its year-by-year revenue-mix classification methodology should still be sound.

Common questions

Q: Does adding dinner and drink service to a movie theater make it a "dinner theater" for Texas franchise tax purposes?
A: No — per this ruling, "dinner theater" specifically means live theatrical productions combined with food service, not film exhibition, regardless of how dining-focused the venue's food and beverage operations become.

Q: If a business's revenue mix changes each year, does its franchise tax rate classification change too?
A: Yes, per this ruling — the reduced 0.5% rate applies only in years where retail food/beverage revenue exceeds entertainment-service revenue; the company must re-determine its correct SIC code and rate every report year.

Q: Are the specific tax rates and thresholds in this 2013 ruling still current?
A: Not necessarily — the STAR system itself flags that Tax Rates, Compensation Deduction Limits, No Tax Due Thresholds, and Total Revenue Thresholds referenced around this ruling may have changed; check STAR Accession No. 202112002L or 202308006L for current figures.

Citations and references

Statutes:

• Tex. Tax Code § 171.002 (Rates; Computation of Tax)
• Tex. Tax Code § 171.002(b) (three-part test for the reduced retail/wholesale rate)

Cited classification authority:

• 1987 Standard Industrial Classification (SIC) Manual, Division G (Retail Trade, SIC 5812 Eating Places) and Division I (Services, SIC 7832 Motion Picture Theaters, SIC 7933 Bowling Centers)
• National American Industry Classification System (NAICS) Code 711110 (dinner theater definition)
• National Dinner Theatre Association membership criteria

Superseding guidance (flagged in the STAR document itself):

• STAR Accession No. 202112002L — current tax rates/thresholds
• STAR Accession No. 202308006L — current tax rates/thresholds

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=MAR
• Opinion: https://star.comptroller.texas.gov/view/201311791L

Original ruling text

ALERT: Tax Rates, Compensation Deduction Limits, No Tax Due Thresholds, and Total Revenue Thresholds for EZ Franchise Tax Reports may have changed due to legislative action. See STAR 202112002L or STAR 202308006L for current information.

November 20, 2013

Re: Private Letter Ruling #13182720

TAXPAYER A

TAXPAYER B

Dear ***:

Thank you for your correspondence requesting a private letter ruling for your

client, TAXPAYER A, and its affiliate, TAXPAYER B, hereinafter together

referred to as the combined group “TAXPAYER.” In response, we issue this

private letter ruling in accordance with Rule 3.1.

Requested Rulings

1. TAXPAYER requests a ruling indicating its appropriate Standard Industry

Classification (“SIC”) code for Texas franchise tax purposes is 5812, Eating

Places, under Division G: Retail Trade, as it is the SIC code that most closely

resembles its business of a Dinner Theater rather than a Movie Theater under

SIC Code 7832.

2. TAXPAYER requests a ruling indicating that it should be subject to franchise

tax as a wholesaler or retailer under Texas Tax Code Section 171.002(b).

Facts Presented

TAXPAYER operates a number of premier luxury entertainment movie theaters

offering indoor and outdoor dining, a bar, and in some locations bowling.

TAXPAYER’s revenues generally consist of proceeds from movie ticket sales,

retail food and beverage sales from onsite restaurants and other miscellaneous

revenues. TAXPAYER’s revenues from its food and beverage sales have

consistently increased, and an analysis of TAXPAYER revenues for the year

ending December 31, 2012, show that more than 50 percent of its total revenues

are derived from retail food and beverage sales.

TAXPAYER has historically filed a Texas combined report using the SIC Code

7832, Motion Picture Theaters, which has resulted in TAXPAYER being taxed at a

rate of one percent as opposed to the 0.5 percent tax rate afforded to entities

primarily engaged in wholesale and retail trade.

Ruling

Under Texas Tax Code Section 171.002, a taxable entity qualifies for the 0.5

percent tax rate if the entity 1) has total revenue from activities in retail

or wholesale trade, as described in Division F and G of the 1987 SIC Manual,

that is greater than the total revenue from activities in other trades; 2) does

not produce, and does not have an affiliate that produces, products that

account for 50 percent or more of the entity's total revenue from retail or

wholesale trade (except for total revenue from activities described by Major

Group 58: Eating and Drinking Places); and 3) does not provide retail or

wholesale utilities.

Dinner theaters are addressed by the National American Industry Classification

System (NAICS) at code 711110, which states this industry comprises: (1)

companies, groups, or theaters primarily engaged in producing the following

live theatrical presentations: musicals; operas; plays; and comedy,

improvisational, mime, and puppet shows; and (2) establishments, commonly known

as dinner theaters, engaged in producing live theatrical productions and in

providing food and beverages for consumption on the premises. Theater groups or

companies may or may not operate their own theater or other facility for

staging their shows.

Similarly, the National Dinner Theatre Association is an organization of live

production companies. Members must be owners, operators or producers of a

dinner theatre. Members must be professional theaters, meaning that they pay

performers. Additional information on dinner theatres can be found at

http://www.ndta.us/ndta/benefits.html.

TAXPAYER’s revenue is not appropriately classified under Division G, SIC Code

5812, as revenue from a dinner theater because, under industry standards,

“dinner theater” is associated with live theatrical presentations, not film or

motion picture exhibition.

TAXPAYER’s revenue from entertainment service activities such as motion picture

exhibition and bowling is classified under Division I: Services, SIC Code 7832,

Motion Picture Theaters, and 7933, Bowling Centers, respectively. TAXPAYER’s

revenue from the retail sale of prepared food and drinks for on-premise or

immediate consumption is classified under Division G, SIC Code 5812, Eating

Places.

TAXPAYER’s qualification to use the 0.5 percent tax rate must be determined on

a year-to-year basis. In years where TAXPAYER’s total revenue from the retail

sale of prepared food and drinks for on-premise or immediate consumption is

greater than its revenue from entertainment services and other non-retail

activities, TAXPAYER qualifies to use the 0.5 percent tax rate and should file

its franchise tax report using SIC Code 5812. In years when TAXPAYER’s revenue

from entertainment services and other non-retail activities is greater than its

total revenue from prepared food and drinks for on-premise or immediate

consumption, TAXPAYER should file its franchise tax report using the

appropriate SIC Code under Division I.

The Texas franchise tax requires combined group reporting for all taxable

entities that are part of an affiliated group engaged in a unitary business,

which includes entities that do not have nexus in Texas. See Rule

3.590(b)(2)(C), Margin: Combined Reporting.

If you have questions about this private letter ruling, please email us at

[email protected] and reference Private Letter Ruling #13182720.

Sincerely,

Tax Policy Division