Can a company that sells crowd-management/security services to a sporting-event or concert promoter buy those security services tax-free under the sale-for-resale exemption, on the theory that security is an integral part of the promoter's taxable amusement service?

Plain-English summary

The Texas Comptroller's Tax Policy Division responded to a special events company that provides taxable crowd-management/security services at public events, and to that company's client, who sells tickets to sporting events or concerts and collects sales tax on the ticket sales. The client had argued that the security company's crowd-management service was an "integral part" of the client's taxable amusement service, and on that basis, the security company should be able to buy or provide the service tax-free under the sale-for-resale exemption, passing the cost through to ticket buyers without separately taxing the security service.

The Comptroller rejected that argument. Rule 3.298(f)(2) defines an "integral part" of a taxable service as one that is essential to performing the taxable service, "without which the taxable service could not be rendered." Crowd-management/security services didn't meet that test: people can attend and watch a sporting event or concert even when there is no security present. The Comptroller acknowledged that security is an important, real business expense for the client and may be a necessary business decision, but that doesn't make it essential to rendering the amusement service itself. As a result, the security service didn't qualify for the resale exemption under Texas Tax Code § 151.006.

What this means for you

Security and crowd-management service providers

If you sell security or crowd-management services to promoters, venues, or event organizers, don't assume your service can be purchased tax-free for resale just because your client says it's essential to their event. The Comptroller has specifically found that security services are not an "integral part" of a taxable amusement service, so the sale-for-resale exemption under § 151.006 doesn't apply on that basis.

Concert and sporting-event promoters (taxable amusement service providers)

Being a necessary or important expense for your business is not the same as being legally "essential" to the taxable service under Rule 3.298(f)(2). The integral-part test asks whether the taxable service (here, the amusement service) could be rendered at all without the purchased service. Since patrons can still watch the event without security on hand, security purchases don't convert into resold, exempt components of your ticket sales — you likely need to pay tax on those purchases as a cost of doing business rather than treating them as resale inventory.

Accountants and tax professionals advising event or venue clients

When evaluating whether a purchased service can ride along with a resale exemption claim, apply the Rule 3.298(f)(2) test literally: is the purchased service one "without which the taxable service could not be rendered"? This letter shows the Comptroller applying that test narrowly — an expense being important, common, or even necessary as a business/legal matter (e.g., for safety or insurance reasons) is not enough if the underlying taxable service could technically still be performed without it.

Common questions

Q: Can a security or crowd-management company sell its services tax-free for resale to an event promoter?
A: Not on the theory that security is an integral part of the promoter's amusement service. This letter states the Comptroller has never considered a security service an integral part of an amusement service for resale-exemption purposes.

Q: Why doesn't security qualify as "integral" to putting on a concert or sporting event?
A: Because under Rule 3.298(f)(2), a service is "integral" only if it's essential to performing the taxable service — one without which the taxable service could not be rendered. The letter reasons that people could attend and watch a sporting event or concert even when there is no security at the event, so security doesn't meet that standard.

Q: Does this mean security services aren't a legitimate business expense for event promoters?
A: No. The Comptroller expressly acknowledged that crowd-management/security is "important" and a real expense incurred by the client, and that purchasing it may be a necessary business decision. It simply doesn't qualify for the sale-for-resale exemption under Tex. Tax Code § 151.006.

Q: Can another business rely on this letter for its own situation?
A: No. The letter itself says the opinion is based on the facts submitted, and other facts, though similar, may yield different results. STAR letters generally can be relied on only by the taxpayer to whom they were directly issued.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.298(f)(2) (definition of "integral part" for taxable services)
• Tex. Tax Code § 151.006 (Sale for Resale)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9510L1373F03

Original ruling text

October 10, 1995

Dear *****:

Thank you for your letter concerning a sale for resale exemption claimed
by one of your clients.

Your client is providing taxable amusement services. The client sells
tickets to sporting events or concerts and collects sales tax on the sale
of the tickets. Your special events company provides a taxable security
service of crowd management for public events. In the letter from your
client, the client states that your security service is an integral part
of their taxable amusement service. For that reason, the client contends
that your security service can be purchased tax-free for resale to the
persons buying tickets to taxable amusement events.

While an interesting argument, your client's contention is incorrect.
We have never considered a security service an integral part of an
amusement service so that the security service can be purchased for
resale by the amusement provider. The definition of "integral part" in
subsection (f)(2) of Rule 3.298 states:

. . . A service will be considered an integral part of a taxable service
if the service purchased is essential to the performance of the taxable
service and without which the taxable service could not be rendered.

Your service of crowd management is important and there is no question
that it is an expense incurred by the client in providing a taxable
service, but that does not qualify the security service for a sale for
resale exemption. People could attend and watch a sporting event or
concert even when there is no security at the event. Purchasing
security services for amusement events may be a necessary business
decision by your client, but that does not exempt the security service
under Texas Tax Code Sec. 151.006.

This opinion is based on the facts you submitted. Other facts, though
similar, may yield different results.

You may call me toll free at 1-800-531-5441, ext. 5-0030. The direct
line is 512/475-0030. You may also write to Tax Policy, Comptroller of
Public Accounts.

Sincerely,

David Somerville
Tax Policy Division

NOTE: Previous Accession Number 9510597L