Is electricity used to run cooling equipment and circulating fans that keep bananas cold and slow their ripening during transit exempt from Texas sales/use tax as manufacturing/processing?

Plain-English summary

A taxpayer's client imported bananas from Colombia and shipped them onward as far as Canada and California. During the trip, the bananas were kept in a cold room at 57 degrees, with circulating fans forcing air through tarp-covered boxes. The purpose of this cold, circulating environment was to minimize ethylene gas production and slow the ripening process, so the bananas would arrive at retail produce companies still unripe rather than spoiled or overripe.

The taxpayer asked whether the electricity used for this cooling, and for the circulating fans, qualified for Texas's sales/use tax exemption for manufacturing or processing equipment. The Comptroller said no. The letter draws a direct contrast with an earlier determination that electricity used to actively ripen bananas qualifies as exempt processing. Here, the electricity was being used for the opposite purpose — to prevent or deter ripening — which the Comptroller characterized as storage rather than processing. Because storage use does not qualify for the manufacturing/processing exemption, the electricity for both the cooling system and the circulating fans was taxable.

What this means for you

Produce importers, distributors, and cold-storage operators

If you use refrigeration, cooling, or air-circulation equipment simply to slow spoilage or ripening and keep perishable goods in a holding state during transit or storage, the electricity for that equipment is treated as a taxable storage use — not an exempt manufacturing/processing use — even though the environment is carefully controlled and directly affects the product's ripeness.

Businesses that actively induce ripening or other processing changes

The letter reaffirms that electricity used to actively change a product's state — such as inducing bananas to ripen — can qualify as exempt processing. The dividing line the Comptroller draws is whether the equipment is being used to transform the product (processing) or merely to hold it in its current condition for a longer period (storage).

Anyone weighing a manufacturing/processing exemption claim on utilities

This ruling is a useful illustration that the same type of equipment (cooling systems, fans) can be taxable or exempt depending entirely on the purpose it serves — deterring a natural process (storage) versus actively causing or accelerating one (processing). The facts of your specific operation control the outcome, and the Comptroller notes its answer is based on the facts presented.

Common questions

Q: Is electricity used to keep produce cold during shipping exempt from Texas sales tax?
A: Not under this ruling. Cooling used to slow ripening/spoilage during transit was treated as storage use, which does not qualify for the manufacturing/processing exemption.

Q: What about electricity used for the fans that circulate the cold air?
A: The circulating fans were used for the same storage purpose (minimizing ethylene buildup and slowing ripening), so their electricity was likewise taxable, not exempt.

Q: Would electricity used to ripen bananas be treated differently?
A: Yes. The Comptroller noted it had previously determined that electricity used for the process of ripening bananas qualified as exempt processing — the opposite use from the cooling/deterrence described in this letter.

Q: Does this ruling apply regardless of the specific facts of my operation?
A: No. The Comptroller expressly states the opinion is based on the facts presented and that other, even similar, facts may produce a different result.

Citations and references

• Tex. Tax Code § 151.318 (manufacturing/processing exemption for equipment and utilities)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9405L1300G04

Original ruling text

May 10, 1994

Dear *****:

Thank you for your letter requesting information on
taxability of electricity used to cool bananas.

Your client receives bananas from Columbia and during the
trip they are cooled. The fruit will be shipped as far away
as Canada and California. The cold room is kept at 57
degrees and circulating fans are situated so as to
force air through the boxes which are covered with a tarp.
This will keep ethylene gas production to a minimum as well
as away from the fruit. This temperature and circulation
environment will minimize the ripening process. This will
allow the fruit to make the long trip without arriving ripe
at the produce companies which will retail the fruit locally.

Question: Is the cooling electrical use exempt? Is the
circulating fans electrical use exempt?

Response: We have previously determined that the process of
ripening bananas was processing and electricity used for
this purpose qualified as exempt use. Your clients use of
electricity is to prevent or deter the ripening process
in bananas and is considered storage rather than processing.
The electricity used for cooling and the circulating fans
does not qualify as being used for processing.

This opinion is based on the facts presented. Other facts
though similar may provide a different result. If you have
other questions or need more information, you may call me at
1-800-531-5441, extension 3-4502. The regular number is
512/463-4502. You may also write to Tax Administration
Division at the above address.

Sincerely,

Gilbert Zamora
Tax Administration Division

NOTE: Previous Accession Number 9405343L