Does a Texas Youth Commission facility's canteen have to charge sales tax on food, soft drinks, and candy sold to the children living there, and what about sales to staff or fundraiser sales?

Plain-English summary

The Texas Comptroller's Tax Policy Division answered a question about sales of food, soft drinks, and candy at a canteen located at "SCHOOL A," which is run by volunteers from a nonprofit group called "COUNCIL ABC."

Texas Tax Code Sec. 151.314(d)(3) exempts food products, meals, and soft drinks served to a patient or inmate of a hospital or other institution licensed by the state for the care of humans. But effective October 1, 1995, a new Subsection (g) took away that exemption for food products, meals, soft drinks, and candy sold to a person confined in a "correctional facility" operated by, or under contract with, the state or a political subdivision. The letter explains that "correctional facility" (as defined in Penal Code Sec. 1.07) covers things like municipal or county jails, Texas Department of Criminal Justice confinement facilities, facilities operated under contract with that department, and community corrections facilities.

The key holding here is that SCHOOL A doesn't fall into that new taxable category. SCHOOL A is operated by the Texas Youth Commission to rehabilitate delinquent children, not by the Texas Department of Criminal Justice to confine criminals. Because of that distinction, sales of food products, meals, and soft drinks served to the children committed to SCHOOL A remain exempt under Sec. 151.314(d)(3), even after September 30, 1995.

The letter also addresses two related points raised by the requester. First, sales to staff, visitors, or volunteers at the canteen are taxable — the exemption only covers food, soft drinks, and candy served to the children committed to the facility. Second, because COUNCIL ABC (the nonprofit running the canteen) has 501(c)(3) exempt status, it may hold up to two one-day tax-free sales or auctions per calendar year under Tax Code Sec. 151.310(c) to raise money, with a "tax-free day" meaning a consecutive 24-hour period; it doesn't need a sales tax permit unless it has other taxable sales to report.

What this means for you

Operators of youth-rehabilitation facilities and their canteens

If your facility houses children for rehabilitation purposes under an agency like the Texas Youth Commission — rather than confining adults or criminals under the Texas Department of Criminal Justice or a similar corrections authority — this letter indicates the 1995 "correctional facility" carve-out for food/candy sales to inmates does not apply to you. Food, meals, and soft drinks served to the children you house can remain exempt under Sec. 151.314(d)(3).

Nonprofit groups running canteens or concession stands at institutional facilities

Sales to staff, visitors, and volunteers are taxable even when sales to the residents/patients/inmates are exempt — so a canteen may need to track and tax those categories separately. If your organization has 501(c)(3) status, you can also use up to two tax-free one-day sales or auctions per year to raise funds without needing a sales tax permit, as long as you don't otherwise have taxable sales.

Facilities that ARE operated by or under contract with a corrections department

This letter is a reminder that, starting October 1, 1995, food, meals, soft drinks, and candy sold to persons confined in a true "correctional facility" (jails, TDCJ facilities, contracted confinement facilities, community corrections facilities) lost the exemption that institutional food sales otherwise enjoy — that exclusion is what makes this letter's distinction (rehabilitation school vs. criminal confinement facility) matter.

Common questions

Q: Are food and soft drink sales to children at a Texas Youth Commission facility taxable?
A: No, according to this letter. Because the facility is operated by the Texas Youth Commission for rehabilitation of delinquent children rather than by the Texas Department of Criminal Justice for confinement of criminals, sales to those children remain exempt under Tax Code Sec. 151.314(d)(3), even after the October 1, 1995 change.

Q: Does the new October 1, 1995 rule tax all food sold to people held in state facilities?
A: It applies specifically to persons confined in a "correctional facility" as defined in Penal Code Sec. 1.07 — municipal/county jails, Texas Department of Criminal Justice facilities, facilities under contract with that department, and community corrections facilities. This letter found that definition did not cover the youth rehabilitation school at issue.

Q: Are sales to staff, visitors, or volunteers at the canteen exempt too?
A: No. The letter states sales tax must be collected on taxable sales to staff, visitors, or volunteers; the exemption applies only to food, soft drinks, and candy served to the children committed to the facility.

Q: Can the nonprofit group running the canteen hold fundraiser sales without collecting sales tax?
A: Yes, within limits. Because the group has 501(c)(3) status, it may hold up to two one-day tax-free sales or auctions per calendar year under Tax Code Sec. 151.310(c), with each tax-free day being a consecutive 24-hour period, and it doesn't need a sales tax permit unless it has other taxable sales to report.

Q: Can another organization rely on this letter?
A: No. The letter states this opinion is based on the facts submitted, and other facts, though similar, may yield different results; STAR letters generally may be relied on only by the taxpayer to whom they were issued.

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 151.314(d)(3) (exemption for food/meals/soft drinks served to a patient or inmate of a licensed institution)
• Tex. Tax Code Sec. 151.314(g) (added effective 10/1/1995 — excludes food/meals/soft drinks/candy sold to persons confined in a correctional facility)
• Tex. Penal Code Sec. 1.07 (definition of "correctional facility")
• Tex. Tax Code Sec. 151.310(c) (one-day tax-free sales/auctions for 501(c)(3) organizations)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9509508L

Original ruling text

September 20, 1995

Dear ** :

Thank you for your letter concerning sales of food, soft drinks,and candy at
the SCHOOL A canteen operated by volunteers from the COUNCIL ABC.

Texas Tax Code Sec. 151.314(d)(3) exempts sales of food products, meals, soft
drinks served to a patient or inmate of a hospital or other institution
licensed by the state for the care of humans. Effective October 1, 1995,
Subsection (g) has been added to Sec. 151.314 to state:

The exemption provided by Subsection (d)(3) does not apply to food products,
meals, soft drinks, and candy for human consumption sold to a person confined
in a correctional facility operated under the authority or jurisdiction of or
under contract with this state or a political subdivision of the state.

The definition of "correctional facility" can be found in Section 1.07 of the
Penal Code. It includes:

-- a municipal or county jail;

-- a confinement facility operated by the Texas Department of Criminal Justice;

-- a confinement facility operated under contract with any division of the
Texas Department of Criminal Justice; and

-- a community corrections facility operated by a community supervision and
corrections department.

SCHOOL A is operated by the Texas Youth Commission for the rehabilitation of
delinquent children rather than operated by the Texas Department of Criminal
Justice for the confinement of criminals. For that reason, sales of food
products, meals, soft drinks served to children committed to a facility of the
Texas Youth Commission will still be exempt under the provisions of Tax Code
Sec. 151.314(d)(3), even after September 30, 1995.

You asked in your letter about sales of food products, soft drinks,and candy to
the staff. Sales tax must be collected on taxable sales to staff, visitors, or
volunteers. The exemption in 151.314(d)(3) applies only to food products, soft
drinks, and candy served to the children committed to the SCHOOL A.

As we discussed by phone, the COUNCIL ABC for SCHOOL A, is an organization with
exempt status under 501(c)(3) of the Internal Revenue Code. Therefore, the
organization may hold two one-day tax free sales or auctions in a calendar year
to raise money for the organization under Texas Tax Code Sec. 151.310(c).
Please note that a tax-free day is considered a consecutive 24 hour period for
purposes of this exemption. The organization may purchase items sold during a
one day sale or auction tax free by giving a properly completed exemption
certificate to a vendor. The organization will not need a sales tax permit
unless it has taxable sales to report and remit tax for.

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