Is electricity used at a restaurant chain's central commissary/kitchen exempt from sales tax if the food leaving the commissary isn't yet ready to eat?

Plain-English summary

A restaurant chain's commissary partially prepares food, then sends that partially prepared food out to the chain's various restaurants, where each restaurant finishes it before serving it to customers. The taxpayer asked whether the electricity used at the commissary qualifies for the sales tax exemption for "commercial use," on the theory that the food isn't ready for immediate consumption when it leaves the commissary.

The Comptroller's Tax Policy Division said no — the electricity used at the commissary is taxable. Tax Code Section 151.317 defines "commercial use" (which is generally exempt) as use by a business engaged in selling, warehousing, or distributing a commodity, but the statute specifically excludes from that exemption "processing tangible personal property for sale as tangible personal property, other than preparation or storage of food for immediate consumption." In other words, preparing food for immediate consumption is carved back out of the exemption and is taxable.

The Comptroller reasoned that the restaurant chain is a single legal entity, so its use of electricity at the commissary — even though the commissary only does part of the food preparation — is really just one step in preparing food that the chain ultimately sells ready for immediate consumption at its restaurants. Because the statutory exclusion for electricity used to prepare food for immediate consumption doesn't turn on whether the food is fully finished at that particular location, the commissary's electricity use is taxable.

What this means for you

Restaurant chains and multi-location food businesses with a central commissary or kitchen

If your business operates a central commissary, central kitchen, or similar facility that does some of the food preparation before sending partially prepared food on to your restaurants or other locations to finish, don't assume the electricity (or other utilities) used at that central facility qualifies for the "commercial use" sales tax exemption just because the food isn't restaurant-ready when it leaves that facility. The Comptroller looks at the business as a whole: if the end product is food sold ready for immediate consumption, utilities used anywhere along that preparation chain can be taxable.

Accountants and tax professionals

This letter illustrates how the Comptroller applies the "commercial use" exemption under Tax Code Section 151.317 to multi-step food preparation. The statute's carve-out for "preparation or storage of food for immediate consumption" is read broadly enough to reach utilities used at an intermediate processing step (the commissary), not just utilities used at the final point of sale. When advising a client with a similar commissary/central-kitchen structure, treat utility usage there as taxable unless the end food product is not sold ready for immediate consumption.

Common questions

Q: Does splitting food preparation between a commissary and individual restaurants change the tax treatment of the commissary's electricity?
A: No. Because the restaurant chain is a single legal entity, the Comptroller looked at the ultimate use of the food (sold ready for immediate consumption) rather than treating the commissary's partial preparation as a separate, non-taxable processing step.

Q: Is electricity used to prepare food always taxable?
A: Under Section 151.317, the general "commercial use" exemption excludes processing tangible personal property for sale as tangible personal property, but that exclusion itself doesn't cover preparing or storing food for immediate consumption. So electricity used to prepare food that will be sold ready for immediate consumption is taxable, even if used at an intermediate facility like a commissary.

Q: Can another business rely on this letter?
A: No. STAR letters generally may be relied on only by the taxpayer to whom they were issued, and this letter is limited to the facts presented; if the facts differ, the Comptroller noted the opinion may change.

Citations and references

Statutes and rules:

• Tax Code Section 151.317 (definition of "commercial use" for the sales tax exemption on electricity, gas, and other 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/9512777L

Original ruling text

December 5, 1995

Dear **:

Thank you for your letter of November 27, 1995, asking about the taxation of
electricity used to prepare food in a restaurant chain's commissary.

The commissary does part of the food preparation ad then sends the partially
prepared food to the several restaurants to finish. You ask if the electricity
used at the commissary qualifies for exemption from sales tax as the food is
not ready for immediate consumption when it leaves the facility (commissary).

Answer: The electricity used at the commissary is taxable. Section 151.317
defines "commercial use" as "use by a person engaged in selling, warehousing,
or distributing a commodity or...service... but does not include use by a
person engaged in processing tangible personal property for sale as tangible
personal property, other than preparation or storage of food for immediate
consumption..." As a single legal entity, the restaurant chain's use of
electricity at the commissary is to prepare food that it sells ready for
immediate consumption in its restaurants.

The statutory language excluding use of electricity in processing tangible
personal property for sale does not include use of natural gas and electricity
to prepare food sold ready for immediate consumption. The restaurant chain's
use of electricity at its commissary is clearly taxable.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free 1-800-531-5441, extension 3-4683. The direct line is
512/463-4683. You may also write to Tax Policy Division, Comptroller of Public
Accounts.

Sincerely,

Eddie C. Washington
Tax Policy Division