Is electricity used at a food-processing facility exempt from Texas sales tax as manufacturing use when the facility's own vending machines are what ultimately sell the packaged food?

Subject

Vending Machine Facility — Electricity Used For Processing Packaged Food For Vending Machines Owned By Same Owner As Facility — Taxable As Food Prepared For Immediate Consumption

Plain-English summary

A business asked the Comptroller to confirm that electricity and natural gas used at its facility -- which manufactures packaged food later sold through vending machines -- would qualify for the manufacturing/processing exemption under Tax Code Sections 151.317 and 151.318, based on a predominant use study showing the electricity and gas were mostly used for processing (cutting, cooking, assembling, cooling, and packaging).

The taxpayer's argument was that Section 151.314(c)(3) -- which taxes food "sold by a retailer" ready for immediate consumption, including food sold through vending machines -- did not apply, because no food was retailed and no vending machines were located at the processing facility itself.

The Comptroller disagreed and ruled the electricity is taxable. The key fact was that the client owned both the processing facility and the vending machines the food is ultimately sold through. Since the client is a single legal entity, the Comptroller treated the electricity and gas used at the facility as being used to prepare food for immediate consumption -- because that food ends up sold through the client's own vending machines -- rather than as processing tangible personal property for sale to someone else. Tax Code Section 151.317(b)(2)(A)(i) specifically excludes from the exemption electricity and natural gas used "by a person engaged in ... preparation or storage of food for immediate consumption." That exclusion applied here even though the vending machines themselves were not physically located at the facility.

What this means for you

Food processors or manufacturers that also sell through vending machines

If your company processes or packages food at one location and then sells that same food through vending machines you also own (even at a different location), the electricity and natural gas used to process that food may not qualify for the manufacturing exemption. The Comptroller looks at whether the food is ultimately sold ready for immediate consumption by the same legal entity, not just at what happens physically inside the processing facility.

Businesses relying on predominant use studies

A predominant use study showing that electricity is mostly used for cutting, cooking, assembling, cooling, and packaging does not automatically secure the manufacturing exemption. If the end product is food destined for immediate-consumption sale (such as through vending machines, restaurants, or similar outlets) owned by the same taxpayer, the "food for immediate consumption" exclusion in Section 151.317(b)(2)(A)(i) can override an otherwise qualifying processing use.

Accountants and tax professionals

Note the structural point in this letter: common ownership of the processing facility and the retail outlet (here, vending machines) is what pulled the facility's utility use out of the exemption, even though Section 151.314(c)(3) on its face addresses food "sold by a retailer" and no retail sales or vending machines existed at the facility itself. Where a client processes food that it will later sell itself through immediate-consumption channels, flag the common-ownership issue before relying on a predominant use study alone.

Common questions

Q: Why was the electricity taxable if no food was actually sold at the processing facility?
A: Because the client owned both the facility and the vending machines the food is ultimately sold through. The Comptroller treated the client as a single legal entity, so the electricity used to prepare that food counted as preparing food for immediate consumption, regardless of where the vending machines were physically located.

Q: Doesn't Section 151.314(c)(3) only apply when food is "sold by a retailer"?
A: The taxpayer made that argument, but the Comptroller's response focused instead on Section 151.317(b)(2)(A)(i), which excludes electricity and natural gas used for "preparation or storage of food for immediate consumption" from the manufacturing exemption -- a separate basis that did not depend on whether food was retailed on-site.

Q: Would the answer differ if the facility and the vending machines were owned by unrelated companies?
A: The letter does not say directly, but it emphasizes that the outcome turned on the client owning both the facility and the vending machines as a single legal entity. This letter does not address a scenario with separate, unrelated owners.

Q: Could this outcome change with different facts?
A: Yes. The letter states the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.317 (electricity and natural gas exemption; "commercial use" definition; § 151.317(b)(2)(A)(i) excludes preparation or storage of food for immediate consumption)
• Tex. Tax Code § 151.318 (manufacturing exemption)
• Tex. Tax Code § 151.314(c)(3) (excludes from "food products" certain foods sold ready for immediate consumption, including through vending machines)
• 34 Tex. Admin. Code § 3.295 (Rule 3.295, natural gas and electricity)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9608L1432G07

Original ruling text

August 14, 1996

Dear *****:

Thank you for your letter concerning the predominant use study being performed
at a facility that manufactures packaged food for vending machines.

You are seeking verification the facility will be considered
exempt if the facility's use of electricity and natural gas show the
predominant use to be for processing and manufacturing according to Tax Code
Section 151.317 (Rule 3.295) and Texas Tax Code Section 151.318.

Raw materials are purchased and stored at the facility in
refrigerators and freezers, which are considered taxable. Processing includes
(but is not limited to) any or all of the following: cutting, cooking,
assembling, cooling (to required temperature within a specific time period) and
packaging for shipment to the customer.

When clarification was requested by phone, Texas Tax Code Section 151.314(c)(3)
was quoted as a reason to deny an exemption for this facility. No food is
retailed at this facility, therefore (c) would not be applicable to the
situation since it states, "When food is sold by a retailer . . ."

Since no food is retailed an there are no vending machines on the premises,
you feel that the electricity and gas consumed for processing and manufacturing
of the packaged foods will qualify as exempt from state sales tax.

Response: The electricity used at the facility is taxable.
Texas Tax Code 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..."

Texas Tax Code Section 151.314(c)(3) excludes from the definition of "food
products:"

foods and drinks (which include meals, milk and milk
products, fruit and fruit products, sandwiches, salads, processed meats and
seafoods, vegetable juices, ice cream in cones or small cups) served, prepared,
or sold ready for immediate consumption in or by restaurants, lunch counters,
cafeterias, vending machines, hotels, or like places of business or sold ready
for immediate consumption from pushcarts, motor vehicles, or any other form of
vehicle.

(Emphasis added.)

Your client, whether a sole owner, partnership, or corporation, is a single
legal entity. The statutory language excluding use of electricity and natural
gas in processing tangible personal property for sale does not include use of
natural gas and electricity to prepare food sold ready for immediate
consumption. If the client owns the facility and the vending machines the
food products are sold through, the electricity and natural gas used at the
facility are for preparing food for immediate consumption. Texas Tax Code
Section 151.317(b)(2)(A)(i) excludes from exemption electricity and natural
gas used "by a person engaged in . . . preparation or storage of food for
immediate consumption."

The electricity and natural gas used at the facility 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

NOTE: Previous Accession Number 9608607L