When restaurant/food-processing equipment like an ice machine is bought tax-free under the manufacturing exemption but later put to a different use, who owes the tax, and how much?

Subject

Restaurant/Food Processors/Bakery — Equipment/Hand Tools Used In Food Preparation — Taxable/Nontaxable Partial List

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9609L1437G02

Plain-English summary

A taxpayer wrote in asking about the phased-in sales tax exemption for manufacturing equipment as it applies to restaurant/processing equipment, and about what happens when that equipment is later used in a way that doesn't match the exemption.

The Comptroller's letter walks through three points, all tied to the Texas Tax Bulletin "Restaurants and the Texas Sales Tax":

• Refund deadline for older purchases. Refunds of tax on qualifying restaurant (processing) equipment had to be applied for in the year immediately following the year the tax was paid -- but that rule only applied to qualifying purchases made from 1990 through September 30, 1991. For qualifying purchases made from October 1, 1993 forward, the regular four-year statute of limitations applies instead.
• Vendors are protected by good-faith exemption certificates. A vendor who accepts an exemption certificate from a purchaser in good faith is relieved of tax liability; the purchaser takes on the liability once a properly completed exemption certificate is issued and accepted. In the ice machine example discussed in the letter, the Comptroller said it would not likely hold the vendor liable for tax on the machine when an exemption certificate was accepted.
• What happens if the equipment's actual use diverges from the exemption depends on the purchase date. If an ice machine was bought tax-free between October 1, 1993 and December 31, 1994, and used predominantly to produce ice sold in drinks, the purchaser owes no additional sales tax for that divergent use (beyond the reduced state and local sales tax already paid on the machine). But if the ice machine was bought completely tax-free on or after January 1, 1995, the buyer owes sales tax on the fair market rental value of the machine for the period it was used in a divergent manner.

The letter closes with the Comptroller's standard caveat: the opinion is based on the facts presented, and could change if the facts are different.

What this means for you

Restaurant and food-processing equipment buyers

If you bought manufacturing/processing equipment (like an ice machine) using an exemption certificate, when you bought it determines your exposure if the equipment's use later diverges from the exempt purpose. Equipment bought tax-reduced between October 1, 1993 and December 31, 1994 and used predominantly for the qualifying purpose (e.g., producing ice sold in drinks) doesn't trigger extra tax for incidental divergent use. Equipment bought fully tax-free on or after January 1, 1995 does trigger tax -- based on the fair market rental value for the time it was used in a divergent manner -- if its use diverges from the exempt purpose.

Vendors selling exempt equipment

Accepting a properly completed exemption certificate in good faith relieves you, the vendor, of tax liability on that sale. The tax liability shifts to the purchaser. This letter confirms the Comptroller would not likely pursue the vendor in that situation.

Accountants and tax professionals

Note the two different limitations regimes referenced here: the special refund-application deadline (year following the year tax was paid) applied only to a narrow 1990 through September 30, 1991 purchase window; purchases from October 1, 1993 forward instead follow the general four-year statute of limitations. Also flag the purchase-date cutoff (January 1, 1995) that determines whether divergent use of exempt restaurant equipment triggers a fair-market-rental-value tax assessment.

Common questions

Q: Is a vendor liable for tax if it accepts an exemption certificate from a restaurant equipment buyer?
A: No -- a vendor who accepts an exemption certificate in good faith is relieved of the tax liability; the purchaser assumes it once a properly completed certificate is issued and accepted.

Q: I bought an ice machine tax-free between October 1993 and December 1994 and used it mostly to make ice for drinks. Do I owe more tax for the divergent use?
A: According to this letter, no additional sales tax liability arises for that divergent use, given the reduced state and applicable local sales taxes were already paid on the machine.

Q: I bought an ice machine completely tax-free on or after January 1, 1995. What if I used it in a divergent manner?
A: The letter states the buyer would owe sales tax on the fair market rental value of the machine for the period of time it was used in the divergent manner.

Q: What's the deadline to apply for a refund on qualifying restaurant processing equipment?
A: The letter confirms that refunds had to be applied for in the year immediately following the year the tax was paid, but only for qualifying purchases made from 1990 through September 30, 1991. For qualifying purchases made from October 1, 1993 forward, the four-year statute of limitations applies instead.

Q: Could this outcome change under different facts?
A: Yes -- the letter explicitly says the opinion is based on the facts presented, and the opinion may change if there are additional or different facts.

Original ruling text

September 10, 1996

Dear ***:

Thank you for your letter of March 4, 1996, that was postmarked September
4, 1996, about the phased-in exemption for manufacturing equipment.

The Texas Tax Bulletin entitled "Restaurants and the
Texas Sales Tax" states that refunds of tax on qualifying restaurant
(processing) equipment must be applied for in the year immediately following
the year in which the tax was paid. You are correct in concluding this
provision applied only to qualifying purchases made from 1990 through September
30, 1991, and that the four-year statute of limitation applies to all
qualifying purchases made from October 1, 1993, forward.

A vendor who accepts an exemption certificate from a
purchaser in good faith is relieved of the tax liability. The purchaser
assumes the tax liability when a properly completed exemption is issued and
accepted by the vendor. In the example given, the comptroller would not likely
hold the vendor liable for tax on the ice machine when an exemption certificate
was accepted.

If the ice machine was bought between October 1, 1993,
and December 31, 1994, and used predominantly for producing ice sold in drinks,
the purchaser (having paid a reduced state sales and applicable local sales
taxes on the ice machine) does not incur any additional sales tax liability for
the divergent use. If the ice machine was bought tax free on or after January
1, 1995, the buyer would owe sales tax on the fair market rental value for the
period of time the ice machine was used in a divergent manner.

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 9609692L