Are compressors that keep breaded fish frozen after processing exempt from Texas sales tax as manufacturing equipment?

Plain-English summary

A restaurant-operating company processes frozen fish by cutting and breading it, then needs to freeze it completely using two compressors that hold roughly zero degrees Fahrenheit. It asked whether the compressors used to keep the fish frozen are exempt from sales tax.

The Comptroller said no. Because the fish is later shipped to the company's own restaurants, cooked, and sold as food ready for immediate consumption, the compressors aren't treated as part of the manufacturing process that completes the product for sale — instead, they're just preventing spoilage or deterioration of an already-processed item, which doesn't qualify for the manufacturing exemption.

On the follow-up questions: assuming the compressors are real property, labor to maintain them is exempt only if it qualifies as maintenance under Rule 3.357 — meaning the work must be scheduled, periodic, and documented. But replacing a compressor is always taxable real property repair, remodeling, or restoration, never exempt. And if the compressors are instead treated as tangible personal property rather than real property, the answers don't change in substance: repair, restoration, remodeling, or maintenance services on tangible personal property are simply taxable outright.

What this means for you

Food processors with an integrated restaurant/retail operation

Refrigeration equipment that merely keeps an already-finished product from spoiling — as opposed to equipment that's part of actually completing the manufacturing process — does not qualify for the manufacturing exemption. Whether your finished product goes to your own retail operation for immediate-consumption sale (as here) can matter to this analysis.

Businesses maintaining or replacing refrigeration/compressor equipment

Only scheduled, periodic, documented maintenance labor on real property refrigeration equipment is exempt; replacing the equipment is always taxable, and any repair/restoration/remodeling/maintenance service on equipment treated as tangible personal property is taxable regardless.

Common questions

Q: Are compressors that freeze food for later sale always exempt as manufacturing equipment?
A: No — here, because they only maintained an already-processed product's frozen state to prevent spoilage rather than complete the manufacturing of the product, they were not exempt.

Q: Is maintenance labor on the compressors taxable?
A: Only exempt if it's scheduled, periodic, documented maintenance of real property under Rule 3.357; replacing a compressor is always taxable.

Q: Can another company rely on this exact letter?
A: No. This is a Texas STAR letter ruling binding on the Comptroller only for the taxpayer it addresses (34 Tex. Admin. Code Rules 3.1, 3.10); confirm your own facts with a tax professional.

Citations and references

Rules:

• 34 Tex. Admin. Code § 3.357 (real property repair, remodeling, restoration and maintenance)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9709953L

Original ruling text

September 24, 1997

Dear*****:

Thank your letter of September 18, 1997, concerning the taxability of
compressors used to freeze and store fish.

Your company processes frozen fish by cutting and breading it. Your company
needs to get the fish to a complete frozen temperature. Your company has two
compressors that keep the temperature at about zero degrees Fahrenheit, in
order that the fish processed will freeze and remain frozen.

Are the compressors used to keep the fish frozen exempt from sales tax?

Answer: Our records show that you operate several restaurants in CITY A. The
fish that is cut up, breaded and frozen is shipped to your restaurants where it
is cooked and sold as food ready for immediate consumption. The compressors
are not exempt. The compressors are not use to freeze breaded fish to be sold.
The compressors are used to prevent spoilage or deterioration.

Is the maintenance and labor exempt from sales tax?

Answer: Presuming the compressors are real property, the labor to maintain the
compressors is exempt only if the service qualifies as maintenance of real
property as defined in Rule 3.357 concerning real property repair, remodeling,
restoration and maintenance. The service must scheduled and periodic and be
documented.

Are replaced compressors exempt from sales tax?

Answer: No. Presuming the compressors are real property, the replacement of a
compressor is taxable real property repair, remodeling or restoration.

If the compressors are tangible personal property, the answers to the questions
remain the same. However, services to repair, restore, remodel or maintain
tangible personal property are 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