Is a restaurant's ice machine exempt from Texas sales tax if it makes ice served directly to customers in drinks?

Plain-English summary

A restaurant owner asked about the sales tax treatment of an ice machine, confirming by phone that the machine was used exclusively to produce ice served directly to customers in their drinks.

The Comptroller confirmed: an ice machine used exclusively for this purpose qualifies for exemption from sales tax, as manufacturing equipment producing a food product sold to customers.

But the letter includes an important caveat: if any of the ice produced is instead used for salad bars, drink coolers, or similar purposes (rather than being served directly to a customer in a drink), that constitutes a divergent use of equipment purchased tax-free for manufacturing. When a divergent use occurs, sales tax becomes due on the fair market rental value of the ice machine for the period during which that non-qualifying use happens.

What this means for you

Restaurant, bar, and beverage-service owners

If your ice machine's output goes exclusively into customers' drinks, you can buy it tax-free as manufacturing equipment. But if you also scoop ice from the same machine for a salad bar, to chill bottled drinks in a cooler, or for any other non-drink-serving purpose, you owe tax on the fair rental value of the machine for that period — track how the ice is actually used if you want to preserve the exemption.

Accountants and tax professionals

This is a compact example of the "divergent use" doctrine applied to a small, everyday piece of restaurant equipment: the exemption is use-based and can be partially lost (via a rental-value tax) rather than lost entirely, if the equipment serves a mix of qualifying and non-qualifying purposes.

Common questions

Q: Is a restaurant ice machine always tax-exempt?
A: Only if it's used exclusively to produce ice served directly in customer drinks, per this letter — using the ice for other purposes changes the analysis.

Q: What happens if the ice is also used for a salad bar?
A: Per this letter, that's a divergent (non-qualifying) use, and sales tax becomes due on the fair market rental value of the machine for the period of that divergent use.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9805517L

Original ruling text

May 7, 1998

Dear **

Thank you for your recent letter regarding the tax treatment of an ice machine
used in your restaurant.

In our telephone conversation of May 7, 1998, you said that the ice machine was
used exclusively to produce ice that is served to customers in their drinks.

The purchase of an ice machine used exclusively for this purpose qualifies for
exemption from sales tax.

Please note that any use of the ice produced for use in salad bars, drink
coolers or the like would constitute divergent use of the ice machine. When a
divergent use is made of an item purchased tax free for use in manufacturing,
sales tax is due on the fair market rental value of the item for the period of
time for which the divergent use is made.

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

You may call me toll free at 1-800-531-5441, ext. 3-4680. The direct line is
512/463-4680. You may also write to Tax Policy, Comptroller of Public
Accounts. The email address is .

Sincerely,

Al Van Allen
Tax Policy Division