Which grocery-store packaging supplies (bags, boxes, trays, shrink wrap, containers) qualify for the manufacturing/processing exemption in departments like cheese, produce, bakery, and bulk foods, and does it matter if the department is also selling exempt products?

Plain-English summary

A grocery store chain under audit got a detailed, department-by-department ruling on its packaging supplies (bags, twist ties, boxes, trays, shrink wrap, containers), then a follow-up clarification letter refining two of the answers. Combined, the two letters map a genuinely useful general framework: the same store can have some packaging that's exempt and some that's taxable, department by department, depending on whether real processing happens there.

The foundational rule (Rule 3.314(e)(2), "combination businesses"): a business that's primarily a manufacturer can buy tax-free packaging supplies even for a portion used in mere repackaging. Applied to a grocery store: the store overall isn't a manufacturer, but individual departments that genuinely process food can have their packaging supplies purchased tax-free, as long as those supplies are clearly distinguishable (e.g., separately invoiced) from packaging used in non-processing departments.

Department-by-department breakdown:

• Produce Department: packaging for fruits/vegetables that are sliced and packaged qualifies for exemption (processing); packaging for produce that's merely washed and packaged does NOT qualify (not processing).
• Cheese Department: cutting and repackaging large wheels of cheese is repackaging, not processing -- packaging supplies for that are taxable. But mixing ingredients to prepare spreads and dips is processing, so packaging for those products is exempt. The clarification letter adds: slicing or grating cheese IS processing, so packaging for sliced/grated cheese also qualifies for exemption.
• Bakery Department: bags, cake boxes, cake domes used to package cookies/breads/pastries baked on-site qualify for exemption; packaging for off-site vendor-baked items is taxable (the store isn't the one processing those).
• Bulk Department (rice, flour, nuts, grains, cereals, herbs): containers/bags used to package bulk items actually processed by the store or the customer (the letter's example: grinding coffee beans) are exempt; containers/bags for bulk items not processed by either party are taxable.

Separate container-specific exemption: Tax Code Section 151.322(a)(1) exempts a container sold together with its contents when the contents' sale price isn't itself taxed -- covering glass, plastic, or metal bottles, cans, barrels, and cylinders (excluding items described in Section 151.302(d)). Critically, plastic bags do NOT qualify as "containers" under this provision -- so a plastic bag holding tax-exempt raw peanut butter or maple syrup doesn't get a separate container exemption the way a glass jar or metal can would (though the bag might still qualify under the general processing-packaging-supplies analysis above if it's used to package something the store or customer processed).

What this means for you

Grocery stores and food retailers with multiple departments

Map your packaging purchases by department and by whether real processing (mixing, slicing, grinding, baking) happens there, not just by department name. Keep processing-department packaging invoices separate from non-processing-department packaging invoices to support tax-free purchasing where it applies.

Departments doing both processing and mere repackaging (like a cheese department preparing both cut wheels and mixed spreads)

The same department can have both taxable and exempt packaging supplies depending on which specific product line the packaging goes to -- cutting/repackaging cheese wheels is taxable, but slicing/grating cheese or mixing dips is exempt.

Accountants and tax professionals

A genuinely comprehensive multi-department reference letter (unusual for its breadth) -- useful as a checklist when auditing or advising a grocery-format client on packaging supply purchasing, and a reminder that "container" under Sec. 151.322(a)(1) has a specific, narrower meaning that excludes plastic bags.

Common questions

Q: Is packaging for grocery store departments always exempt or always taxable?
A: Neither -- it depends department-by-department, and often product-by-product within a department, on whether genuine processing (not mere repackaging) occurs.

Q: Does slicing or grating cheese count as processing?
A: Yes, per the clarification in this letter -- packaging for sliced/grated cheese qualifies for exemption.

Q: Do plastic bags qualify for the container exemption under Sec. 151.322(a)(1)?
A: No, plastic bags are specifically excluded from that provision's definition of "containers."

Q: Can I rely on this letter for my own grocery store's packaging purchases?
A: No. It is based on the specific facts presented and can only be relied on by the taxpayer to whom it was issued.

Citations and references

Statutes and rules:

• Texas Tax Code Section 151.322(a)(1) (container exemption)
• Texas Tax Code Section 151.302(d) (container exemption exclusions)
• 34 Tex. Admin. Code Rule 3.314(b)(1), (e)(2) (wrapping and packaging supplies)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9904382L

Original ruling text

April 7, 1999

Dear ****:

This is to clarify my December 14, 1998 response to you regarding packaging
supplies and processing. My responses to question 2 and 4 are restated below
with the clarification added (last paragraph added to my response to question 2
and first sentence of question 4 clarified and last paragraph added).

These packaging products are used in the following departments in a retail
grocery store:

2. Cheese Department - this department cuts and repackages large wheels of
   cheese, and prepares cheese, olive and various other spreads and dips.

Response: This department is considered repackaging the cheese rather than
processing the cheese, therefore the packaging supplies used for this purpose
are taxable. The mixing of ingredients to prepare spreads and dips qualifies
as processing and packaging for those products qualify for exemption.
Subsection (e) (2) of Rule 3.314 provides in part:

(e) Combination businesses. A business that primarily manufactures tangible
personal property for sale may also purchase tangible personal property for
resale that was manufactured by another entity. If the business is primarily a
manufacturer, all packaging supplies may be purchased tax free even though a
portion of the packaging supplies are used in repackaging a product. For
example:

(1) ...

(2) a grocery store purchases tangible personal property for resale, but also
processes food and food products. A grocery store's meat department or snack
bar may be processing as well as re-packaging food and food products. If the
packaging supplies used by the departments that process are clearly
distinguishable from those packaging supplies used in the nonprocessing
department, the processing department's packaging supplies may be purchased tax
free.

Slicing or grating of cheese is considered processing. Packaging supplies
(containers, bags, labels, etc.) used to package cheese sliced or grated by Taxpayer
qualify for exemption as wrapping and packaging supplies.

4. Bulk Department - this department includes over a hundred products such as
   rice, flour, nuts, grains, cereals and herbs. Without a package to put these
   in, such as a plastic bag, the customer would not be able to take the product
   off the store premises.

Additionally, the auditor has indicated that containers are taxable if used in
non-processing departments. It appears to me that containers are exempt by
statute as long as the ingredients within the containers are also not taxable,
such as raw peanut butter or maple syrup. Could you please confirm that as
well?

Response: You are correct, with respect to the "sale" of containers with
exempt products. Texas Tax Code 151.322 (a)(1) exempts a container sold with
its contents if the sales price of the contents is not taxed under this
chapter. "Containers" that qualify include glass, plastic, or metal bottles,
cans, barrels, and cylinders, but does not include any item of a type described
in Section 151.302(d). Also, plastic bags do not qualify as containers.

Subsection (b)(1) of Rule 3.314 - concerning wrapping and packaging supplies,
exempts from sales tax containers or packaging supplies purchased by
"manufacturers" for use as a part of the completion of the manufacturing
process. Therefore, Taxpayer can purchase tax free containers or packaging supplies
used in the Bulk Department used to package bulk items processed by Taxpayer or the
customer (i.e., grinding of coffee beans). Containers and bags used to package
or bag bulk items not processed by Taxpayer, or the customer, are not exempted.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. I hope this information answers your questions.

If you need additional information, please call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Policy Division, Comptroller of Public Accounts. You may also e-mail our tax
help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division

cc: Ping Hu, Auditor -Audit

December 14, 1998

Dear Ms. **:

This is in response to your request for a ruling on certain packaging products
used by COMPANY A in their stores. You are currently under audit and have been
advised by our auditor, Ping Hu, to request a taxability determination on
certain packaging products.

Packaging supplies for these departments are separately invoiced, and therefore
clearly distinguishable from packaging supplies purchased for other
non-processing department in the store.

You asked for a ruling on the taxability of each of the department's bag and
packaging purchases as well as on the container question. If you have any
questions or need additional information, please feel free to contact me at the
number listed below.

These packaging products are used in the following departments in a retail
grocery store:

1. Produce Department- in addition to simply placing produce on a shelf for
   customer purchase fruits and vegetables are washed, sliced and packaged for
   sale.

Response: Packaging for fruits and vegetables that are sliced and packaged for
sale will qualify for exemption. Packaging for fruits and vegetables that are
merely washed and then packaged does not qualify for exemption.

2. Cheese Department - this department cuts and repackages large wheels of
   cheese, and prepares cheese, olive and various other spreads and dips.

Response: This department is considered repackaging the cheese rather than
processing the cheese, therefore the packaging supplies used for this purpose
are taxable. The mixing of ingredients to prepare spreads and dips qualifies
as processing and packaging for those products qualify for exemption.
Subsection (e) (2) of Rule 3.314 provides in part:

(e) Combination businesses. A business that primarily manufactures tangible
personal property for sale may also purchase tangible personal property for
resale that was manufactured by another entity. If the business is primarily a
manufacturer, all packaging supplies may be purchased tax free even though a
portion of the packaging supplies are used in repackaging a product. For
example:

(1) ...

(2) a grocery store purchases tangible personal property for resale, but also
processes food and food products. A grocery store's meat department or snack
bar may be processing as well as re-packaging food and food products. If the
packaging supplies used by the departments that process are clearly
distinguishable from those packaging supplies used in the nonprocessing
department, the processing department's packaging supplies may be purchased tax
free.

3. Bakery Department - in addition to selling baked goods from an off-site
   bakehouse and other outside vendors, the stores have on-site ovens where they
   bake cookies, breads and other pastries.

Response: The bags, cake boxes, cake domes, etc., used in the bakery department
to package the off-site and on-site baked cookies, breads and pastries will
qualify for exemption. Packaging materials used for outside vendor-baked items
are taxable.

4. Bulk Department - this department includes over a hundred products such as
   rice, flour, nuts, grains, cereals and herbs. Without a package to put these
   in, such as a plastic bag, the customer would not be able to take the product
   off the store premises.

Additionally, the auditor has indicated that containers are taxable if used in
non-processing departments. It appears to me that containers are exempt by
statute as long as the ingredients within the containers are also not taxable,
such as raw peanut butter or maple syrup. Could you please confirm that as
well?

Response: You are correct. Texas Tax Code 151.322 (a)(1) exempts a container
sold with its contents if the sales price of the contents is not taxed under
this chapter. "Containers" that qualify include glass, plastic, or metal
bottles, cans, barrels, and cylinders, but does not include any item of a type
described in Section 151.302(d). Also, plastic bags do not qualify as
containers.

This opinion is based on the facts presented. Other facts though similar may
provide a different result. I hope this information answers your questions.

If you need additional information, please call me toll-free at 1-800-531-5441,
extension 3-4502. The direct line is 512/463-4502. You may also write to Tax
Policy Division, Comptroller of Public Accounts. You may also e-mail our tax
help section at:

Sincerely,

Gilbert Zamora
Tax Policy Division