Can a bakery avoid sales tax on the electricity and other utilities it uses to bake and freeze dough by claiming a manufacturing exemption?

Subject

Utilities Purchased for Baking/Freezing are Subject to Sales Tax

Plain-English summary

The Missouri Department of Revenue ruled that a bakery's purchase of utilities used in its freezing and baking operation is NOT exempt from state sales tax.

Applicant operates a bakery and freezing operation that combines raw materials to make dough, which is then sold to Applicant's own stores. Applicant asked whether the utilities it purchases to run its freezing and baking equipment qualify for a sales tax exemption.

The Department said no. Section 144.020.1, RSMo, imposes sales tax on sellers of tangible personal property or taxable services. Two statutes provide exemptions from that tax for utilities used in manufacturing: Section 144.030.2(12), RSMo, exempts electrical energy used in the "actual primary manufacture, processing, compounding, mining or producing" of a product, and Section 144.054.2, RSMo, exempts electrical energy, gas, water, coal, and other energy sources, chemicals, machinery, equipment, and materials used or consumed in "manufacturing, processing, compounding, mining, or producing" any product.

However, the Missouri Supreme Court has consistently held that preparing food for retail consumption does not count as "manufacturing" or "processing" within the meaning of those exemptions. The ruling quotes Brinker Mo., Inc. v. Dir. of Revenue for the point that the legislature never intended "manufacturing," "mining," "fabricating," or "producing" to be read broadly enough to include the preparation and cooking of food, and quotes Aquila Foreign Qualifications Corp. v. Director of Revenue for the point that the industrial connotation of "processing" in Section 144.054.2 does not extend to food preparation for retail consumption. Because Applicant's baking and freezing of dough is food preparation for retail consumption, its utility purchases fall outside both exemptions and remain subject to sales tax.

What this means for you

Bakeries and food-preparation businesses

If your business bakes, freezes, cooks, or otherwise prepares food that will ultimately be sold at retail, don't assume the manufacturing/processing utility exemptions in Sections 144.030.2(12) and 144.054.2, RSMo, apply to you. This ruling confirms that Missouri courts and the Department treat food preparation for retail consumption as categorically different from industrial manufacturing or processing, so utilities (electricity, gas, water, and similar) used in baking or freezing operations remain taxable.

Multi-location or store-supply operations

Even though Applicant's dough was produced centrally and then distributed to Applicant's own stores rather than sold directly to the public at the production site, that distinction didn't change the outcome. The ruling focused on the nature of the activity -- baking and freezing dough destined for retail sale -- not on whether the production facility itself sells directly to consumers.

Accountants and tax professionals

When a client in food production or food service asks about claiming the manufacturing exemption for utility costs, check whether the end product is food for retail consumption. Under Brinker and Aquila, that fact pattern defeats the exemption regardless of how industrial the equipment or process may seem. This ruling is a useful, on-point citation for that conclusion in the baking/freezing context specifically.

Common questions

Q: Are utilities used to bake and freeze dough exempt from Missouri sales tax as a manufacturing input?
A: No. The Department ruled that Applicant's utility purchases for its baking and freezing operation are not exempt, because preparing food for retail consumption is not "manufacturing" or "processing" under Sections 144.030.2(12) and 144.054.2, RSMo.

Q: What statutes did Applicant try to rely on for an exemption?
A: Section 144.030.2(12), RSMo (exemption for electrical energy used in actual manufacturing/processing) and Section 144.054.2, RSMo (broader exemption for electrical energy, gas, water, and other utilities/materials used in manufacturing, processing, compounding, mining, or producing a product).

Q: Why didn't those exemptions apply to a bakery?
A: The Missouri Supreme Court held in Brinker Mo., Inc. v. Dir. of Revenue and Aquila Foreign Qualifications Corp. v. Director of Revenue that the legislature did not intend "manufacturing," "processing," "mining," "fabricating," or "producing" to include the preparation and cooking of food for retail consumption. Baking and freezing dough for retail sale falls into that excluded category.

Q: Does it matter that the dough was sold to Applicant's own stores rather than directly to the public?
A: The ruling's response doesn't turn on that distinction -- it focuses on the fact that the activity is food preparation for retail consumption, which is outside the scope of the manufacturing/processing exemptions regardless of the internal distribution chain.

Q: Can another bakery rely on this ruling for its own utility purchases?
A: Not automatically. This is a Missouri letter ruling, binding on the Department only with respect to the requesting Applicant, only for three years from its date, and only so long as the facts and underlying law remain unchanged. A different business should confirm its own facts match and consult a tax professional before relying on this result.

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8198

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated April 29, 2022.

The facts as presented in your letter ruling request are summarized as follows:

Applicant has a bakery and freezing operation that produces dough which is then sold to its stores. Applicant combines the raw materials necessary to make the dough.

ISSUE 1 :

Is Applicant's purchase of utilities used in its freezing and baking operation exempt from state sales tax?

RESPONSE 1 :

No. Applicant's purchase of utilities used in its freezing and baking operation are not exempt from state sales tax. Section 144.020.1, RSMo, provides "[t]ax is hereby levied and imposed upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service in this state."

Section 144.030.2(12), RSMo, exempts:

Electrical energy used in the actual primary manufacture, processing, compounding, mining or producing of a product, or electrical energy used in the actual secondary processing or fabricating of the product...

Section 144.054.2, RSMo, exempts:

...electrical energy and gas, whether natural, artificial, or propane, water, coal, and energy sources, chemicals, machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product...

The Missouri Supreme Court has consistently held that food preparation for retail consumption does not constitute manufacturing or processing as contemplated by the exemptions in sections 144.030.2(12) and 144.054.2., RSMo:

"The legislature did not include the words 'restaurant' or 'preparation' or 'furnishing' or 'serving' in section 144.030.2, RSMo., nor did it elsewhere indicate that it intended the words 'manufacturing,' 'mining,' 'fabricating' or 'producing' to be used in a broad sense to include preparation and cooking of food..." Brinker Mo., Inc. v. Dir. Of Revenue, 319 S.W.3d 433, 438 (Mo. Banc 2010)( abrogated on other grounds).

"Section 144.054.2 lists 'processing' along with 'manufacturing,' 'compounding,' 'mining,' and 'producing.' The industrial connotations of those terms in section 144.054.2 indicate that the legislature did not intend "processing" to include food preparation for retail consumption." Aquila Foreign Qualifications Corp. v. Director of Revenue , 362 S.W. 3d 1, 5 (Mo. Banc 2012).

Therefore, Applicant's purchases of utilities used in its freezing and baking operations are not exempt from state sales tax.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford