Is a fast-food restaurant a 'manufacturer' entitled to the production exemption on the utilities and equipment it uses to prepare food?

Plain-English summary

Tri City Desserts, Inc. runs a fast-food operation: it makes soft-serve ice cream from mix using a freezer unit, and prepares and serves hamburgers, hot dogs and other food for eating on or off the premises. It asked whether a fast-food restaurant counts as a manufacturing operation entitled to the production exemption on its purchases of utilities.

The Department held that preparing restaurant food is not manufacturing — with a narrow carve-out for bulk ice cream.

• Restaurant food is taxed under § 1105(d), not exempt as production. Section § 1105(d) taxes food and drink sold by restaurants and similar establishments, and fast-food, ice cream and hot-dog stands are listed among those that must collect it (20 NYCRR 527.8(b)). The food exemption in § 1115(a)(1) expressly does not exempt food taxed under § 1105(d).
• Making restaurant food ≠ producing tangible personal property. Department policy TSB-M-81(11)S and the Court of Appeals in Burger King, Inc. v. State Tax Commission, 51 N.Y.2d 614 hold that restaurants "process and deliver restaurant food," a category distinct from tangible personal property, so the production exemptions in § 1115(a)(12) (machinery) and § 1115(c) (utilities) don't apply to that food prep.
• Bulk ice cream is different — it's an exempt food-store item. Selling ice cream in bulk (pint, quart, half-gallon, gallon), pre-packaged novelty items, and ice cream cakes is an exempt retail sale under § 1115(a)(1) because those are sold in the same form/packaging as in food stores (20 NYCRR 527.8(e)).
• So a sliver of exemption survives. Utilities used to run the mixing machine to make that bulk ice cream are exempt under § 1115(c); and a machine is exempt under § 1115(a)(12) only if more than 50% of its use goes to preparing that bulk ice cream. All other food-prep utilities and equipment are taxable.

What this means for you

Running a restaurant is not "manufacturing" for sales-tax purposes. No matter how much cooking, mixing and assembling you do, preparing food you sell under § 1105(d) doesn't qualify you for the production-machinery or production-utility exemptions. The Burger King decision settled this.

The line is whether the food is taxed as restaurant food or sold like a store product. Food you sell for immediate consumption (or that's taxable under § 1105(d)) is on the taxable side. Items you sell in the same form, quantity and packaging as a grocery store — here, bulk ice cream, pre-packaged novelties, ice cream cakes — are exempt food, and the equipment and utilities dedicated to making those can qualify.

Apportion by machine and by use. A single machine used mostly for exempt bulk ice cream (over 50%) can be exempt; utilities feeding that use are exempt. Keep records that separate exempt bulk-ice-cream production from ordinary taxable food prep, or you'll default to taxable.

Common questions

Q: We clearly "make" our food — why aren't we manufacturers?
A: Because the food you sell is taxed as restaurant food under § 1105(d). The Court of Appeals (Burger King) held that preparing restaurant food isn't producing tangible personal property, so the production exemptions don't apply.

Q: What part of our operation can be exempt?
A: The bulk ice cream you sell like a food store (pints/quarts/half-gallons/gallons), pre-packaged novelties and ice cream cakes are exempt food. Utilities running the mixer for that bulk ice cream are exempt, and a machine used over 50% for it is exempt.

Q: Our soft-serve cones are sold to eat right away — are the freezer's utilities exempt?
A: No. Soft-serve sold for immediate consumption is taxable § 1105(d) restaurant food. Only utilities and equipment devoted to the exempt bulk ice cream / packaged items qualify.

Citations and references

Statutes and regulations:

• Tax Law § 1105(a) — tax on retail sales of tangible personal property
• Tax Law § 1105(b) — tax on utilities
• Tax Law § 1105(d) — tax on food and drink sold by restaurants and similar establishments
• Tax Law § 1115(a)(1) — food exemption (not food taxed under § 1105(d))
• Tax Law § 1115(a)(12) — production-machinery exemption; § 1115(c) — production-utilities exemption
• 20 NYCRR 527.8(b), 527.8(e), 528.13(c) example 6, 528.22(c)

Authority cited:

• Burger King, Inc. v. State Tax Commission, 51 N.Y.2d 614; TSB-M-81(11)S

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1981.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a81_46s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-81(46)S
Sales Tax
November 5, 1981

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. S810728B

On July 28, 1981 a Petition for Advisory Opinion was received from Tri City Desserts, Inc.,
3781 Delaware Avenue, Tonawanda, New York 14217.
The issue raised is whether a fast food restaurant operated by Petitioner is considered to be
a manufacturing operation and, therefore, entitled to a tax exemption on its purchases of utilities.
Petitioner purchases soft ice cream mix and by means of an ice cream freezer unit produces
a soft serve ice cream. Petitioner also prepares and serves hamburgers, hot dogs and other food
products for consumption by its patrons, either on or off Petitioner's premises.
Section 1105(a) of the Tax Law imposes a tax on "The receipts from every retail sale of
tangible personal property, except as otherwise provided in this article." The sale of electricity or
electric service is subject to tax pursuant to section 1105(b). Also, section 1105(d) imposes a tax on
"The receipts from every sale of . . . food and drink or food alone, when sold in or by restaurants,
taverns or other establishments in this state . . . : (1) in all instances where the sale is for
consumption on the premises where sold; . . . and (3) in those instances where the sale is for
consumption off the premises of the vendor, except where food (other than sandwiches) or drink or
both . . . are of a type commonly sold for consumption off the premises and in the same form and
condition, quantities and packaging, in establishments which are food stores other than those
principally engaged in selling foods prepared and ready to be eaten."
Food, food products, certain beverages, dietary foods and health supplements sold for human
consumption are exempt from the tax imposed pursuant to section 1105(a). Tax Law § 1115(a)(1).
Such exemption provision further states: "Nothing herein shall be construed as exempting food or
drink from the tax imposed under subdivision (d) of section eleven hundred five."
Section 1115(a)(12) of the Tax Law provides an exemption for: "Machinery or equipment
for use or consumption directly and predominantly in the production of tangible personal property,
. . . for sale, by manufacturing, processing . . ." In explaining the application of the manufacturing
exemption, the Sales and Use Tax Regulations state that: "Machinery or equipment is used
predominantly in production, if over 50% of its use is directly in the production phase of a process."
20 NYCRR 528.13(c)(4).
Section 1115(c) exempts from the tax imposed pursuant to section 1105(b): ". . . electricity
. . . for use or consumption directly and exclusively in the production of tangible personal property
. . . for sale, by manufacturing, processing . . ." The Regulations relating to this exemption state:

JAMES H. TULLY., COMMISSIONER
TP-8 (4/80)

LOUIS M. JACOBSON, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-81(46)S
Sales Tax
November 5, 1981

"'Exclusively' means that the . . . electricity . . . and like services are used in total (100%) in the
production process." 20 NYCRR 528.22(c)(3).
The Sales and Use Tax Regulations include fast food operators, ice cream stands and
hamburg and hot dog stands among the types of establishments which are required to collect the tax
imposed pursuant to section 1105(d) of the Tax Law. 20 NYCRR 527.8(b).
The Department of Taxation and Finance issued an interpretive policy statement on August
10, 1981 which discusses the tax status of machinery and equipment purchased by restaurants, diners
and similar establishments as follows:
"It is the policy of the Department of Taxation and Finance to hold taxable all purchases of
machinery, equipment and supplies used in the preparation of food by restaurants, diners and
similar establishments, as well as energy sources or utilities used to operate such machinery
and equipment. The production exemption contained in section 1115(a)(12) of the Tax Law
does not apply to the above mentioned purchases, as they are not used to produce tangible
personal property for sale. They process and deliver restaurant food, a category distinct from
tangible personal property. (See Regulation section 528.13(c), example 6.) This policy is
consistent with the decision reached by the New York Court of Appeals in the matter of
Burger King, Inc., v State Tax Commission, 51 NY 2d 614." TSB-M 81(11)S.
Petitioner is making sales of food and drink within the purview of section 1105(d) of the Tax
Law. Therefore, based on a decision of the New York State Court of Appeals (Burger King, Inc. v.
State Tax Commission 51 NY 2nd 614), the exemptions and utilities used in the production of
tangible personal property for sale are not applicable to the preparation of food and drink which are
subject to tax pursuant to section 1105(d). However, the sale of ice cream in bulk (pint, quart, half­
gallon, gallon), pre-packaged novelty items and ice cream cakes is a retail sale which is exempt
pursuant to section 1115(a)(1) as such items are in the same form, condition, quantity and packaging
found in food stores. 20 NYCRR 527.8(e).
Accordingly, Petitioner's purchases of utility services are subject to tax pursuant to section
1105(b) of the Tax Law, except to the extent such utilities are consumed in operating the mixing
machine to prepare ice cream for sale in bulk (pints, quarts, half-gallons, gallons), pre-packaged
novelty items and ice cream cakes. Utilities used for such purpose are exempt pursuant to section
1115(c). Also, Petitioner is liable for tax on all purchases of machinery and equipment used to
prepare and serve food and drink, unless more than 50% of the use of a machine is devoted to
preparation of bulk ice cream, pre-packaged novelty items and ice cream cakes for sale. In this
instance, such machine is also eligible for exemption. Tax Law § 1115(a)(12) and 20 NYCRR
528.12(c)(4).

DATED: October 20, 1981

s/LOUIS ETLINGER
Deputy Director
Technical Services Bureau