Does a restaurant owe Texas sales tax on the disposable collars it uses to temporarily extend soft-serve ice cream cups while blending toppings?

Plain-English summary

A Texas restaurant asked whether the disposable plastic collars it uses to temporarily extend soft-serve ice cream cups qualify for the state's sales-tax exemption for property used in manufacturing. The Comptroller said no — the collars are taxable.

Texas exempts property that is directly used in manufacturing if it either (1) causes a chemical or physical change to the product being made, or (2) is necessary to comply with a public-health law. The collar does neither: it just holds extra ice cream and topping around the rim of the cup while an employee blends the dessert, and it gets thrown away afterward. It doesn't change the soft serve itself, and the health rule the restaurant follows (Texas's sanitary-operations rule for food-contact surfaces) doesn't require using a collar at all — it's just a convenience.

On top of that, the manufacturing exemption specifically excludes "hand tools" — anything used, managed, and powered by hand — and the collar fits that description too. So the restaurant has to pay sales tax when it buys the collars.

What this means for you

Restaurant and food-service owners

Single-use items that make food prep more convenient — cup collars, liners, disposable inserts — are not automatically exempt just because they're used during a "manufacturing" step like blending or cooking. To qualify, the item has to directly cause a chemical or physical change to the product itself, or be legally required for health-code compliance. Items that are merely helpful, or that are held and operated by hand, are taxable "hand tools" even in a manufacturing context.

Accountants and tax professionals

This is a straightforward application of the Section 151.318(c)(2) hand-tool carve-out layered on top of the (a)(2)(A) chemical/physical-change test and the (a)(10) public-health test. Worth flagging for any client claiming a manufacturing exemption on consumables: ask whether the item changes the product itself (not just its packaging or presentation) and whether it's legally mandated, not just used to comply in a convenient way.

Common questions

Q: Why doesn't a chemical or physical change to the cup count?
A: Because the item being manufactured for sale is the ice cream dessert, not the cup. The exemption looks at whether the item changes the product being sold, and the collar only affects the cup's temporary shape.

Q: Could the health-code angle ever support an exemption for something like this?
A: Only if the law or rule actually requires using that specific item. Here, the sanitation rule requires clean food-contact surfaces, but it doesn't mandate a collar — the restaurant chose to use one for convenience, so the exemption doesn't apply.

Q: Does this ruling apply to my restaurant's disposable equipment?
A: Not automatically. This is a private letter ruling binding only on the Comptroller as to the taxpayer and facts described here. Other businesses with similar disposable items should look at whether their item causes a chemical/physical change to the product or is legally required for health compliance, and ideally get their own ruling if it matters.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.009 (Tangible Personal Property)
• Tex. Tax Code § 151.318(a)(2)(A), (a)(10), (c)(2) (manufacturing exemption and hand-tool exclusion)
• 34 Tex. Admin. Code § 3.300(a)(6), (c)(3) (hand tool definition; incidental items excluded)
• 25 Tex. Admin. Code § 229.219(d) (sanitary operations)
• STAR Accession No. 201106515L (June 7, 2011); Comptroller's Decision No. 117,324 (2021)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202410005L

Original ruling text

October 9, 2024

RE: Private Letter Ruling No. 20240228112146

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. 1 We are responding to your request February 1, 2024. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of disposal ice cream collars.

Facts Presented

The relevant facts are based on the following redacted documents provided for review by ** (Taxpayer).

Taxpayer operates COMPANY A (Restaurant) throughout Texas. One of the menu items served is a PRODUCT A, a soft serve ice cream (Dessert). To produce the Dessert, Taxpayer owns and operates a variety of tools and machines, including spoons, a “disher” or serving utensil, freezers, the Dessert machine, wells or tubs, and an ingredient dispenser. Restaurant is required to comply with certain public health regulations, such 25 Texas Administrative Code, Section 229.219 (Sanitary Operations), when cleaning its equipment.

To make the Dessert, the employee fills a cup with soft serve ice cream leaving room around the sides near the top of the cup. The employee then places a disposable collar on the cup to temporarily extend the cup during the blending process. Next, the employee adds the customer’s selected ingredients (topping). The soft serve and toppings are then blended by a spindle on the Dessert machine. Next, the employee removes the cup from the Dessert machine. The employee then adds the final topping to the mixed treat and removes and discards the collar. Finally, a spoon is inserted before the Dessert is served to the customer.

Question, Ruling, and Analysis

Our restatement of your question is shown below, followed by our response and analysis.

Question: Is the disposable ice cream collar exempt from Texas sales and use tax as property used in manufacturing?

Ruling: No, the disposable ice cream collars do not qualify for a manufacturing exemption and are taxable.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). “Taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Tangible personal property is defined as personal property that can be seen, weighted, measured, felt, or touched or that is perceptible to the senses in any manner. Section 151.009 (“Tangible Personal Property”).

Taxpayer’s disposable ice cream collars are tangible personal property and taxable unless an exemption applies. Section 151.009, .051. Section 151.318 (Property Used in Manufacturing) provides exemptions for certain tangible personal property used by a manufacturer. Section 151.318(a)(2)(A) provides an exemption for tangible personal property directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation and directly makes or causes a chemical or physical change to the product being manufactured, processed, or fabricated for ultimate sale.

An exemption is also provided for tangible personal property used or consumed in the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements related to public health. Section 151.318(a)(10).

The manufacturing exemption specifically excludes hand tools. Section 151.318(c)(2). A hand tool is defined as an instrument used, managed, and powered by the hand. Rule 3.300(a)(6) (Manufacturing; Custom Manufacturing; Fabricating; Processing). Items that are merely useful or incidental to the manufacturing operation are also excluded from the manufacturing exemption unless they are a component of a qualifying piece of equipment. Rule 3.300(c)(3). See also STAR accession No. 201106515L (June 7, 2011).

The use of the collar is to temporarily extend the size of the cup. The product being manufactured is the Dessert and not the cup. The collar does not make a chemical or physical change to the Dessert being manufactured and as a result, does not meet the requirements found in 151.318(a)(2).

25 Texas Administrative Code, Section 229.219(d) requires that all food-contact surfaces be cleaned. However, that section does not require the use or purchase of specific equipment to prepare food. Taxpayer’s collars extend the cup to provide additional volume when making the Dessert. They are not used for cleaning food-contact surfaces and their use is not required to comply with Rule 229.219. The collars are therefore not necessary and essential to comply with public health regulations and do not qualify for exemption under Section 151.318(a)(10). See also Comptroller’s Decision No. 117,324 (2021).

The additional volume provided by the collars is useful when making the Dessert. However, they do not cause a chemical or physical change to the Dessert, and they are disposable and not a component of manufacturing equipment. They are incident to the manufacturing operation and excluded from exemption by Rule 3.300(c)(3). The collars are used and managed by hand and meet the definition of hand tools under Rule 3.300(a)(6). The collars are also therefore excluded from the exemptions for property used in manufacturing by Section 151.318(c)(2). Taxpayer’s purchase of the disposable collars is subject to Texas sales and use tax.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20240228112146.

Sincerely,

Tax Policy Division –Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.