Which electricity used to blend and package a manufacturer's rice and spices was exempt?

Plain-English summary

A contract packager received bulk rice and spices from a manufacturer, did not take title to them, and blended and packaged them to the manufacturer's specifications. Texas treated that work as assembling tangible personal property.

Electricity directly used to dispense the ingredients, heat-seal envelopes and boxes, and heat-shrink plastic around pallets was exempt. Electricity for heating, air conditioning, lighting, conveyors and other intraplant transportation, and other nonproduction uses was taxable.

The letter pointed to Rule 3.295 for the exemption and its study and engineer-certification requirements.

Common questions

Did the packager need to own the ingredients? No. It assembled and packaged materials supplied by the manufacturer.

Was electricity for sealing and shrink-wrapping exempt? Yes.

Were conveyors and building utilities exempt? No, on the facts presented.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/8905L0943E12

Original ruling text

COMPTROLLER OF PUBLIC ACCOUNTS
STATE OF TEXAS
AUSTIN, 78774

May 15, 1989

Dear ****:

Thank you for your letter regarding sales tax exemption on electricity
used by your client who does contract packaging of food-stuffs, such as rice
products.

You stated that the manufacturer ships various ingredients such as rice
and spices in bulk to your client. Your client does not take title to the
materials, but merely packages and blends the furnished ingredients according
to the instructions of the manufacturer.

The packages, such as envelopes, pass under dispensers which inject
various amounts of different spices and special types of rice into separate
envelopes (2-3 different spices are packaged into an envelope and different
rices are packaged into an envelope) which are heat sealed, placed into boxes,
and placed on pallets which have a plastic film which is heat shrunk around the
boxes.

The manufacturer has a quality control laboratory at your client's plant
which checks to make certain that the mixing of the various types of rice and
spices are in accordance with the manufacturer's specifications.

Your client is assembling tangible personal property. The electricity
directly used in the assembling and packaging is exempt use. This includes
electricity used to dispense the spaces and rice, the equipment used to heat
seal the envelopes and the boxes, and the equipment used to heat shrink the
plastic around the pallet of boxes. Electricity used for hearing,
air-conditioning, lighting, intraplant transportation (conveyors, hoists,
etc.), and any other non production use is taxable.

I am enclosing Rule 3.295 for your information about the exemption and
the requirement for a study and engineers certification.

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

If you have any questions or need more information, please call toll free
1-800-252-5555 or the regular number 512/463-4600. My extension is 3-4666.
You may write to Tax Correspondence, Comptroller of Public Accounts.

Sincerely,
Jo Ann Dieck
Tax Correspondence