Were natural gas and electricity used by restaurants to prepare food for immediate consumption exempt from Texas sales tax?

Plain-English summary

A restaurant or similar food-service business asked whether natural gas and electricity used to prepare food were exempt. The Comptroller said Texas Tax Code § 151.317(c)(2)(A)(i), as amended effective October 1, 1987, treated utilities used to prepare or store food for immediate consumption as taxable commercial use.

The result was the same whether customers ate the food on the premises or carried it out. Utilities purchased by restaurants and similar businesses for that food preparation were taxable.

The letter distinguished a facility processing food not ready for immediate consumption, such as frozen dinners, for sale to third parties. Such a facility could claim a utility exemption if more than 50% of the use was directly in processing equipment. But utilities used to prepare products for the entity's own restaurants, at the same or another location, remained taxable commercial use.

What this means for you

The 1991 letter drew the line at immediate consumption and who received the processed food. Restaurant and takeout preparation was taxable utility use; third-party production of food not ready for immediate consumption could qualify if direct processing was the predominant use.

Common questions

Did takeout food qualify for different utility treatment? No.

Could a frozen-dinner processor qualify? Potentially, when it produced food not ready for immediate consumption for third parties and direct processing exceeded 50% of utility use.

What if a central facility prepared food for the company's own restaurants? The letter treated the utilities as taxable commercial use.

Citations and references

• Texas Tax Code § 151.317(c)(2)(A)(i) — utilities used to prepare or store food for immediate consumption
• 34 Tex. Admin. Code Rule 3.293 — food, food products, meals, and food service

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9106L1116F06

Original ruling text

June 20, 1991

Dear ***:

Thank you for your letter regarding sales tax exemption on natural gas
and electricity (utilities) used in the preparation of food products to be
consumed on the premises or carried out.

As we discussed in our telephone conversation, Section
151.317(c)(2)(A)(i) of the Tax Code was amended effective October 1, 1987, to
consider utilities used in the preparation or storage of food for immediate
consumption as commercial use. Commercial use of utilities is taxable.

Therefore, utilities purchased by restaurants and other like places of
business are taxable whether the food is consumed on premises or carried out.
Please refer to the enclosed Rule 3.293, Food; Food Products; Meals; Food
Service, for information on food ready for immediate consumption.

A facility that processes food products not ready for immediate
consumption, e.g. frozen dinners, for sale to third parties could claim tax
exemption on utilities if the predominant use (over 50%) is for direct use in
the processing equipment. However, if the food products are prepared for the
entity's own restaurants at that location or at another location, the utilities
are commercial use and taxable.

If you have any questions or need additional information, you may call
toll free 1-800-252-5555 or the regular number 512/463-4600. My extension
is 3-4666. You may write to Tax Administration Division.

Sincerely,

Jo Ann Dieck
Tax Administration Division