Could a food-service subsidiary buy disposable meal-service items tax-free when it transferred them with taxable prepared meals to its carrier parent?

Plain-English summary

A food-service subsidiary bought disposable items and transferred them with taxable prepared meals sold to its carrier parent. The vendor had collected Texas tax, and the subsidiary sought an approximately $160,000 refund.

The Comptroller held that the subsidiary could buy the nonreusable items tax-free under Rule 3.293(f)(4). It was a separate legal entity and a food-service retailer, even though its carrier parent would have been the taxable consumer if it bought the items directly.

The vendor could accept a resale or exemption certificate and refund tax on exempt sales within the four-year limitations period, then recover the refunded amounts through later or amended returns under Rule 3.325.

What this means for you

The identity and business role of the purchaser mattered. A food-service subsidiary qualified even though its transportation-provider parent would not have qualified on a direct purchase.

Common questions

Were the disposable items taxable to the subsidiary? No, on the stated facts.

Why did separate corporate identity matter? The subsidiary itself was the food-service retailer transferring the items with taxable meals.

Could the vendor refund previously collected tax? Yes, within the four-year period stated in the letter.

Citations and references

• 34 Tex. Admin. Code Rule 3.293(f)(4) — disposable food-service items
• 34 Tex. Admin. Code Rule 3.297 — carrier-consumption position discussed in the request
• 34 Tex. Admin. Code Rule 3.325 — refunds and credits

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9108L1127B04

Original ruling text

August 20, 1991

Dear ***:

Thank you for your recent letter and phone call, regarding taxability
of certain non-reusable food service items purchased by ABC (a
whollyowned subsidiary of XYZ). The items in question are apparently
transferred by ABC to XYZ along with the prepared meals that ABC sells
to XYZ, and are disposable in nature. QRS Corporation in Georgia has
collected Texas tax on all such items sold to ABC, and ABC is now seeking
a refund of some $160,000 in tax. XYZ paid tax to ABC on the prepared
meals.

At present, QRS feels that tax was due on the items under Rule 3.297
because they were sold to and consumed by a carrier (XYZ). You have
argued to the Contrary that the items were sold to a food service
provider (ABC) that was entitled to issue a resale or exemption
certificate to buy such items tax-free under Rule 3.293 (f)(4).

We agree that tax was not due on ABC's purchase of non-reusable food
service items transferred to XYZ with the taxable prepared meals under
Rule 3.293 (f)(4). QRS may accept a resale or exemption certificate
from ABC, and may refund (within the four year statute of limitations)
tax collected on exempt sales. QRS may recover such amounts refunded
by reducing reported taxable sales on future returns or by filing
amended tax returns for the periods for which tax is refunded to ABC.
See enclosed Rule 3.325 for more on this.

** of QRS mentions in his June 24, 1991 letter to XYZ that this
agency advised him that no tax refund was justified in this situation.
Without any further facts, I can only speculate that the agency
representative who reached this conclusion thought that XYZ was buying the
items directly from QRS. The argument would follow that XYZ is not a
"food service provider", but a provider of transportation services.
As such, XYZ would owe tax to QRS as the consumer of the items sold by
QRS.

But ABC is a separate legal entity from XYZ, and is a retailer engaged
in the food service business within the meaning of Rule 3.293. ABC is
entitled to claim this exemption even though the same exemption would
not be available to XYZ.

Feel free to send a copy of this letter to QRS, and to supply my name
and phone number to anyone Who has a question.

The Texas legislature, during the first special session this month,
made substantive changes to the law governing sales for resale,
wrapping and packing materials, and containers. These changes will affect
the exemption described in Rule 3.293, although we have not had time
to discuss the extent of the effect. I will follow up in writing as
soon as I know the impact of the legislative changes on the answers
contained in this letter. Of course, the changes will be prospective
only, and would not affect ABC's right to a refund for past periods.

This opinion is based on the facts presented. Different facts, though
similar, might lead to different answers. If you have further
questions, feel free to write or call me at 1-800-252-5555, ext. 3-3889.

Sincerely,

John Christian
Attorney
Tax Administration