Texas Letter Ruling 9209L1195A01: Airlines/Licensed Carrier — Complimentary/Noncomplimentary Alcoholic/Nonalcoholic Beverages Served To Passengers — Nonreusable Items Used (Cups/Stir Sticks/Napkins)

Subject

Airlines/Licensed Carrier — Complimentary/Noncomplimentary Alcoholic/Nonalcoholic Beverages Served To Passengers — Nonreusable Items Used (Cups/Stir Sticks/Napkins)

Plain-English summary

An airline asked the Texas Comptroller whether non-reusable items — plastic cups, paper napkins, stir sticks, and similar items — used to serve both alcoholic and non-alcoholic beverages to passengers were exempt from sales/use tax. The airline's position was that Texas Alcoholic Beverage Code Section 34.04(b), which exempts the preparation and service of alcoholic beverages from the tax imposed by the Limited Sales, Excise and Use Tax Act, also covered the cups, stir sticks, napkins, and other non-reusable items along with the liquor itself.

The Comptroller's Tax Administration Division disagreed. It explained that Section 34.04(b) imposes a service fee that accrues when the container holding the alcoholic beverage is delivered to the passenger — the permittee (the airline) may either absorb that fee or collect it from the passenger. But if the alcoholic beverage isn't actually contained in the non-reusable item, the service fee doesn't apply to that item at all. Because the cups, stir sticks, and napkins are not themselves alcoholic beverages, they don't come within the fee or the related exemption.

The ruling emphasized that exemptions must be strictly construed and are expressed, not implied — the taxpayer bears the burden of proving it clearly qualifies. It cited Southwest Airlines Co. v. Bullock (Tex. App.—Austin 1990), where the court held that the sales tax exemption for food and drinks bought by airlines and served to passengers did not extend to nonreusable cups, napkins, and stir sticks. The service fee under Section 34.04(b) is also different in kind from the tax on receipts imposed under Chapter 202 of the Alcoholic Beverage Code, and it accrues even when the airline serves the alcoholic beverage to the passenger for free (complimentary).

The letter also walked through related rules: under Section 34.05(a), only a package store permit holder may sell liquor to an airline beverage permit holder, and that sale is treated as a retail sale to a consumer. By contrast, permittees licensed under Chapter 202 (a different licensing scheme that doesn't apply to this airline) can buy liquor tax-free for resale, and the Legislature amended Texas Tax Code Section 151.054 to let licensed sellers make tax-free liquor sales to Chapter 202 permittees without needing a resale certificate. The letter also noted that Texas Tax Code Section 151.321, which used to exempt wrapping, packing, and packaging supplies used to further a sale of tangible personal property, was repealed effective October 1, 1991 — so that exemption was no longer available at all by the time of this ruling. Rule 3.289(e) lets a private club permittee licensed under Chapter 202 issue a resale or exemption certificate for non-reusable items furnished with beverages, meals, or food sold for immediate consumption — but the airline here was not a private club permittee, so that rule didn't help it either.

The Comptroller's bottom line: the airline was required to pay sales or use tax on the plastic cups, napkins, stir sticks, and similar items because the alcoholic beverage was not served in those plastic cups (the beverage's exemption doesn't flow through to the separate serving items). The letter closed by noting that airlines are licensed and taxed under Chapter 34 of the Alcoholic Beverage Code rather than Chapter 202 because of differences between airlines and the businesses licensed under Chapter 202, citing Fairmont Dallas Restaurants, Inc. v. McBeath (Tex. Civ. App. 1978).

What this means for you

Airlines and other beverage/alcohol permit holders

If you serve alcoholic beverages under an airline beverage permit (Chapter 34 of the Alcoholic Beverage Code), the exemption/service-fee treatment for the alcoholic beverage itself does not automatically extend to the cups, napkins, stir sticks, or other non-reusable serving items you use — even when the drink served is complimentary. Under this ruling, you owe sales or use tax on those non-reusable items unless some other, separately applicable exemption applies to you.

Private club permittees under Chapter 202

The ruling notes that Rule 3.289(e) allows a private club permittee licensed under Chapter 202 to issue a resale or exemption certificate for non-reusable items furnished with beverages, meals, or food products sold for immediate consumption. That option was not available to the airline in this ruling because it held an airline beverage permit under Chapter 34, not a Chapter 202 private club permit — so if you're licensed differently than this taxpayer, check whether Rule 3.289(e) actually applies to your permit type.

Accountants and tax professionals

This letter is a useful illustration of how the Comptroller draws a line between a beverage itself and the disposable materials used to serve it: the Section 34.04(b) service fee/exemption tracks the container's contents (the alcoholic beverage), not the container. It also flags that the former Texas Tax Code Section 151.321 exemption for wrapping, packing, and packaging supplies was repealed effective October 1, 1991, so that avenue is not available for ruling requests concerning periods on or after that date.

Common questions

Q: Does the alcoholic beverage service fee exemption under Section 34.04(b) cover the cups and napkins used to serve the drink?
A: No. The Comptroller ruled that the fee and its related exemption apply only to the alcoholic beverage itself. If the alcoholic beverage is not contained in the non-reusable item (the cup, napkin, or stir stick), the service fee simply does not apply to that item, and it remains subject to sales or use tax.

Q: Does it matter that the drinks were sometimes served for free (complimentary) to passengers?
A: No. The ruling states that the Section 34.04(b) service fee accrues even on complimentary alcoholic beverages served by airlines, so the complimentary nature of the drink does not change the taxability of the non-reusable serving items.

Q: Could the airline use a resale or exemption certificate for these items?
A: Not under Rule 3.289(e) as applied here — that rule lets a private club permittee licensed under Chapter 202 of the Alcoholic Beverage Code issue such a certificate for non-reusable items. The airline in this ruling was not a private club permittee, so Rule 3.289(e) did not apply to it.

Q: Is there still an exemption for packaging and wrapping supplies generally?
A: Not as of this ruling. Texas Tax Code Section 151.321, which had exempted wrapping, packing, and packaging supplies used to further the sale of tangible personal property, was repealed effective October 1, 1991.

Citations and references

Statutes, rules, and cases cited in this letter:

• Texas Alcoholic Beverage Code Sec. 34.04(b) (airline alcoholic beverage service fee)
• Texas Alcoholic Beverage Code Sec. 34.05(a) (sale of liquor to airline beverage permit holder)
• Texas Tax Code Sec. 151.054 (tax-free sales for resale to Chapter 202 permittees)
• Texas Tax Code Sec. 151.321 (former wrapping/packing/packaging supplies exemption; repealed effective October 1, 1991)
• Rule 3.289(e) (resale/exemption certificates for non-reusable items furnished by a private club permittee)
• Southwest Airlines Co. v. Bullock, 784 S.W.2d 563 (Tex. App.—Austin 1990)
• Fairmont Dallas Restaurants, Inc. v. McBeath, 618 S.W.2d 931 (Tex. Civ. App. 1978)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1195A01

Original ruling text

September 25, 1992

Dear ***:

Thank you for your letter of September 16, 1992, concerning the taxability of
non-reusable items, such a plastic cups, paper napkins, etc., used by
*** in serving both alcoholic and non-alcoholic beverages to
passengers.

*** believes Texas Alcoholic Beverage Code Section 34.04(b) that
exempts the preparation and service of alcoholic beverages from the tax imposed
by the Limited Sales, Excise and Use Tax Act also applies to the cups, stir
sticks, napkins, and other non-reusable items as well as the liquor. The Tax
Administration Division disagrees; the cups, stir sticks, napkins, etc. are not
alcoholic beverages and are not subject to the service fee.

Section 34.04(b) states:

The fee accrues at the time the container containing the alcoholic beverage is
delivered to the passenger. The permitee may absorb the cost of the fee or may
collect it from the passenger.

If the alcoholic beverage is not contained in the non-reusable items, the
service fee does not apply to those items. Exemptions are to be strictly
construed. *** has the burden of proving that it is clearly entitled
to the exemption. Exemptions in the sales and use tax law are expressed, not
implied. In Southwest Airlines Co. v. Bullock (App. 3 Dist. 1990) 784 S.W.2d
563, the court held that the sales tax exemption on food and drinks bought by
airlines and served to passengers did not extend to nonreusable cups, napkins,
stir sticks, etc.

This fee is not a tax on receipts as is the tax imposed under Chapter 202 of
the Alcoholic Beverage Code. This fee accrues even on complimentary alcoholic
beverages served by airlines.

Texas Alcoholic Beverage Code Sec. 34.05(a) only allows a holder of a package
store permit to sell liquor to an airline beverage permit holder and mandates
that the sale is a retail sale to a consumer.

The permittees licensed under Chapter 202 may purchase liquor tax free for
resale. The Legislature amended Texas Tax Code Sec. 151.054 to allow tax-free
sales of liquor by licensed sellers to permittees licensed under Chapter 202
without the need to obtain a resale certificate.

Texas Tax Code Sec. 151.321 exempted wrapping, packing, and packaging supplies
used by a person to further the sale of tangible personal property sold. This
exemption was repealed effective October 1, 1991.

Rule 3.289(e) allows a private club permittee licensed under Sec. 202 to issue
either a resale or exemption certificate for non-reusable items furnished with
the beverages, meals, or food products sold for immediate consumption.
*** is not a private club permittee.

*** is required to pay sales or use tax on the plastic cups, napkins,
stir sticks, etc., because the alcoholic beverage is not served in the plastic
cups.

The Legislature licensed and taxed airlines under Chapter 34 of the Alcoholic
Beverage Code rather than Chapter 202 because of differences between airlines
and the businesses licensed and taxed under Chapter 202. See Fairmont Dallas
Restaurants. Inc. v. McBeath (Civ. App. 1978) 618 S.W.2d 931.

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

You may call toll free 1-800-252-5555, extension 3-4683 if you have any
questions or need more information. You may write to Tax Administration
Division, Comptroller of Public Accounts.

Sincerely,

Eddie C. Washington
Tax Administration Division