Texas Letter Ruling 9211869L: Lowering Of Temperature/Flash Freezing Product During Processing Vs. Keeping Product At Targeted Temperature — Electricity Used

Plain-English summary

A company in the business of cooling and storing food products for its customers asked the Texas Comptroller whether the electricity it uses to lower the temperature of various food products counts as tax-exempt "processing" electricity or taxable "storage" electricity. The taxpayer described six scenarios: chilling avocados from 70 degrees F down to 38 degrees F; removing field heat from apples and nuts; chilling chickens from 28 degrees F down to 4 degrees F; freezing individually wrapped beef briskets down to -4 degrees F; freezing bulk-packaged meat (separated by dividers for air flow) down to -4 degrees F; and mixing, packaging, and lowering the temperature of blended frozen vegetables.

The taxpayer stipulated that none of these six situations involved maintaining the product after it already reached its contractual "core" temperature -- and noted that if it delivered product above that core temperature, it owed damages to the customer under its contract.

The Comptroller ruled that electricity used to lower the temperature in all six examples is exempt from sales tax because it is used in processing, which is not a taxable commercial use. The act of reducing the temperature is what makes the activity "processing." By contrast, using electricity to hold or maintain a product at a given temperature once it's already there is taxable storage. The ruling notes this conclusion is based on the facts presented and could change if the facts are different.

What this means for you

Cold-storage and food-processing companies

If your business chills, flash-freezes, or otherwise actively lowers the temperature of a food product to reach a target "core" temperature, the electricity consumed in that temperature-reduction step is exempt processing electricity, according to this ruling. But once the product has reached that target temperature and you're simply running refrigeration to keep it there, the electricity for that maintenance function is taxable storage electricity. Businesses that do both (reduce temperature, then hold it) should be prepared to distinguish and potentially meter or allocate electricity use between the two functions.

Businesses handling multiple product types (produce, poultry, meat, mixed vegetables)

The ruling covers a range of processing activities -- chilling fresh produce, removing field heat, freezing packaged meat, and blending/freezing mixed vegetables -- and treats the temperature-reduction electricity in each as exempt processing use. The common thread is an actual reduction in temperature toward a defined target, not merely handling or repackaging the product.

Accountants and tax professionals

This is a fact-specific, taxpayer-issued letter ruling, not a generally applicable rule. The Comptroller expressly says the opinion "is based on the facts presented" and "could change" if the facts differ. The key line-drawing concept in the letter is the taxpayer's own stipulated "core" temperature: electricity used to get the product down to that core temperature is exempt processing; electricity used afterward to keep it there is taxable storage.

Common questions

Q: Is electricity used to chill or freeze food products exempt from Texas sales tax?
A: According to this ruling, yes -- when the electricity is used to actively lower a food product's temperature down to its target ("core") temperature, that use qualifies as tax-exempt processing electricity.

Q: Is electricity used to keep frozen or chilled food at temperature also exempt?
A: No. The ruling distinguishes this as taxable storage: once the product has reached its target temperature, electricity used merely to maintain it there is a taxable commercial use, not processing.

Q: Does it matter what kind of food product is involved?
A: The ruling addressed several types -- avocados, apples, nuts, chickens, beef briskets, bulk meat, and mixed frozen vegetables -- and treated the temperature-reduction electricity for all of them the same way, as exempt processing.

Q: Can I rely on this letter for my own business?
A: This letter was issued to a specific taxpayer based on the facts that taxpayer presented, and the Comptroller notes the opinion could change with different facts. See the disclaimer below regarding reliance on STAR letters.

Citations and references

The original ruling text does not cite any specific Texas statutes, administrative rules, or prior rulings by number -- it applies the general processing-versus-storage electricity exemption concept directly to the taxpayer's stipulated facts.

Subject

Lowering Of Temperature/Flash Freezing Product During Processing Vs. Keeping Product At Targeted Temperature — Electricity Used

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9211869L

Original ruling text

November 23, 1992

Dear **:

Thank you for your letter concerning the taxability of electricity consumed in
certain activities performed by one of your clients.

You state that the taxpayer is in the business of lowering the temperature of
and storing food products for its customers. You request a ruling as to the
taxability of the following activities performed by the taxpayer:

1. Receiving avocados at 70 degrees F. and lowering the temperature to 38
   degrees F.;
2. Removing field heat from apples and nuts;
3. Receiving chickens at 28 degrees F. and lowering the temperature to 4
   degrees F.;
4. Receiving beef briskets already individually wrapped in plastic and lowering
   the temperature to -4 degrees F.;
5. Receiving meat products packaged in bulk putting dividers between the pieces
   of meat to provide air flow and lowering the temperature to -4 degrees F.;
6. Taking frozen vegetables from bulk, mixing different vegetables together,
   packaging the mixed vegetables and lowering the temperature of the mixed
   vegetable packages.

You stipulate that for purposes of your request, the situations described do
not involve maintaining the food products after the taxpayer has reduced the
temperature of a food product to the "core" temperature of the product. You
further state that if the food products are delivered to a customer at higher
than the "core" temperature stipulated in its contract, the taxpayer must pay
damages to the customer.

The electricity consumed by the taxpayer in lowering the temperatures of the
various products listed in the six cited examples is exempt from sales tax
because it is used in processing, which is not a commercial use. The reduction
in temperature of the products is what qualifies these activities as
processing. This is as opposed to a situation where the an equal opportunity
electricity is being used to maintain the products at a given temperature,
which is taxable storage.

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

If you have any questions, please don't hesitate to write the Tax
Administration Division or call one of our tax specialists toll free
1-800-252-5555.

Sincerely,

Vic Hinterlang
Tax Administration Division