Does an airline owe Texas sales or use tax on peanuts, donuts, and disposable cups, stir sticks, and napkins given to passengers?

Plain-English summary

The Texas Comptroller's Tax Policy Division told an airline that none of the items it asked about — peanuts, donuts, and the disposable cups, stir sticks, and napkins used to serve drinks — are subject to sales or use tax, but for two different reasons.

Peanuts and donuts: These are bought in bulk, not as part of prepared meals, so the same rule that makes bulk food purchases tax-free applies. Because the airline's bulk purchase of the peanuts and donuts isn't taxable, giving them to passengers doesn't create a tax either.

Disposable serving items (napkins, stir sticks, cups): These can be bought tax-free under the resale exemption when used for drinks the airline charges for (non-complimentary), because they become part of the taxable item sold to the traveler. But if the same items are used for free (complimentary) drinks, the airline owes tax on those purchases. The letter notes the airline keeps records tracking which items go to paid versus free drinks — and warns that if it stops doing so, the Comptroller will presume all purchases of these items are taxable.

What this means for airlines and licensed carriers

If you buy snack items like peanuts or donuts in bulk to hand out to passengers, treat that purchase the same as any other bulk food purchase — it's not taxable, and you don't need to charge tax when giving the items away.

For disposable items used in beverage service (napkins, stir sticks, cups), you can claim a resale exemption on purchases used for drinks you sell to passengers. But you must accrue and pay use tax on the portion used for complimentary drinks. Keeping accurate records that separate complimentary from non-complimentary usage is essential — without them, the Comptroller can treat your entire purchase of these supplies as taxable.

Common questions

Q: Do we owe tax on the peanuts and donuts we give passengers?
A: No. Because they are purchased in bulk rather than as part of a prepared meal, they fall under the same rule that exempts bulk food purchases from sales tax.

Q: Can we buy napkins, stir sticks, and cups tax-free?
A: Only to the extent they're used to serve drinks that passengers pay for — you can claim a resale exemption on those because they become part of what you're selling. Items used for complimentary drinks are taxable purchases.

Q: What happens if we don't track which supplies go to paid drinks versus free drinks?
A: The Comptroller will presume all of your purchases of these disposable items are taxable if you fail to maintain records distinguishing complimentary from non-complimentary usage.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9212112L

Original ruling text

December 21, 1992

Dear **:

Thank you for coming in and discussing the taxation of peanuts, donuts, and
non-reusable items used in serving non-complimentary drinks. We have concluded
all the items discussed are not subject to tax for two different reasons.

The peanuts and donuts are not subject to tax because they are purchased, not
as part of dinners, but on a bulk basis. Therefore, the same rules that apply
to the purchase of foods generally apply to them. Because peanuts and donuts
(when purchased in bulk amounts) are not subject to sales tax, they are not
subject to tax when purchased by COMPANY A to be given to their customers.

As regards the non-reusable items used in serving non-complimentary drinks
(napkins, swizzle sticks, and cups), these may be purchased for resale as they
are part of the drinks that are sold to the traveler. However, the airline must
pay tax on any of these items used for complimentary drinks. From our
conversation, it is my understanding that the company keeps a record of which
of these items are used for non-complimentary drinks. Should they fail to do
this, aI1 their purchases of these items will be presumed taxable.

I hope this satisfactorily answers your questions.

Sincerely,

Mike Doyle
Director of Tax Administration

cc: Chuck Johnstone, Manager of Tax Administration