Can a bakery that sells some food for immediate consumption and some for later consumption still give a gas/utility exemption certificate based on a utility study?

Plain-English summary

An engineering/architectural firm asked the Comptroller's office whether a utility (gas) use study could still support a sales tax exemption certificate for a bakery-type business that sells some of its food for immediate consumption (which is taxable) and some food that is not sold for immediate consumption (which can be exempt).

The Comptroller's answer: yes, but the certificate has to be backed up by more than just the raw utility study. It must also come with a statement showing the split between quantities of goods sold for immediate consumption versus goods not sold for immediate consumption, and when you combine that split with the utility study's production percentage, the overall result still has to show a predominant (over 50%) exempt use.

The letter walks through a worked example: if a utility study shows 80% of a donut bakery's gas is used for production, and of the donuts produced, 3,000 are sold for immediate consumption and 7,000 are not, then you multiply 80% by the "not sold for immediate consumption" share (7,000/10,000 = 70%): 80% x 70% = 56%. Since 56% is over 50%, the exemption certificate can be accepted in good faith, because the predominant use of the gas is for an exempt purpose.

What this means for you

Bakery and similar food-business owners

If your business uses gas (or a similar utility) to produce food, and you sell some of that food for immediate consumption (taxable) and some not for immediate consumption (potentially exempt), you can still support a utility exemption certificate — but you need real numbers, not just the utility study alone. You (or your utility-study consultant) need to document what share of the utility use goes to production, and separately, what share of what you produce is NOT sold for immediate consumption. Multiply the two percentages together; if the product exceeds 50%, you're in exempt-use territory for the certificate.

Engineers and consultants who prepare utility studies

The ruling confirms that a bare utility study percentage (e.g., "80% of gas is used for production") isn't, by itself, enough where a business has mixed immediate/non-immediate consumption sales. The study needs to be paired with a sales-mix statement so the combined math can be checked against the 50% threshold.

Accountants and tax professionals

This letter gives a specific mechanical test for a supplier or purchaser deciding whether to accept an exemption certificate in good faith when they know a business sells food both ways: multiply the utility study's production percentage by the percentage of goods NOT sold for immediate consumption, and see if the result is over 50%.

Common questions

Q: Can a bakery use a utility study to justify a gas exemption certificate if it sells some food for immediate consumption?
A: Yes, as long as the certificate is accompanied by a statement of the quantity split between food sold for immediate consumption and food not sold for immediate consumption, and the combined calculation still shows an overall exempt use over 50%.

Q: What's the actual math the Comptroller's office used?
A: Multiply the utility study's percentage of gas used for production by the percentage of goods NOT sold for immediate consumption. In the letter's example, 80% (gas used for production) x 70% (7,000 of 10,000 donuts not sold for immediate consumption) = 56%.

Q: What threshold has to be met?
A: The combined percentage must exceed 50% — that's what makes the predominant use of the gas an exempt use.

Q: Who wrote and received this letter?
A: It's a response from Wade Anderson, Assistant Director of Tax Administration, to an engineering and architectural firm that had asked about utility use studies for bakeries and similar businesses, referencing the firm's own August 31, 1993 letter about five bakeries in three unnamed cities.

Citations and references

No statutes, administrative rules, or case citations appear in the original letter text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9304L1260G13

Original ruling text

April 1, 1993

Dear **:

I have recently been contacted by the engineer and architectural firm of AGENCY
concerning utility use studies of bakeries and similar businesses. Having read
your letter of August 31, 1993, to the firm concerning five bakeries in CITY A,
CITY B, and CITY C, it would appear additional clarification is necessary
concerning utility studies as applied to businesses which sell items for
immediate consumption and also sell items that are not sold for immediate
consumption. You are concerned about being able to accept an exemption
certificate in good faith based on a utility study if you know the company
sells food for immediate consumption.

An exemption certificate from such a seller based on a utility study may be
accepted if the certificate is accompanied by a statement concerning the
quantity of goods sold for immediate consumption verses not sold for immediate
consumption and the combination shows an overall exempt use. The multiplication
of the percentage of gas used for production by the percentage of goods not
sold for immediate consumption must exceed 50%.

For example, if the utility study showed that 80% of the gas was used to
produce donuts by a donut bakery and that 3000 donuts were sold for immediate
consumption and 7000 were not sold for - immediate consumption, the exemption
certificate should be accepted based on the following multiplication. 80% x
7000/10,000 = 56%. Therefore, 56% of the gas used would be used to produce
items not sold for immediate consumption and the predominant use of gas would
be exempt usage.

Should you have any further questions, please feel free to call me at
1-800-531-5441, extension 3-4004.

Sincerely,

Wade Anderson
Assistant Director of Tax Administration

cc: AGENCY
Mona Shoemate, Tax Administration