Is prepared coffee sold by a non-restaurant for on-premises consumption taxable in Texas?

Plain-English summary

This 1994 letter responds to a long list of questions from a business (apparently a copy/print/mailing services provider) about which of its many charges are subject to Texas sales tax. Near the end of the letter, the taxpayer asked a separate, unrelated question: whether sales of prepared coffee by a non-restaurant business, for consumption on the seller's own premises, are subject to tax. The Comptroller's answer on that point is short and direct: "The charge is taxable."

The rest of the letter addresses a series of other services offered by the same or a similar business — word processing, resume composition, folding and stapling, mailing services, self-serve photocopiers, facsimile transmission, self-serve computers and typewriters, film processing, shipping and postage, other computer services (data conversion, scanning, computer design work), and rentals of mailboxes, conference rooms, office space, and audio-visual equipment. Because the file name and subject line for this letter is "Coffee — Ready For Consumption," this summary focuses on that specific holding, while noting the letter's other conclusions for context.

The letter does not cite any specific statute or administrative rule in connection with the coffee question (it does mention Rule 3.300 and Rule 3.344 in connection with the self-serve copier and facsimile questions, but not in connection with coffee).

What this means for you

Businesses selling prepared coffee or similar prepared beverages

If you are a non-restaurant business (for example, a copy shop, office-services business, or similar retailer) that sells prepared coffee for customers to drink on your premises, this letter indicates the Comptroller treated that charge as taxable. The ruling does not elaborate on why — it does not walk through the "ready for consumption" distinction in detail or cite a rule — it simply states the charge is taxable.

Accountants and tax professionals

This letter is useful mainly as a data point confirming the Comptroller's 1994 position that prepared coffee sold for on-premises consumption by a non-restaurant is taxable. Because it is a STAR letter ruling addressed to a specific (redacted) taxpayer and does not cite a statute or rule for the coffee holding, it should not be relied on as binding precedent for a different taxpayer — confirm current law and any applicable Comptroller rules before advising a client based on this letter alone.

Businesses with mixed service offerings similar to this letter

If your business also performs any of the other services discussed in this letter — word processing, mailing preparation, self-serve copying, faxing, computer/typewriter rentals, film processing, shipping, or equipment/space rentals — the letter's other responses may be of interest, but each was answered based on the specific facts presented by this particular taxpayer, and this summary focuses only on the coffee question named in the subject line.

Common questions

Q: Is prepared coffee sold by a non-restaurant for consumption on-site taxable in Texas, according to this letter?
A: Yes. The Comptroller's response was simply: "The charge is taxable."

Q: Does the letter explain why coffee sold for on-premises consumption is taxable?
A: No. The letter states the conclusion without further explanation and does not cite a specific statute or rule for this particular answer.

Q: Does this letter only address coffee?
A: No. It is a long letter answering many questions from the same taxpayer about services such as word processing, mailing, self-serve copying, faxing, computer/typewriter rentals, film processing, shipping, and equipment rentals. The coffee question appears near the end. This summary focuses on the coffee holding because that is the subject of this particular page.

Q: Can I rely on this 1994 letter for my own business today?
A: STAR letters can generally be relied upon only by the taxpayer to whom they were issued, and this letter's taxpayer-identifying details have been redacted. Because it is more than 30 years old and cites no statute for the coffee holding, confirm current Texas Comptroller guidance with a licensed tax professional before relying on it.

Citations and references

The original letter does not cite any specific statute for the coffee holding. (Elsewhere in the letter, in answering unrelated questions about self-serve photocopiers and facsimile services, the Comptroller references Rule 3.300 and Rule 3.344 and quotes Tax Code Section 151.0035 regarding data processing services, but none of these are cited in connection with the coffee question.)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9404359L

Original ruling text

April 13, 1994

Dear **:

Thank you for your recent letter that is restated in part with responses below.

Services in general: Some of our clients sell various forms of printed matter
and related tangible personal property. These items range from photocopies and
letterhead to T-shirts, buttons and floppy disks. Often our clients perform
services that are not subject to tax for customers who have also purchased
tangible personal property. These services typically include: word processing,
resume composition, folding, stapling, and miscellaneous non-fabrication labor
per hour.

a. Are these services subject to tax when they are performed by a person who
has also provided tangible personal property on which the services are
performed?

b. Is the answer different if the services are performed on tangible personal
property that is provided by the customer?

Response: Word processing is a data processing service and is taxable in either
case. Charges for resume composition are not taxable if separately stated in
either case. Charges for folding materials printed by the company performing
the folding are taxed as services in connection with the sale of the printing.
Charges for folding printed matter provided by the customer are not taxable.
Charges for stapling materials are taxable in either case. I need more specific
information in order to give you an opinion on the tax treatment of
miscellaneous non-fabrication labor.

Mailing Services: These are charges for preparing literature to be mailed,
usually to potential customers of the purchaser of the service. The following
services are typically performed: folding, inserting, addressing, affixing
mailing labels, adding postage to the mailer or envelope, and placing the items
in the mail.

a. Are charges for these services subject to tax?

b. Are charges for these services subject to tax when they are separately
stated on an invoice that also includes charges for the sale of printed matter?

Response: The mailing services you mention are not taxable if separately
stated. However, such charges are taxable if they are lumped together with
charges for printing or the sale of other able items.

Self Serve Copier Service: This is a service whereby customers are allowed to
use copy machines to make photocopies. The copy machines are located at retail
locations which are visited by customers. The customers are charged a per copy
fee for the use of the copier. The paper and supplies necessary to operate the
copiers are provided by the owner of the copiers and not the customer. Are
these charges subject to tax?

a. Customers may pay for the above service by purchasing a magnetic card. The
card can be read by the copy machine. Based on the amount paid for the card,
the copier will allow the user to make a pre-programmed number copies. Are
charges for these ,cards taxable?

b. Can the service provider issue a resale certificate when purchasing the
copiers that will be used to provide the self-serve service?

Response: Sales of copies are taxable. Sales of the cards are treated as
prepaid sales of copies and are taxable. The copiers may not be purchased for
resale, but, do qualify for the phase-in exemption on manufacturing equipment.
I am enclosing a copy of Rule 3.300 for your reference.

Facsimile Services: Customers are charged an amount for sending or receiving
faxes. The fee is typically based on the number of pages sent or received.

a. Are these charges subject to sales or use tax?

b. If the sender of the facsimile is located in another state or country are
the charges subject to sales or use tax?

c. If the recipient of the facsimile is located in another state or country are
the charges subject to sales or use tax?

d. Same three questions as above, but with respect to telecommunications excise
taxes?

Response: Facsimile is a taxable telecommunications service. The charges are
not taxable if the transmission originates outside Texas, but, are taxed if the
transmission originates in Texas. I am enclosing Rule 3.344 for your reference.
The sales and excise tax are the same.

Word Processing Services: This category is comprised of charges for entering
text into a computer via a keyboard. The content of the text is provided by the
customer. The product that is delivered to the customer is either a printed
document or a computer disk containing the file embodying the text.

a. Is this charge subject to tax?

b. In some cases, this charge may be made in conjunction with the design of a
document that also contains images such as a logo or other computer stored
artwork. Does this scenario alter your answer to part a?

Response: This is a taxable data processing service in either case.

Self Serve Computers, Printers & Typewriters: This is a charge for allowing
customers to use computer hardware and typewriters on the premises of the
service provider. Are the following charges subject to tax?

a. Per hour charges for the on-site use of typewriters or computer hardware?
Does this answer change depending on whether or not tax was paid on the
purchase of the computer and typewriters?

b. Additional charges for printing out documents? The fee for this service is
based on the number of pages printed.

c. Included in the per hour charge for the use of the computer is the fee for
the use of the software that is installed on the computer. Can the service
provider issue a resale certificate to the seller of the software?

d. Can the service provider issue a resale certificate when purchasing the
computers that will be used in the self-serve computer and typewriter service?

e. In some cases, customers may rent portable computers that are removed from
the premises of the service provider. Does the application of tax change under
these circumstances?

Response: Charges for on-premise use of computers, memory typewriters, and
printers are taxable as data processing services. Tax Code Section 151.0035
defines Data Processing Services to include "the use of a computer or computer
time for data processing whether the processing is performed by the provider of
the computer or computer time or by the purchaser or other beneficiary the
service."

Software used in performing data processing services may not be purchased for
resale. The rental of computers to be removed from the premises are taxed as a
rental of tangible property. Computers and software used for this purpose may
be purchased tax free for resale. However, any divergent use of the hardware or
software would then be taxed based on the fair market rental value for the
period of divergent use.

Film Processing: This service is segregated into two charges:

(1) charges for developing film and (2) charges for prints. Charge (2) is based
on the number of prints provided to the customer. Are either of these charges
subject to tax?

Response: Both type charges are taxable.

Shipping and Postage: These are charges for shipping tangible personal property
at the direction of customers. These charges generally arise under the
following conditions:

a. The customer purchases printed material and directs the service provider,
who is also' the seller of the printed matter, to ship the materials (e.g.
marketing brochures) to a list of addresses. In addition to the bill for the
printed material and the mailing services, the service provider charges the
customer a separate amount for the cost of the postage. The postage charge is
generally related to delivery by the U.S. Mail, but in some cases it may be for
delivery via another carrier. Is this postage charge subject to tax?

Response: Separately stated charges for U. S. postage are not taxable when
billed by the seller to a client if the cost of the postage was incurred by the
seller at the request of the client to distribute tangible personal property to
third party recipients designated by the seller's client. Charges by the seller
for delivery using means other than the U.S. Post Office are taxable.

b. The customer purchases printed matter or other tangible personal property
and directs the seller to ship the goods to the customer's business location or
other destination. This type of delivery is almost always via common carrier
(e.g. U.P.S.). The seller makes a separate charge for the delivery. There is no
stipulation in any of the documents transferred between the buyer and seller
regarding the F.O.B. point. Is this delivery charge subject to tax?

Response: The shipping charge is taxable.

c. The customer brings tangible personal property to the service provider's
business location. The customer arranges to have the service provider ship the
goods via one of many alternative methods (e.g. U.P.S., Federal Express
overnight, 2-day U.S. Postal Service, etc.). The service provider charges the
customer an amount which is higher than the service providers cost for the
shipping. Is this shipping service subject to tax? Would the answer change if
the service provider only charged the customer an amount equal to the service
provider's cost?

Response: Charges for shipping tangible property by a party other than the
seller of the property are not subject to sales tax. The fact that the shipping
charges are marked up does not affect the tax treatment of the shipping
charges.

Misc. Computer Services: These are charges for conducting computer operations
requested by customers. The services fall into the following three general
categories:

a. Converting data provided by a client from one form of media to another. For
example, transferring data from a 3&1/2" diskette to a 5&1/4" diskette, or
converting Apple Macintosh files to an IBM compatible format. The source disk
is provided by the client who may, or may not, furnish the target disk. Is this
service subject to tax?

Response: This is a taxable data processing service.

b. Scanning images provided by customers. The scanned image is provided to the
customer on a computer disk, or the image may be used in a document which is
printed by the service provider and given to the customer. A separate charge is
made for the scanning service. Is this scanning charge taxable?

Response: This is a taxable data processing service.

c: Using the computer to design documents for customers. A customer indicates
the general format of a desired printed product. The service provider uses
desktop publishing software to design the document (e.g. flyers, advertising
mailers, etc.). The design is incorporated into a printed product for which a
separate charge is made. Is this design charge subject to tax?

Response: This charge for computer art is taxable.

Rentals: These are charges for the use of various tangible and personal
property. Are the following charges subject to tax?

• Mail box rentals
• Conference room rentals (hourly rate)
• Office space rentals (hourly rate)
• On-site rentals of audio visual equipment (hourly rate)

Response: Rentals of "Electronic Mail Boxes" are taxable as telecommunications
services. Rentals of mail boxes attached to real property are not subject to
sales tax. Rentals of real property such as conference rooms and office space
are not subject to sales tax. When tangible property is rented as part of a
rental of real property, the charge is not taxable. Persons working on a
production of a video master, a copy of which will be sold or offered for
ultimate sale, license, distribution, broadcast or exhibition may issue an
exemption certificate for the rental of audio visual equipment. Otherwise the
rental is taxable.

Can the service provider issue a resale certificate when purchasing tangible
personal property that will be rented to customers?

Response: A resale certificate may be issued for tangible property purchased to
be rented in the regular course of business and not as part of a rental of real
property.

Coffee: Are sales of prepared coffee by a non-restaurant. for consumption on
the seller's premises subject to tax?

Response: The charge is taxable.

This opinion is rendered based on the facts you submitted. Other facts, though
similar, may yield different results.

If you have questions or need more information, please call or write. You may
reach me by calling toll free, (800) 531-5441 (ext.34680). My direct line
number is (512) 463-4680. The number for FAX transmissions is (512) 475-0900.
You may write to me in care of Tax Administration Division.

Sincerely,

Al Van Allen
Tax Administration Division