When a bakery sells some food for immediate consumption (taxable) and some food not for immediate consumption (exempt), how does the Texas Comptroller decide whether a utility (electricity) exemption certificate based on a utility study can be accepted?

Plain-English summary

This letter from the Texas Comptroller's Tax Administration division (signed by Wade Anderson, Assistant Director) responds to an inquiry from an engineering and architectural firm that performs utility use studies for bakeries and similar businesses. The firm asked for clarification on how to apply utility studies to businesses that sell some items for immediate consumption (a taxable use of the utilities that produced them) and also sell items that are not sold for immediate consumption (an exempt use), and specifically whether an exemption certificate based on such a study could be accepted in good faith when the seller is known to sell some food for immediate consumption.

The Comptroller's answer: an exemption certificate from such a seller, based on a utility study, may be accepted if the certificate is accompanied by a statement showing the quantity of goods sold for immediate consumption versus not sold for immediate consumption, and the combination of that ratio with the utility study shows an overall exempt use. Specifically, the percentage of electricity used for production (from the utility study) must be multiplied by the percentage of goods not sold for immediate consumption, and that result must exceed 50%.

The letter illustrates this with a worked example: a donut bakery's utility study shows 80% of its electricity is used to produce donuts. Of the donuts produced, 3,000 were sold for immediate consumption and 7,000 were not sold for immediate consumption (7,000/10,000 = 70%). Multiplying 80% by 70% gives 56%. Because 56% exceeds 50%, the predominant use of the electricity is treated as exempt, and the exemption certificate should be accepted.

What this means for you

Bakeries and similar food businesses with mixed sales (immediate consumption and not)

You can still qualify for a utility (electricity) tax exemption even if part of your food is sold for immediate consumption, as long as the combined math works out: (% of electricity used for production) x (% of goods not sold for immediate consumption) must exceed 50%. Keep records of how much of your output is sold for immediate consumption versus not, since you'll need that ratio to support the exemption certificate.

Engineers and consultants who perform utility studies for these businesses

When you prepare a utility study for a bakery or similar business with mixed sales, don't stop at the production-use percentage alone. You also need the business's breakdown of units sold for immediate consumption versus not sold for immediate consumption, and you must multiply the two percentages together to determine whether the combined exempt-use percentage exceeds 50%.

Sellers deciding whether to accept an exemption certificate

You may accept an exemption certificate based on a utility study in good faith, even if you know the buyer sells some food for immediate consumption, as long as the certificate is accompanied by the required statement of the immediate-consumption-versus-not ratio and the combined calculation shows overall exempt use exceeding 50%.

Common questions

Q: Can a bakery that sells some food for immediate consumption still claim a utility exemption certificate based on a utility study?
A: Yes, if the certificate includes a statement of the quantity of goods sold for immediate consumption versus not sold for immediate consumption, and the combined calculation (production-use percentage from the utility study multiplied by the percentage of goods not sold for immediate consumption) exceeds 50%.

Q: How is the combined exempt-use percentage calculated?
A: Multiply the percentage of electricity used for production (from the utility study) by the percentage of goods not sold for immediate consumption. If the result exceeds 50%, the predominant use of the electricity is exempt.

Q: What does the letter's donut bakery example show?
A: A utility study found 80% of electricity was used for production. Of 10,000 donuts, 7,000 (70%) were not sold for immediate consumption. 80% x 70% = 56%, which is over 50%, so the exemption certificate should be accepted.

Citations and references

No specific statutes, rules, or cases are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9504197L

Original ruling text

April 10, 1995

Dear Ms. **:

I have recently been contacted by the engineer and architectural firm of
** concerning utility use studies of bakeries and similar
businesses in **. 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 electricity 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 electricity 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 electricity used would be used
to produce items not sold for immediate consumption and the predominant use of
electricity 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
Tax Administration

cc: **
Mona Shoemate, Tax Administration