Is electricity used to recool ferns after they arrive in Texas from Mexico, and again after further processing, exempt from Texas sales tax as an exempt use in processing?

Plain-English summary

A taxpayer asked the Comptroller's Tax Policy Division to clarify how the sales tax exemption for electricity used in processing applies to recooling ferns that had warmed up during shipment. The Mexican agents supplying the ferns cooled them to 40 degrees before loading them onto refrigerated trucks. By the time the ferns reached Texas, the temperature had risen 10-20 degrees above that target. Once received, the ferns were placed in a solution to remove bacteria and deepen their green color, then placed in a cooler to bring them back down to 40 degrees. About 70% of the ferns were then pulled out for further processing, such as trimming.

The letter contrasts this with a prior hearings decision that denied an exemption for recooling beer that had heated up in transit: in that case, the administrative law judge found the beer was ready for sale both before and after the reheating, so recooling it wasn't "processing" at all.

The ferns are different, the Comptroller concluded, because a processing step (the bacteria-removal and color-deepening solution) occurred before each recooling. Because there is intervening processing before each round of cooling, the recooling itself counts as processing, and the electricity used to bring the ferns back to 40 degrees is exempt from tax. However, electricity used to cool the ferns after they have already been packaged for sale is not exempt.

What this means for you

Agricultural and produce handlers

If your product needs to be recooled after a step that changes or treats it in some way (like a bacteria-removal or color treatment), the recooling itself can qualify as exempt processing — the same way the original cooling would. The key fact here was that a genuine processing step happened between the initial cooling and the recooling.

Businesses claiming the processing exemption on electricity

Timing relative to your production process matters more than the mechanical act of cooling or recooling by itself. Recooling that merely restores a finished, sale-ready product to a set temperature (with no intervening processing) is not exempt — that's the lesson from the beer hearings decision referenced in this letter. But recooling that occurs as part of, or between, genuine processing steps can be exempt.

Accountants and tax professionals

Once a product has been packaged for sale, electricity used to cool or maintain it is not exempt, even if earlier cooling in the production chain was. Draw a clear line at the packaging-for-sale point when evaluating a client's electricity exemption claims for refrigeration equipment.

Common questions

Q: Is electricity used to recool a product after shipment automatically exempt?
A: No. It depends on whether a processing step occurred before the recooling. If the product was already finished and ready for sale both before and after the temperature change (as with the beer in the referenced hearings decision), recooling is not exempt.

Q: What made the recooling of the ferns different from the beer case?
A: In the ferns' case, processing occurred before each recooling — first the bacteria-removal and color-deepening treatment, and later further processing such as trimming. In the beer case there was no such intervening processing; the beer was sale-ready the whole time.

Q: Is electricity used to cool the ferns after they're packaged for sale exempt?
A: No. The letter specifically states that electricity used to cool the ferns after they have been packaged for sale is not exempt.

Q: Did the letter cite a specific statute or case for the beer hearings decision?
A: No. The letter refers only generally to "a hearings decision" involving beer recooling, without giving a case number or statute citation.

Citations and references

No specific statutes or case citations were given in this letter. It references an unspecified prior Comptroller hearings decision involving the recooling of beer.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9505494L

Original ruling text

May 25, 1995

Dear***:

On May 23, 1995, you asked for clarification concerning
our policy on recooling items following a step in the processing the item. In
particular, you were concerned about the cooling of ferns collected in Mexico
by the agents of CORPORATION A

The Mexican agents collect ferns and cool them to 40
degrees. Thereafter, they are shipped to Texas in refrigerated trucks. During
shipment, the temperature becomes 10-20 degrees too high. Upon receipt of the
ferns in CITY A, they are placed in solutions to remove bacteria and change the
plants' color to a deeper green and placed in a cooler to lower the temperature
to 40 degrees. Thereafter, approximately 70% of the ferns are removed for
further processing such as trimming.

As you may know, there is a hearings decision that
disallowed recooling of beer, which had been heated up during transportation.
The ALJ found that the beer was ready for sale before and after shipment and
the recooling was not exempt as processing.

This case differs from the above hearing in that
processing occurs before each recooling of the ferns. Because there is
intervening processing, it is my conclusion that the recooling upon receipt of
the ferns from Mexico and after the ferns are further processed is processing
and the electricity used to reduce the ferns to 40 degrees is exempt.
Electricity used to cool the ferns after they have been packaged for sale is
not exempt.

I hope this satisfactorily answers your questions.

Sincerely,

Wade Anderson
Assistant Director, Tax Administration

cc: Joe Galvan
Manager, Tax Administration

Harold Lee
Manager, Audit