Does a coffee manufacturer's own grinding machine, placed in a grocery store for the store's customers to use on already-shipped coffee beans, qualify for the Texas manufacturing exemption?

Plain-English summary

A coffee manufacturer places a storage/grinding machine inside grocery stores that buy its coffee beans, so the stores' own customers can grind whole beans at the point of sale. The manufacturer had received a favorable ruling in January 1997 that this machine qualified for Texas's manufacturing exemption -- but the Comptroller revisited and corrected that answer in this letter, after learning a key fact had been missed: by the time the beans are ground in the store, the manufacturer no longer owns them. Tax Code § 151.318(d) defines "manufacturing" as ending when the property has the physical properties it has when the manufacturer transfers it to someone else -- so the manufacturer's own manufacturing process for those beans was already complete once it shipped them to the grocery store. Equipment used at the manufacturer's own plant, before shipping, still qualifies for the exemption because the manufacturer still owns the beans being processed there. But equipment sitting in the grocery store, grinding beans the store now owns, doesn't qualify -- the rule requires the same party to both own the equipment and own the property being processed by it, and here that's the grocery store, not the manufacturer. The corrected result: the manufacturer must accrue and pay Texas tax on these grinding machines, and should keep a copy of both the original letter and this correction on file in case of an audit.

What this means for you

Manufacturers who place their own equipment inside a customer's retail location

The manufacturing exemption tracks who OWNS the property being processed, not just who owns the equipment. If you place equipment at a retail location to process goods your customer already owns (even goods you originally made), that use doesn't qualify as your own manufacturing -- you'll owe sales/use tax on that equipment.

Grocery/retail businesses that receive vendor-placed equipment

If a vendor's equipment (like an in-store grinder) processes product you've already purchased and now own, tax responsibility for that equipment generally falls to whoever placed it there, not automatically to you -- but confirm ownership and tax treatment with your vendor and your own tax advisor.

Accountants and tax professionals

Note this letter is itself a correction of an earlier same-office ruling -- a useful illustration that a prior favorable letter ruling can be revisited and reversed when a missed or misunderstood fact (here, who owned the beans at the point of processing) comes to light. Advise clients to keep both versions on file for audit purposes, as this letter itself instructs.

Common questions

Q: Does a manufacturer's grinding equipment placed in a customer's store qualify for the manufacturing exemption?
A: No, per this letter -- once the manufacturer has shipped and sold the beans, its own manufacturing process is complete, and the store (not the manufacturer) owns the beans being ground in-store.

Q: Does equipment used at the manufacturer's own plant, before shipping, qualify?
A: Yes, per this letter -- because the manufacturer still owns the beans being processed there.

Q: What should the manufacturer do about tax on the in-store grinding machines?
A: Per this letter, accrue and report tax, or pay tax to vendors, on grinding machines purchased for use in Texas.

Q: Why did the Comptroller change its answer from an earlier ruling?
A: Per this letter, the earlier (January 10, 1997) ruling was revisited after it was pointed out that the manufacturer did not own the beans being ground by grocery store customers.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.318(d) (definition of "manufacturing")

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9705384L

Original ruling text

May 16, 1997

Dear ***:

This is to restate my letter ruling of January 10, 1997, regarding the
applicability of the Texas manufacturing exemption to a coffee storage/grinding
machine (hereinafter machine) owned by your client and used within grocery
stores to whom your client sells its coffee beans.

The issue and my initial response were revisited because it was pointed out
that your client did not own the beans being processed (ground) by grocery
store customers and therefore the client's processing of the beans had been
completed. The beans at the time they were ground were owned by the grocery
store. If the grocery store owned the grinder it would qualify for the
manufacturing exemption, because it also owns the beans being processed.

Texas Tax Code ¤151.318 (d) defines "manufacturing" to include:

each operation beginning with the first stage in the production of tangible
personal property and ending with the completion of tangible personal property
having the physical properties (including packaging, if any) that it has when
transferred by the manufacturer to another.

Emphasis added.

Equipment that your client may have at its plant to process the beans prior to
shipping the beans to its grocery store customers would qualify for the
exemption. However, once the beans are shipped to its customers, your
client's processing of the beans has been completed for purposes of the
manufacturing exemption (i.e., the beans have physical properties that they
have when transferred to the grocery stores by your client). No exemption is
available for your client's equipment located at the grocery stores.

I apologize for any inconvenience this may cause. Your client should accrue
and report tax or pay tax to vendors on any grinding machines purchased fot use
in Texas. Be sure to keep a copy of my original letter on file, as well as
this correction, in the event of an audit of your client.

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division