T’aE TQRBi’EY ENERAL
OF TEXAS
Honorable Bob Bullock Opinion No. JM-756
Comptroller of Public Accounts
L.B.J. Building Re: Whether gas and electricity
Austin, Texas 78774 used by a restaurant to prepare
food for retail consumption is
exempt from the sales and use
tax, and related questions
Dear Mr. Bullock:
You ask several questions concerning the application of an
exemption in the limited sales, excise, and use tax, chapter 151 of
the Tax Code, to gas and electricity sold to restaurants as a source
of energy to prepare food for consumption by customers. We set out
your questions as follows:
1. Is the use of gas and electricity by a
restaurant to prepare food for consumption by
customers exempt?
2. If gas and electricity used by a restaurant
to prepare food for consumption by customers is
exempt, then is gas and electricity used for the
following purposes exempt?
a. to store food in either a frozen or
unfrozen condition prior to preparation?
b. to store prepared food in an eatable
condition?
c. for lighting, heating, and cooling in
the food preparation area?
d. for hot water heaters, dishwashers,
exhaust vents, garbage disposals and other
support equipment?
Cl,,
e. to maintain food at a desired serving
temperature in the food preparation area?
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Eonorable Bob Bullock - Page 2 (J-M-756)
f. to maintain food at a desired serving
temperature outside the food preparation area?
*. to prepare food in a public area of
the restaurant?
h. to store food outside the restaurant’s
food preparation area?
i. to freeze food for preservation
purposes?
3. May I require a utility usage study to show
both exempt and nonexempt use before granting the
exemption?
4. If the answer to (3) is ‘yes,’ may I
require the study to be done or reviewed by a
registered engineer?
Your office is charged with adopting regulations deemed
“essential to the speedy and proper assessment and collection of the
revenues of the state.” V.T.C.S. art. 4344. When the meaning of a 4.
statutory provision in the Tax Code is ambiguous, the construction
developed by your department is entitled to weight. Calvert v.
Kadane , 427 S.W.2d 605 (Tex. 1968). Your office has promulgated an
extensive set of regulations defining and applying the limited sales,
use, and excise tax to restaurants and other retail purveyors of
prepared food. See 34 T.A.C. 553.293 and 3.295. Because this office
cannot adjudicatefactual questions in the article 4399. V.T.C.S.,
opinion process, we cannot answer the questions requiring a
point-by-point application of the law posed by you in question two of
your request. The answers to these questions require the application
of the special skills and knowledge of your office to complex fact
situations the ultimate significance of which may not be discernible
in even a well-framed hypothetical question.
We will review your general application of an exemption in the
limited sales, use, and excise tax to gas and electricity used by
restaurants to prepare food for consumption by customers. In the
course of examining this issue, we must consider the general
understanding of certain words applied in the statute.
The limited sales, use, and excise tax applies generally to
“sales”; a “sale” includes “the furnishing, preparation, or service of
food, meals. or drinks” done or performed for consideration (Emphasis
added). Tax Code 9151.005. Your concern, however, is not with the
sale of food but with the sale of gas and electricity to businesses
that prepare food for sale. --.
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Honorable Bob Bullock - Page 3 (JM-756)
Sales of gas and electricity are exempted from the limited sales,
excise, and use tax, except when sold for “commercial use.” Tax Code
9151.317. “Commercial use” means
use by a person engaged in selling, warehousing,
or distributing a commodity or a professional or
personal service, but does not include a person
engaged in:
(A) processing tangible personal property for
sale as tangible personal property. (Emphasis
added).
Tax Code 5151.317(c)(2).’
We note that while the statute exempts gas and electricity sold
for “processing.” because processing is specifically listed as a
noncommercial use, your rules apparently interpret the statutory
comand to include both “processing” and “manufacturing.”
The tax imposed by Texas Tax Code chapter 151 must
be collected on the sale of natural gas or
Ih electricity for commercial use. The sale of
natural gas . . . for use directly in manu-
facturing, processing, or for other noncommercial
uses is exempt. (Emphasis added).
34 T.A.C. 83.295(c).
The Tax Code contains definitions neither of “processing” nor of
“manufacturing.” You define these terms in connection with your rules
for administering the exemption as follows:
Manufacturing -- Every operation commencing with
the first production stage and ending with the
completion of production. The ‘first production
stage’ means the first act of production, and it
does not include acts in preparation for
production. For example, a manufacturer gathering
or arranging raw material or inventory is
preparing for production. For the purposes of
this section, direct use of natural gas or
1. “Tangible personal property” is “personal property that can
be seen, weighed, measured, felt, or touched or that is perceptible to
the senses in any other manner.” Tax Code 9151.009.
,-
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Honorable Bob Bullock - Page 4 (JM-756)
electricity in manufacturing will hereafter be
referred to as 'noncommercial use.'
. . . .
Processing -- Includes an operation or a series of
operations, the object of which is to create,
produce, modify, or to change the characteristics
of an article of tangible personal property. The
repair of tangible personal property by restoring
it to its original condition is not considered
processing of that property. The property being
processed may belong either to the processor or
the customer, the only tests being whether the
property is 'processed' and whether it will
ultimately be sold. The mere packing, unpacking,
or shelving of a product to be sold will not be
considered processing of that product. Direct use
of natural gas or electricity in processing will
be referred to as 'noncommercial use.'
34 T.A.C. 53.295(a)(3), (5). Your rationale for maintaining separate
definitions for "processing" and "manufacturing" is unclear, since the
statute only refers to "processing."
You relate that "[flor many years we have considered restaurants
as engaging in both processing and commercial activities, processing
when the food is prepared and commercial when it is sold." In order
to arrive at a workable application of the Tax Code to the situation
of a particular restaurant-taxpayer, you apply a "predominant use
test" when a taxpayer purchases gas or electricity through a single
metering device for both exempt and nonexempt uses. See 34 T.A.C.
53.295(d). See generally Houston Natural Gas Corporation v.
Southwestern Apparel, Inc., 558 S.W.2d 950 (Tex. Civ. App. - Austin
1977, writ dism'd); Colonial Cafeteria-Arlington v. Bullock, 587
S.W.2d 211 (Tex. Civ. App. - Beaumont 1979. no writ).
Our review of your long-standing definition of "processing" in
the context of restaurants preparing food for sale to customers must
begin in 1961, when the limited sales, use, and excise tax was first
adopted in its present form. The exemption now embodied in section
151.317 originally read:
Certain Utility Service Exempt. There are
exempted from the taxes imposed by this Chapter
the sale, production, distribution, lease or
rental of and the storage, use or other
consumption in this State of gas and electricity
when used in industrial, manufacturing, mining,
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Honorable Bob Bullock - Page 5 (JM-756)
agricultural, dairy or poultry operations or
pumping water for irrigation or for electrical
processes such as electroplating and electrolysis.
Tex.. Tax.-Gen. Ann. art. 20.40(Q); see Acts 1961, 57th Leg., 1st C.S.,
ch. 24, at 71, 86. In 1962, thelegislature directed the Texas
Commission on State and Local Tax Policy to make a comprehensive study
of the limited sales, excise, and use tax. Acts 1962, 57th Leg., 3d
C.S., H. Con. Res. 5. at 226. The commission reached the following
conclusions about article 20.04(Q):
Few provisions of the Limited Sales Tax statute
have proved to be as difficult to interpret as
Art. 20.04(Q) which establishes an 'exemption for
gas and electric utility services when sold for
'industrial, manufacturing, mining' and agricul-
tural use. The statute is certainly clear that
agricultural usage and certain electrical
processes are exempt. It is also clear that
residential usage is taxable. The problem
revolves around the meaning of the terms 'indus-
trial,' 'manufacturing' and 'mining.' Already
there are two lawsuits seeking clarification of
these terms and the State Comptroller has joined
with taxpayers in requesting this Commission to
develop clarifying language.
The Commission has attempted to determine what
the Legislature probably intended in passing this
particular provision. It is the Commission's
considered judgment that the intent was to exempt
manufacturing and mining as those terms are
commonly used. In other words, the Commission
believes that the term 'manufacturing' was
intended to embrace industrial operations that
might be more precisely termed 'processing' or
'fabricating' or 'assembling'. . . .
The Commission also believes that the Legisla-
ture intended all other forms of cosmercial usage
to be taxable. This would include retail and
wholesale trade, professional and personal
services,. amusements, hotels, office buildings,
etc. (Emphasis added).
Texas Commission on State and Local Tax Policy, Proposed Changes in
the Texas Limited Sales, Excise, and Use Tax Law (1962) at 20. The
commission issued the following recommendation:
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Honorable Bob Bullock - Page 6 (JM-756)
Recommendation Twelve
. . . .
B. It is recommended that the Limited Sales
Tax statute be amended to make it clear that gas
and electric utility service is exempt when sold
for use in manufacturing, mining and agriculture
as those terms are generally understood and used
and that all other business and professional
use. . . is taxable. (Emphasis added).
-Id. at 21.
Specific statutory language to enact legislation reflecting the
recommendation was proposed by the cosmission. The proposed
clarification was adopted without comment or change by the
legislature; that language is now in article 151.317 of the Tax Code.
See id. at 56-57;
-- Acts 1963, 58th Leg., ch. 138, at 371, 386-87.
We think that it is important to emphasize that the Tax
Commission recommendations underlying its proposal to the legislature
to adopt the language now in article 151.317 stressed the need to
apply the exemption to situations "generally underst.ood" as
manufacturing; the Tax Commission chose "processing" as an appropriate
term to express the legislature's intent in exempting manufacturing as
"generally understood." See Recommendation 12 of the Tax Commission,
quoted in part above. Inthe absence of a definition in a statute for
a term, the term is to be given its ordinary meaning, given the
context in which it is used. Big H Auto Auction, Inc. v. Saens
Motors, 665 S.W.2d 756, 758 (Tex. 1984).
It is appropriate for you to continue to use your definition of
"processing," so long as you can justify your definition as
representing the "generally understood" meaning of "manufacturing" in
the context of processing by restaurants to prepare food for
consumption by customers. Although you do not provide us with the
rationale for your long-standing administrative practice of including
some of the activities of restaurants within the meaning of
"processing," if that term is generally understood to mean
"manufacturing," your definitions are unlikely to be disturbed. -See
Calvert v. Kadane, supra; Brown Express, Inc v. Railroad Commission,
415 S.W.Zd 394~ (Tex. 1967). See, also Ziperstein v. Tax Commissioner,
423 A.2d 129 (Corm. 1979) (trial court's finding that restaurant was
"generally recognized" as a "manufacturer" puGant to a sales tax
exemption scheme was significantly supported by the fact that
authorities perceived restaurant to be a manufacturer by granting it a
"manufacturers" license).
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Honorable Bob Bullock - Page 7 (JM-756)
Several, if not most, of the several states have considered the
meaning of "processing" and "manufacturing" in the setting of taxation
schemes which employ language both similar to and different from that
used in the Tax Code. See generally Annot., "Items or materials
exempt for use tax as used in manufacturing, processing, or the like,"
30 A.L.R. 2d 1439 (1953). See also Annot.. "What constitutes
manufacturing and who is a manufacturer under Tax Laws," 30 A.L.R. 3d
7 (1970). Almost all of the cases which we have examined seem to
consider that processing essentially connotes the transformation of
one form of tangible personal property into a finished form of
tangible personal property ready for sale. Iowa Auto Dealers Ass'n v.
Iowa Department of Revenue, 301 N.W.2d 760 (Ia. 1981) ("Processing
essentially connotes the transformation of raw material into a
finished product."); State v. Four State States Drilling Co., 177
So.2d 828 (Ala. 1965) (processing is "to prepare for the market [or]
to convert into marketable form"): Commonwealth Department of Taxation
v. Orange-Madison Cooperative Farm Service, 261 S.E.2d 532 (Va. 1980)
(mixing of components, useful in themselves or in final product is
"processing"), citing inter alla, Richmond v. Dairy Co., 157 S.E.728
(Va. 1931) (pasteurization of milk is a "process").
Some cases conclude that the preparation of food for immediate
consumption by a restaurant is not "processing" or "manufacturing," as
those terms are "generally understood." In Golden Skillet Corp. v.
Commonwealth, 199 S.E.2d 511 (Va. I973), the Virginia Supreme Court
decided that the following sales and use tax exemption was unavailable
to a restaurant:
The terms 'sale at retail,' 'lease or' rental,'
'distribution,' 'use,' 'storage' and 'consumption'
shall not . . . include machinery or tools or
repair parts therefor or replacements thereof,
fuel, power, energy, or suppli es, used directly in
processing, manufacturing, refining, mining or
conversion of products for sale or resale. . . .
(Emphasis in original).
Id. at 513, quoting Va. Code 558-441.6. The Virginia court concluded
that the exemption only applied to processing, manufacturing, or
conversion of products for sale or resale "in an industrial sense."
because "[clommon sense tells us that the process of preparing and
frying chicken for sale at retail . . . is not an industrial opera-
tion." -Id. at 514.
In McDonald's Corporation v. Oklahoma Tax Commission, 563 P.2d
635 (Okla. 1977), the following sales tax exemption provision was
interpreted -not to apply to restaurant operations:
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Honorable Bob Bullock - Page 8 (m-756)
There is hereby specifically exempted from the
tax levied by this Article the gross receipts or
gross proceeds derived from the:
. . . .
(p) Sale of machinery and equipment purchased
and used by persons establishing new manufacturing
or processing plants in Oklahoma, and machinery
and equipment purchased and used by persons in the
operation of manufacturing plants already esta-
blished in Oklahoma; provided, this exemption
shall not apply unless such machinery and equip-
ment is incorporated into, and is directly used
in, the process of manufacturing property Subject
to taxation under this Article. The term 'manu-
facturing plants' shall mean thoseestablishments
primarily engaged in manufacturing or processing
operations, and generally recognized as such.
(Emphasis in original).
Id. at 636, quoting 68 Okla. Stat. 1971, 51305. The Oklahoma court
concluded that the preparation or cooking of food is not "generally
recognized" as "manufacturing" or "processing." (Emphasis added.)
Id.
- at 638.
In Roberts v. Bowers, 162 N.E.2d 858 (1959), the Supreme Court of
Ohio found that a restauranteur was .not a manufacturer and that
personal property used in preparation of food for retail was not
"manufacturing" equipment entitled to be listed at fifty percent of
its value for personal property taxation purposes. The court
distinguished between a manufacturer and a merchant, stating that a
merchant, or dealer, sells to earn a profit, and a manufacturer sells
to make a profit already earned:
Sale of materials already manufactured in order to
make a profit already earned differs greatly from
sale at retail of foods cooked primarily at the
time and for purpose of sale in a retail food-
service business.
-Id. at 861.
The Virginia Supreme Court deduces a common theme from all of the
restaurant-as-processor cases: processing alone by a restaurant is
ancillary to the service provided by the restaurant; hence a
restaurant is not a processor or a manufacturer as those terms are
"commonly understood." Commonwealth Department of Taxation v.
Orange-Madison Cooperative Farm Service, 261 S.E.Zd 532, 534 (Va.
1980).
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Honorable Bob Bullock - Page 9 (JM-756)
On the other hand, in Zipperstein v. Tax Commissioner, 423 A.2d
129 (Corm. 1979). the Connecticut Supreme Court in the course of
examining the application of a sales tax exemption granted for the
sale of electricity to "an industrial plant" engaged in the process of
manufacturing tangible personal property for sale "and generally
recognized as such," supported an application of the exemption to food
production operations of a restaurant. The court found that there was
sufficient evidence produced at trial to support a finding that a
fast-food restaurant was "generally recognized" as an industrial
plant, in part because the state itself had perceived it to be an
industrial plant by granting the required license for that category of
establishment. The court intimated that restaurants are generally
recognized as manufacturers. Id. at 131. See also Burger King, Inc;
v. State Tax Commission, 407 Nz. 2d 957 (1978).
We conclude on a cautionary note. The Supreme Court of Virginia
in the Golden Skillet case, D. completed a survey of cases
applying sales tax exemptions to restaurants as "process0rs" or
"&urufacturers" by noting- that the decisions show "no-definite trend
among the states and are, even in some instances within the same
jurisdiction, conflicting." 199 S.E.2d at 514. Because our task is,
as is yours, to interpret the Texas limited sales, use, and excise tax
statute, we are not prepared to rely solely on the decisions of other
states. Each of the reported decisions deals with differently-worded
statutes, and legislative policies underlying the statutory language
may vary. We think it best, then, to rely on the "general under-
standing" of whether restaurants preparing food for customers are
"processors." Your office has concluded that such is the "general
understanding," and we are not prepared to say otherwise.
You also ask whether you may require a utility usage study to
show both exempt and nonexempt use before granting an exemption.
Article 151.317 is a provision exempting taxpayers from a tax that
would otherwise be imposed. See Direlco, Inc. V. Bullock, 711 S.W.2d
360 (Tex. App. - Austin 1986,zt ref'd n.r.e.). A taxpayer claiming
an exemption from taxation must prove the exemption clearly applies.
Bullock-v. National Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979).
Sections 111.001 and 111.002 of the Tax Code specifically authorize
you to promulgate rules and regulations relating to the administration
and enforcement of the limited sales, excise, and use tax. An agency
may issue any rule in general harmony with the objectives of the
authorizing statute. Gerst v. Oak Cliff Savings and Loan Association,
432 S.W.2d 702, 706 (Tex., 1968). You may promulgate regulations
requiring reports including information that you determine may be
necessary for the proper administration of the limited sales, use and
excise tax. Tax Code 5151.406. The information you may require in
such reports is of such a nature that the absence of the data would
make the administration of the tax difficult, if not impossible.
p. 3532
Honorable Bob Bullock - Page 10 (JM-756)
Eouston Natural Gas Corp. v. Southwestern Apparel, Inc., 558 S.W.2d
950 (Tex. Civ. App. - Austin 1977, writ dism'd).
Of course, any act by your office to change or add rules for the
application of the exemptions in article 151 to a particular class of
taxpayer must comply with the structures of the Administrative
Procedure and Texas Register Act, article 6252-13a. V.T.C.S.. and the
Constitutions of Texas and the United States. See generally Bullock
v. Hewlett-Packard Co., 628 S.W.2d 754 (Tex. 1982).
You also ask whether you may require a utility usage study to be
done or reviewed by a registered engineer before recognizing an
exemption under it. We believe that you must make the ultimate
determination of what steps are "essential to the speedy and proper
assessment and collection of the revenues of the state." V.T.C.S.
art. 4344. You may require information the absence of which would
make the collection of taxes difficult, if not impossible. Houston
Natural Gas v. Southwestern Apparel, m.
Because your regulations at present do not define either the
scope or the contents of a "utility usage study," we are unable to say
whether the studies mustbe conducted by a~ registered engineer. The
Engineering PracticeAftlimits the "practice of engineering" to duly
licensed engineers. V.T.C.S. art. 3271a, $1.2. The practice of
"engineering" is defined in the act to mean
any service or creative work, either public or
private, the performance of which requires engi-
neering education, training and experience in the
application of special knowledge of the mathemat-
ical, physical, or engineering sciences to such
services or creative work.
V.T.C.S. art. 3271a. 52(4).
Thus, if the preparation or review of a utility usage study
requires the skills associated with engineering, it must be prepared
by a registered engineer.
SUMMARY
The limited sales, excise, and use tax, chapter
151 of the Texas Tax Code,, exempts from taxation
sales of gas and electricity purchased processing
tangible personal property for sale as tangible
personal property. Tax Code art. 151.317. So
long as the preparation of food by restaurants for
sale to customers is generally understood as
"processing," the exemption in article 151.317 for
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Honorable Bob Bullock - Page 11 (JM-756)
gas and electricity sales applies. The comptrol-
ler of public accounts may require information
from taxpayers without which taxes would be
difficult, if not impossible, to collect. so-
called "utility usage studies" submitted by a
taxpayer in support of a claim for exemption from
taxation may require preparation or review by a
professional engineer licensed according to the
Engineering Practices Act. V.T.C.S. art. 3271a.
JIM MATTOX
Attorney General of Texas
MARY XRLLER
Executive Assistant Attorney General
JUDGE ZOLLIE STRAXLBY
Special Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Don Bustion
Assistant Attorney General
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