T’aE TQRBi’EY ENERAL OF TEXAS

Honorable BobBullock Comptroller of Public Accounts L.B.J. Building Austin, Texas 78774

DearMr.Bullock: Opinion No. JM-756 Re: Whether gas andelectricity used by arestaurant to prepare food for retail consumption is exempt from the sales and use tax, andrelated questions

You ask several questions concerning the application of an exemption in the limited sales, excise, and use tax, chapter 151 of the TaxCode, to gas andelectricity sold to restaurants as asource of energy to prepare food for consumption by customers. Weset 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 andelectricity used byarestaurant 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 topreparation? 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. tomaintain food at adesired serving temperature in the food preparation area?

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f. tomaintain food at adesired 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. MayIrequire autility usage study toshow both exempt andnonexempt 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 andproper assessment andcollection of the revenues of the state.” V.T.C.S. art. 4344. Whenthe meaning of a 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 andapplying the limited sales, use, and excise tax to restaurants and other retail purveyors of prepared food. See 34T.A.C. 553.293 and3.295. 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 lawposed byyou in question twoof your request. Theanswers to these questions require the application of the special skills and knowledge of your office to complex fact situations the ultimate significance of which maynot be discernible in even awell-framed hypothetical question. 4.

Wewill 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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Sales of gas andelectricity are exempted from the limited sales, excise, anduse tax, except whensold for “commercial use.” TaxCode 9151.317. “Commercial use” means

use by a person engaged in selling, warehousing, or distributing acommodity or aprofessional or personal service, but does not include a person engaged in: (A) processing tangible personal property for sale as tangible personal property. (Emphasis added).
TaxCode 5151.317(c)(2).’ Wenote that while the statute exempts gas andelectricity 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.”

Thetax imposed byTexas TaxCodechapter 151must be collected on the sale of natural gas or electricity for commercial use. The sale of natural gas
. . . for use directly in manufacturing, processing, or for other noncommercial uses is exempt. (Emphasis added). 34T.A.C. 83.295(c). TheTaxCode contains definitions neither of “processing” nor of

“manufacturing.” Youdefine 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, amanufacturer 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

beseen, weighed, measured, felt, or touched or that is perceptible to the senses in anyother manner.” TaxCode9151.009.

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electricity in manufacturing will hereafter be referred to as 'noncommercial use.'

. . . . Processing -- Includes anoperation or aseries of operations, the object of which is to create, produce, modify, or to change the characteristics of anarticle of tangible personal property. The repair of tangible personal property byrestoring it to its original condition is not considered processing of that property. The property being processed maybelong either to the processor or the customer, the only tests being whether the property is 'processed' and whether it will ultimately be sold. Themerepacking, unpacking, or shelving of aproduct to be sold will not be considered processing of that product. Direct use of natural gas or electricity in processing will bereferred toas 'noncommercial use.'
34T.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." Yourelate that "[flor manyyears wehave considered restaurants as engaging in both processing and commercial activities, processing whenthe food is prepared and commercial whenit is sold." In order to arrive at aworkable application of the TaxCode 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. nowrit). Our review of your long-standing definition of "processing" in the context of restaurants preparing food for sale to customers must begin in 1961, whenthe limited sales, use, and excise tax was first adopted in its present form. The exemption nowembodied 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 andelectricity when used in industrial, manufacturing, mining,

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agricultural, dairy or poultry operations or pumping water for irrigation or for electrical processes such as electroplating andelectrolysis. 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 onState andLocal TaxPolicy tomakeacomprehensive study of the limited sales, excise, anduse 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):

Fewprovisions of theLimited Sales Taxstatute 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 agricultural 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 'industrial,' 'manufacturing' and 'mining.' Already there are two lawsuits seeking clarification of these terms and the State Comptroller hasjoined with taxpayers in requesting this Commission to develop clarifying language. TheCommission has attempted to determine what the Legislature probably intended in passing this particular provision. It is the Commission's considered judgment that the intent wasto 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'.

. . . TheCommission also believes that the Legislature 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, andUseTaxLaw(1962) at 20. The commission issued the following recommendation:

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Recommendation Twelve

. . . . B. It is recommended that the Limited Sales Tax statute be amended to makeit clear that gas and electric utility service is exempt whensold 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 nowin article 151.317 of the TaxCode. Seeid. 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 TaxCommission chose "processing" asanappropriate termto express the legislature's intent in exempting manufacturing as "generally understood." SeeRecommendation 12of the TaxCommission, quoted inpart above. Inthe absence of adefinition in astatute for a term, the term is to be given its ordinary meaning, given the context in which it is used. Big HAuto Auction, Inc. v. Saens Motors, 665S.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; BrownExpress, Inc v. Railroad Commission, 415S.W.Zd 394~(Tex. 1967). See,also Ziperstein v. TaxCommissioner, 423A.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 tobeamanufacturer bygranting it a "manufacturers" license).

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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 anddifferent from that used in the Tax Code. See generally Annot., "Items or materials exempt for use tax asused inmanufacturing, processing, or the like," 30 A.L.R. 2d 1439 (1953). See also Annot.. "What constitutes manufacturing andwhois amanufacturer under TaxLaws," 30A.L.R. 3d 7 (1970). Almost all of the cases which wehave 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. IowaAutoDealers 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] toconvert into marketable form"): CommonwealthDepartment of Taxation v. Orange-Madison Cooperative FarmService, 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 ofmilk is a"process").

Some cases conclude that the preparation of food for immediate consumption byarestaurant 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 anduse tax exemption wasunavailable toarestaurant:

The terms 'sale at retail,' 'lease or' rental,' 'distribution,' 'use,' 'storage' and 'consumption' shall not

. . . include machinery or tools or repair parts therefor or fuel, power, energy, or suppli processing, manufacturing, refining, mining or replacements thereof, es, used directly in
conversion of products for sale or resale.

. . . (Emphasis inoriginal). Id. at 513, quoting Va. Code 558-441.6. TheVirginia 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 operation." 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 toapply torestaurant operations:

-

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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 andused bypersons establishing newmanufacturing or processing plants in Oklahoma, and machinery andequipment purchased andused bypersons in the operation of manufacturing plants already established in Oklahoma; provided, this exemption shall not apply unless such machinery and equipment is incorporated into, and is directly used in, the process of manufacturing property Subject to taxation under this Article. The term 'manufacturing plants' shall meanthoseestablishments primarily engaged in manufacturing or processing operations, and generally recognized as such. (Emphasis inoriginal). Id. at 636, quoting 68Okla. 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. - InRoberts v. Bowers, 162N.E.2d 858 (1959), the SupremeCourt 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 amanufacturer and amerchant, stating that a merchant, or dealer, sells to earn aprofit, andamanufacturer sells tomakeaprofit already earned:

Sale ofmaterials already manufactured inorder to makeaprofit already earned differs greatly from sale at retail of foods cooked primarily at the time and for purpose of sale in a retail foodservice business. Id. at 861. - TheVirginia SupremeCourt deduces acommonthemefrom 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 amanufacturer 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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Onthe other hand, in Zipperstein v. Tax Commissioner, 423A.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 assuch," supported anapplication of the exemption tofood production operations of arestaurant. Thecourt 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 bygranting the required license for that category of establishment. The court intimated that restaurants are generally recognized asmanufacturers. Id. at 131. See also Burger King, Inc; v. State TaxCommission, 407Nz. 2d957 (1978).
Weconclude onacautionary note. TheSupreme 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." 199S.E.2d at 514. Because our task is, asis yours, to interpret theTexas limited sales, use, andexcise tax statute, weare not prepared to rely solely onthe decisions of other states. Eachof the reported decisions deals with differently-worded statutes, and legislative policies underlying the statutory language mayvary. Wethink it best, then, to rely on the "general understanding" of whether restaurants preparing food for customers are "processors." Your office has concluded that such is the "general understanding," andweare not prepared tosay otherwise.
You also ask whether you mayrequire 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. SeeDirelco, Inc. V. Bullock, 711 S.W.2d 360 (Tex. App. -Austin 1986,zt ref'd n.r.e.). Ataxpayer claiming an exemption from taxation must prove the exemption clearly applies. Bullock-v. National Bancshares Corp., 584S.W.2d 268, 272 (Tex. 1979). Sections 111.001 and 111.002 of the Tax Code specifically authorize you topromulgate rules andregulations relating to the administration andenforcement of the limited sales, excise, anduse tax. Anagency may issue any rule in general harmony with the objectives of the authorizing statute. Gerst v. OakCliff Savings andLoanAssociation, 432 S.W.2d 702, 706 (Tex., 1968). You may promulgate regulations requiring reports including information that you determine maybe necessary for the proper administration of the limited sales, use and excise tax. Tax Code 5151.406. The information you mayrequire in such reports is of such anature that the absence of the data would make the administration of the tax difficult, if not impossible.

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Eouston Natural Gas Corp. v. Southwestern Apparel, Inc., 558 S.W.2d 950 (Tex. Civ. App. -Austin 1977, writ dism'd). Ofcourse, anyact byyour office to change or addrules for the application of the exemptions in article 151toaparticular class of taxpayer must comply with the structures of the Administrative Procedure andTexas 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., 628S.W.2d 754 (Tex. 1982). Youalso askwhether you mayrequire autility usage study tobe done or reviewed by a registered engineer before recognizing an exemption under it. Webelieve 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 mayrequire information the absence of which would make the collection of taxes difficult, if not impossible. Houston Natural Gasv. Southwestern Apparel, m. Because your regulations at present do not define either the scope or the contents of a"utility usage study," weare unable tosay 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 tomean

any service or creative work, either public or private, the performance of which requires engineering education, training and experience in the application of special knowledge of the mathematical, 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 byaregistered engineer. SUMMARY

Thelimited sales, excise, anduse 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 asthe preparation of food byrestaurants for sale to customers is generally understood as "processing," the exemption in article 151.317 for

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gas andelectricity sales applies. Thecomptroller of public accounts may require information from taxpayers without which taxes would be difficult, if not impossible, to collect. socalled "utility usage studies" submitted by a taxpayer in support of aclaim for exemption from taxation mayrequire preparation or review by a professional engineer licensed according to the Engineering Practices Act. V.T.C.S. art. 3271a.

JIM MATTOX Attorney General ofTexas MARYXRLLER Executive Assistant Attorney General JUDGEZOLLIESTRAXLBY Special Assistant Attorney General RICKGILPIN Chairman, Opinion Committee Prepared byDonBustion Assistant Attorney General

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