T’aE TQRBi’EY ENERAL 

OF TEXAS 

Honorable Bob Bullock 

Comptroller of Public Accounts 

L.B.J. Building 

Austin, Texas 78774 

Dear Mr. Bullock: 

Opinion No. JM-756 

Re: Whether gas and electricity 

used by a restaurant to prepare 

food for retail consumption is 

exempt from the sales and use 

tax, and related questions 

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? 

p. 3524 
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 

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. 

4. 

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. --. 

p. 3525 
Ih 

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 

electricity for commercial use. The sale of 

natural gas . . . for use directly in manufacturing, 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. 

p. 3526 
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, 

p. 3527 
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 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 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 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, and Use Tax Law (1962) at 20. The 

commission issued the following recommendation: 

p. 3528 
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). 

p. 3529 
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 

fuel, power, energy, or suppli 

processing, manufacturing, refining, mining or 

replacements thereof, 

es, used directly in 

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 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 to apply to restaurant operations: 

- 

p. 3530 
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 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 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 foodservice 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). 

p. 3531 
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 understanding" 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 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 

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 

p. 3533 
Honorable Bob Bullock - Page 11 (JM-756) 

gas and electricity sales applies. The comptroller 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 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 

p. 3534