
TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN




ON MOTION FOR REHEARING






NO. 03-01-00447-CV





Cafeteria Operators, L.P., Appellant


v.


Carole Keeton Rylander, Comptroller of Public Accounts; and John Cornyn, Attorney
General of the State of Texas, Appellees





FROM THE DISTRICT COURT OF TRAVIS COUNTY, 261ST JUDICIAL DISTRICT

NO. 99-14363, HONORABLE CHARLES F. CAMPBELL, JR., JUDGE PRESIDING






	We withdraw our opinion and judgment of July 26, 2002, and substitute the following
in its place.  Cafeteria Operators runs a chain of cafeterias and buffet-style restaurants known as
Furr's Cafeterias and Furr's Family Dining restaurants (Furr's).  As a method of controlling costs
and maintaining product uniformity, Furr's operates a central kitchen to service all of its restaurants. 
At the central kitchen, bulk food items are turned into the individual portions served at the
restaurants.  For example, large blocks of compressed frozen fish are sliced into fillets which are then
buttered and breaded.  Corn bread muffins are prepared in mass quantities.  The food is then shipped
to the individual restaurants, where it is heated and served.

	To prepare this food, Furr's uses electricity and gas.  After auditing the period from
April 1, 1991, to October 31, 1994, the Comptroller assessed sales tax on the electricity and gas used
in Furr's central kitchen.  Furr's protested the assessment.  A hearing was held before an
administrative law judge who upheld the Comptroller's assessment.  After a trial de novo, the district
court denied Furr's motion for summary judgment and rendered judgment in the Comptroller's favor
on its cross-motion for summary judgment.  In one issue on appeal, Furr's contends that the
electricity and gas used in the central kitchen during the audit period qualified for exemption from
sales tax.  We will affirm the trial-court judgment.

Discussion


Electricity and Food
	We cannot discuss the taxability of electricity under section 151.317 of the tax code
in a vacuum; the evolving, if convoluted, provisions governing electricity and restaurants inform our
discussion. (1)  The predecessor version of the sales tax statute at issue in this case exempted gas and
electricity from taxation when used "for processing tangible personal property for sale as tangible
personal property."  Act of May 31, 1981, 67th Leg., R.S., ch. 389, § 1, sec. 151.317, 1981 Tex. Gen.
Laws 1490, 1563-64.  In the context of restaurants, under that version of the statute, the Comptroller
exempted from taxation the electricity used in food preparation activities because it was considered
used for "processing," while the electricity used for other activities in the restaurant was considered
taxable.  See Op. Tex. Att'y Gen. No. JM-756 (1987). (2)  The statute was amended to eliminate the
exemption for utilities used in "preparation or storage of food for immediate consumption."  Act of
July 21, 1987, 70th Leg., 2d C.S., art. 1, pt. 4, § 25, 1987 Tex. Gen. Laws 1, 18-19 (emphasis added). 
Thus, electricity or gas used in the preparation of food for immediate consumption became taxable. (3)
	Before this amendment in 1987, "food for immediate consumption" did not 
specifically govern the taxation of electricity, but the concept already existed to distinguish a tax
exempt "food product" from taxable "food ready for immediate consumption."  Tex. Tax. Code Ann.
§ 151.314 (West 2002). (4)  Under section 151.314, food products for human consumption are tax
exempt.  Id. § 151.314(a).  "Food products" do not include items such as soft drinks or candy, or
"[f]oods and drinks . . . served, prepared, or sold ready for immediate consumption in or by
restaurants, lunch counters, cafeterias . . . ."  Id. § 151.314(c)(2), (c)(3).  "Food for immediate
consumption" is defined by rule as "the type of food, beverages, or meals normally prepared, served
or sold by restaurants, lunch counters, cafeterias, etc., which, when sold, require no additional
preparation prior to consumption."  34 Tex. Admin. Code § 3.293(a)(9)(A) (2002) (Comptroller's
Rule 3.293).
	The same set of activities may in practice produce an edible substance that sometimes
is classified as an exempt food product and sometimes is taxable as food ready for immediate
consumption.  For example, consider the activities that produce doughnuts.  If sold in quantities of
five or fewer by a retailer who provides eating facilities (tables, trays, chairs, benches or booths),
those doughnuts are taxable food ready for immediate consumption.  Comptroller Rule
3.293(a)(9)(B)(vi).  If sold in a quantity of six or more, the same doughnuts become an exempt food
product.  Likewise, individual ice cream sundries are taxable as food ready for immediate
consumption unless sold in a prepackaged unit containing six or more such items.  Comptroller's
Rule 3.293(a)(9)(B)(v), (C)(iv).  Therefore, logically, the same set of physical activities could
sometimes be "processing tangible personal property for sale as tangible personal property" and
sometimes be preparing "food for immediate consumption," depending on how and where the food
is sold. (5)
	Furr's operates cafeterias and has a central kitchen that prepares food exclusively for
Furr's cafeterias.  Furr's does not contend that its customers are not being served "food ready for
immediate consumption."  Furr's admits that the steps occurring inside each individual Furr's unit
to heat and serve the food are taxable activities performed to prepare food for immediate
consumption.  However, Furr's asks us to draw a line at the kitchen door of each cafeteria and
classify any steps performed elsewhere as an exempt activity, that is the processing of tangible
personal property for sale as tangible personal property.  We cannot ignore that the preparatory
activities performed in the central kitchen produce food served at, and only at, Furr's cafeterias;
those same activities could be performed in a kitchen physically attached to the serving line.  To
adopt Furr's analysis, we would have to classify a continuous stream of activities into two different
kinds of activities based primarily on location.  We believe that would contravene our holdings in
Texas Citrus Exch. v. Sharp, 955 S.W.2d 164, 170-71 (Tex. App.--1997, no pet.), and Rylander v.
Haber Fabrics Corp., 13 S.W.3d 845, 850 (Tex. App.--Austin 2000, no pet.).

Texas Citrus

 Texas Citrus involved a cooperative marketing association that produced fruit juice. 
In its manufacturing process, it extracted juice from the fresh fruit and then extracted the remaining
water to obtain a thick, syrupy substance known as industrial concentrate.  Texas Citrus next froze
the concentrate, which was then sent to an off-site tank farm.  The concentrate was maintained in its
frozen state for up to six months in order to collect concentrate from various harvests with different
acidity levels to be blended to achieve a uniform quality.  Id. at 166.  The Comptroller attempted to
assess tax on the electricity used to maintain the concentrate in its frozen state, asserting that
electricity used in "warehousing" was distinct from the exempt electricity used for processing
tangible personal property.  Texas Citrus contended that the maintenance of concentrate in its frozen
state to achieve a proper blend was an integral part of its juice-manufacturing procedure.  Id. at 167. (6)
	This Court held that the manufacturing process includes every operation from the
beginning of production until the product is completed and packaged for sale.  Id. at 170.  The
opinion rejected the Comptroller's theory that the manufacturing process could be separated into
discrete components, some taxable and some tax-exempt. Because the vast majority (7) of the frozen
concentrate in the tanks was held for use in formulating Texas Citrus's main juice product, the
electricity used to maintain the frozen concentrate was an essential part of the manufacturing process
and was exempt from taxation.  Id. at 170-71.  Significantly, the opinion rejected the Comptroller's
argument that the off-site location of the tank farm changed the nature of the activity from
manufacturing to warehousing.
	This Court applied a similar analysis in Rylander v. Haber Fabrics Corp., 13 S.W.3d
at 850, in which we held that the Comptroller cannot divide a production stream into component
parts and examine each in a vacuum.  One must look to see whether a function is a "reasonable
continuum from start to finish" in deciding the taxable nature of the activity.  Id.  In that case, we
concluded that the activities performed by the taxpayer, a series of manipulations to transform fabric
of varying qualities into uniform rolls of first quality fabric, were all part of a tax-exempt
manufacturing process.  Id.
	Applying our analysis in Texas Citrus and Haber to the facts of Furr's operations, we
hold that Furr's engages in the taxable activity of preparing food for immediate consumption in its
central kitchen, as well as in its restaurants. (8)  The steps it takes in the central facility are part of the
continuum of events that Furr's performs to prepare food to be served and consumed in its
restaurants.  That the initial steps of food preparation are performed at an off-site central location
does not alter the continuous nature of the activity, just as holding the frozen concentrate in off-site
tanks in Texas Citrus did not remove that activity from the manufacturing stream.
	We note that no significant food product prepared in Furr's central kitchen is retailed
for home preparation.  It is all prepared for immediate consumption by Furr's cafeteria customers. 
If Furr's had only one cafeteria and performed all the food preparation in a kitchen at that location,
the electricity used in preparing food for immediate consumption would be taxable.  It is immaterial
whether Furr's transports a fish fillet from a walk-in freezer on the premises to its deep-fat fryer ten
feet away or transports that piece of frozen fish to be fried in a kitchen several hundred miles away. 
Location does not alter the activity of preparing food for immediate consumption.
	In Texas Citrus, this analysis of whether the taxpayer's activities were a "reasonable
continuum from start to finish" resulted in the conclusion that the electricity used at the tank farms
was part of the exempt manufacturing of tangible personal property.  In the current case, it results
in the conclusion that the electricity and gas used in the central kitchen constitutes the taxable use
of electricity in preparing food for immediate consumption. (9)

Conclusion


	We hold that the that the electricity and gas used in Furr's central kitchen are being
used for the taxable purpose of preparing food for immediate consumption.  We overrule Furr's
single issue and affirm the trial-court judgment.


  
					Bea Ann Smith, Justice
Before Chief Justice Aboussie, Justices B. A. Smith and Puryear
Affirmed
Filed:   October 10, 2002
Publish
1.        During the period covered by the audit, section 151.317(a) read: "Gas and electricity are
exempted . . . except when sold for a commercial use."  Act of May 31, 1981, 67th Leg., R.S., ch.
389, § 1, sec. 151.317(a), 1981 Tex. Gen. Laws 1490, 1563. Section 151.317(c)(2)(A)(i) defined 
"commercial use" as not including use by a person engaged in processing tangible personal property
for sale as tangible personal property other than preparation or storage of food for immediate
consumption.  Act of July 21, 1987, 70th Leg., 2d C.S., ch. 5, art. 1, pt. 4, § 25, 1987 Tex. Gen. Laws
1, 18-19.  In 1999, section 151.317(a) was restructured to read affirmatively that gas and electricity
are exempt when used for a list of certain exempt purposes.  Act of May 31, 1999, 76th Leg., R.S.,
ch. 1467, § 2.18, sec. 151.317(a), 1999 Tex. Gen. Laws 5017, 5017.
2.        The Attorney General noted that many other states did not consider the use of electricity in food
preparation as an exempt processing activity.  The opinion also dealt with the Comptroller's ability
to impose certain requirements on utility studies.  Under the predominant use rule, electricity flowing
through a single meter, but used for both exempt and taxable purposes, was not taxed
proportionately.  The predominant (more than 50%) use determined whether all of the electricity
flowing through that meter was exempt or taxable.  34 Tex. Admin. Code § 3.295(e)(1) (2002)
(Comptroller's Rule 3.295).  In practice, as noted in the motion for rehearing, that distinction caused
a large expenditure of the Comptroller's time in analyzing elaborate utility studies of restaurants to
determine the predominant use.
3.        We observe that the language of the statute, "processing tangible personal property for sale as
tangible personal property other than the preparation of food for immediate consumption" could be
read as saying that preparation of food for immediate consumption is a form of processing, but a
taxable form.  However, the extensive use of the word "processing" makes for a confusing analysis,
so we will consider "processing of tangible personal property" and "preparation of food for
immediate consumption" as two separate categories.
4.        Section 151.317 uses the phrase "food for immediate consumption."  Section 151.314 uses the
phrase "food ready for immediate consumption."  These phrases seem to be used interchangeably. 
The Comptroller's rule refers to "food ready for immediate consumption."  4 Tex. Admin. Code
§ 3.293 (2002) (Comptroller's Rule 3.293).
5.        Furr's argues that section 151.317 does not define the words "food for immediate consumption"
so we must give those words their plain meaning.  Accordingly, it contends, frozen fish leaving their
central cafeteria cannot possibly be food ready for immediate consumption. As noted above, the
Comptroller does have a long standing rule defining, largely by example, what constitutes food for
immediate consumption, which is not defined in its literal sense.  The ordinary meaning of the words
used in the statute would not seem to imply a distinction between five doughnuts and six in deciding
whether those items are literally food ready for immediate consumption.
6.         In its motion for rehearing, appellant complains that Texas Citrus involves "manufacturing"
not "processing."  As discussed in an attorney-general opinion, at one time the electricity exemption
did not refer to "processing."  The Comptroller considered "manufacturing" to encompass
"processing."  See Op. Tex. Att'y Gen. No. JM-756 (1987).
7.        A small amount of the frozen industrial concentrate was sold as concentrate.  Under the
predominant use rule, electricity flowing through a single meter, but used for both exempt and
taxable purposes, was not taxed proportionately.  The predominant (more than 50%) use determined
whether all of the electricity flowing through that meter was exempt or taxable.  Comptroller's Rule
3.295(e)(1).
8.        As with the Texas Citrus Exchange's sale of a de minimus amount of the frozen concentrate,
Furr's sells a small amount of the items leaving the central processing facility.
9.        Furr's contends that the Comptroller's reliance on its "single entity" theory to assess tax in these
circumstances violates the Comptroller's own "single meter" rule.  We have not relied on the single
entity theory and our holding does not implicate the "single meter" or "predominant use" rule: 
"Natural gas or electricity used during a regular monthly billing period for both exempt and taxable
purposes under a single meter is totally exempt or taxable based upon the predominant use of the
natural gas or electricity measured by that meter."  See Tex. Admin. Code § 3.295(e)(1) (2001)
(emphasis added).  Furr's never established that a single meter at any location measured electricity
and gas used for both an exempt and a taxable purpose.

