                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?




                                         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                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.                                                                              --.




                                               p.    3525
     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.
,-




                                              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 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:




                                        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 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:




                                               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    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).




                                               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       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




                                            p.   3533
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




                                                p.   3534
