The Texas Comptroller has issued a private letter ruling discussing the taxability of disposable collars for dessert cups. The taxpayer operates restaurants throughout Texas. One of the menu items is a soft serve ice cream dessert. When preparing the dessert, employees fill a cup with ice cream then place a disposable collar on the cup to temporarily extend the cup during the blending process. The taxpayer inquired if the disposable collar is exempt from Texas sales and use tax as property used in manufacturing.
Texas provides an exemption for tangible personal property directly used or consumed in or during the actual manufacturing, processing, or fabrication of tangible personal property for ultimate sale if the use or consumption of the property is necessary or essential to the manufacturing, processing, or fabrication operation, and it directly makes or causes a chemical or physical change to the product. An exemption is also provided for tangible personal property used in the manufacturing process if the use or consumption of the property is necessary and essential to comply with federal, state, or local laws or rules that establish requirements related to public health. Texas’s manufacturing exemption specifically excludes hand tools. Additionally, items that are merely useful or incidental to the manufacturing operation are excluded from the manufacturing exemption unless they are a component of a qualifying piece of equipment.
Texas stated that the disposable collar does not qualify for the manufacturing exemption for the following reasons. The use of the collar is to temporarily extend the size of the cup. The product being manufactured is the dessert, and not the cup. The collar does not make a chemical or physical change to the dessert. The collar is not used for cleaning food-contact surfaces and is not necessary and essential to comply with public health regulations. The collar is incidental to the manufacturing operation. Finally, the collar is used and managed by hand and meets the definition of a hand tool, which is excluded from the manufacturing exemption. As a result, the taxpayer’s purchase of disposable collars is subject to Texas sales and use tax.
This private letter ruling offers interesting insights as to why a manufacturing exemption doesn’t apply. It also demonstrates that it may be worthwhile to request private letter rulings to determine if a manufacturing exemption applies to an item or activity that may not be considered a traditional manufacturing process. (Letter No. 202410005L, Texas Comptroller of Public Accounts, October 9, 2024)