Texas Comptroller of Public Accounts    STAR System


200812326H



SOAH DOCKET NO. 304-07-2041.26
CPA HEARING NO. 48,097

RE: **************
TAXPAYER NO.: **************
AUDIT OFFICE: **************
AUDIT PERIOD: April 1, 2002 THROUGH June 30, 2005

Limited Sales & Use Tax/RDT

BEFORE THE COMPTROLLER 
OF PUBLIC ACCOUNTS 
OF THE STATE OF TEXAS

SUSAN COMBS
Texas Comptroller of Public Accounts

KARI HONEA
Representing Tax Division

**************
Representing Petitioner


COMPTROLLER’S DECISION

************** (Petitioner) requested a redetermination of the sales tax 
assessed against it by the Texas Comptroller of Public Accounts (TCPA), and 
requested a hearing on that request. The Staff of the TCPA (Staff) responded 
that the assessment should not be adjusted. After considering the evidence and 
argument presented at hearing, the Administrative Law Judge (ALJ) recommends 
that the assessment be adjusted.

I. JURISDICTION, NOTICE, AND PROCEDURAL HISTORY 

There are no contested issues of notice, jurisdiction, or venue in this 
proceeding. Therefore, these matters are addressed in the findings of fact and 
conclusions of law without further discussion here. 

On March 30, 2006, the TCPA issued to Petitioner a Notification of Audit 
Results. On April 24, 2006, Petitioner requested a redetermination of the 
assessment. Petitioner raised two alternative contentions, and a third 
contention.

On March 9, 2007, Staff issued a Notice of Hearing referring this case to the 
State Office of Administrative Hearings (SOAH) for an oral hearing on April 30, 
2007. The hearing convened April 30, 2007, before ALJ Roy G. Scudday in the 
William P. Clements Building, 300 West 15th Street, Fourth Floor, Austin, 
Texas. Staff was represented by Victor John Simonds, Assistant General Counsel. 
Respondent was represented by **************, tax consultant. The record was 
closed at the conclusion of the hearing that day.

II. REASONS FOR DECISION

A. Contentions

1. Petitioner contends that the cleaning services on the vent hoods were not 
subject to tax because they were scheduled and periodic maintenance on real 
property.

2. Alternatively, Petitioner contends that the cleaning services on the vent 
hoods were not subject to tax because they were services performed on tangible 
personal property that was necessary and essential for public health or 
pollution control.

3. Petitioner contends that it detrimentally relied on publications of the 
TCPA.

B. Legal Standards

Texas Tax Code Ann (Code) Section 151.051 imposes a state sales tax on the sale 
of a taxable item in this state. Code Section 151.010 includes taxable services 
in the definition of “taxable item.” Code Section 151.0101(5) includes “the 
repair, remodeling, maintenance and restoration of tangible personal property” 
as a taxable service, and subsection (11) includes “real property services” as 
“taxable services.” Code Section 151.3111 exempts from sales tax taxable 
services performed on tangible personal property that is exempt from sales tax. 
Code Section 151.318(a)(5) exempts tangible personal property “used or consumed 
in the actual manufacturing, processing, or fabrication of tangible personal 
property for ultimate sale if the use or consumption is necessary and essential 
to a pollution control process.” Code Section 151.318(a)(10) exempts tangible 
personal property “used or consumed in the actual manufacturing, processing, or 
fabrication of tangible personal property for ultimate sale if the use or 
consumption is necessary and essential to comply with federal, state, or local 
laws or rules that establish requirements related to public health.”

C. Evidence

Staff presented the testimony of one witness, David Gonzalez, an employee of 
the TCPA who is a supervisor of contract audits; and submitted four exhibits. 
Respondent submitted three exhibits.

1. Facts Established by Documentary Evidence

Petitioner operates a restaurant in CITY A. Petitioner was audited for sales 
tax compliance for the period of April 1, 2002, through June 30, 2005. The TCPA 
issued a Notification of Audit Results on March 30, 2006, in the amount of 
$**************, including tax and interest. During the audit period, 
Petitioner purchased cleaning services for the vent hoods that cover its 
grills, and paid tax on those services. On May 31, 2005, Petitioner deducted 
the tax paid on those purchases from the sales tax it owed for that report 
period. Exam 1, the only exam in the audit, solely consists of the taxes 
deducted by Petitioner that it paid on the cleaning services.

During the audit, Petitioner asserted that the vent hoods were real property. 
At a Dispute Resolution Conference held November 29, 2005, both parties agreed 
that the vent hoods were real property. However, pictures of the hoods 
introduced as Petitioner’s Exhibit 1 indicate that the vent hoods are actually 
trade fixtures that are not permanently affixed to the building and could 
easily be removed.

2. Mr. Gonzalez’ Testimony

Mr. Gonzalez toured Petitioner’s restaurant. He observed that the vent hoods 
were above, but not attached to, the grills. He agreed that the purpose of the 
vent hoods was to filter smoke and grease from the operation of the grills. He 
also agreed that the vent hoods could possibly be considered to be trade 
fixtures that could be removed from the building.

D. Analysis

Petitioner’s first contention is predicated on the argument that the vent hoods 
are real property. However, as discussed above, the vent hoods are not 
permanently affixed to the building and could easily be removed. As a result, 
the vent hoods are tangible personal property as opposed to real property. 
Accordingly, Petitioner’s first contention is moot.

In regard to Petitioner’s second contention, Petitioner asserts that the vent 
hoods are exempt tangible personal property pursuant to Code Section 
151.318(a)(5) and (10), because they are necessary and essential for pollution 
control, and their use is required by state and local health regulations. Staff 
responds that, in order for the vent hoods to be exempt tangible personal 
property, they must either be component parts of the cooking equipment, or must 
cause a chemical or physical change to the product being manufactured, i.e., 
the food being cooked. Staff relies on State Tax Automated Research System 
(STAR) Accession No. 9905450L [ENDNOTE: (1)] in support of this position. That 
Taxability Letter states that if the vent hoods are separate from the cooking 
equipment, that is, not component parts of the cooking equipment, then they are 
not exempt because they do not cause a chemical or physical change, and are not 
considered to be pollution control equipment because they are not shown to be 
required by either the EPA or the TNRCC, now the TCEQ. The policy letter does 
not address the exemption to comply with public health requirements.

Pursuant to 25 Texas Administrative Code (TAC) Section 229.167(h), the Texas 
Department of State Health Services (DSHS) requires food establishments to 
provide mechanical ventilation “if necessary to keep rooms free of excessive 
heat, steam, condensation, vapors, obnoxious odors, smoke, and fumes.” Sec. 
20-21.25(b)(g) of the CITY A Food Ordinance provides that all cooking equipment 
in restaurants “shall be provided with a ventilation hood.”

Staff argues that the vent hoods in question do not qualify for the exemption 
because they are not components of the manufacturing equipment, do not cause an 
actual physical or chemical change to the food being manufactured, and have not 
been shown to be pollution control equipment. However, none of these is a 
requirement for the exemption under Code Section 151.318(a)(10). There is no 
language in subsection (a)(10) that requires the vent hoods to be a component 
part of the grills if they are exempt as separate equipment. In addition, 
unlike subsection (a)(2) [ENDNOTE: (2)] the language of subsection (a)(10) does 
not include the phrase “and directly makes or causes a chemical or physical 
change.”

Comptroller’s Decision No. 40,286 (2006) included a discussion of subsection 
(a)(10) as follows: 

Section 151.318(a)(10) does not exclude machinery and equipment from the 
exemption and applies to all tangible personal property that meets the 
statutory requirements. For the most part, the language of Section 
151.318(a)(10) parallels the language of Section 151.318(a)(2), as it existed 
prior to the 1997 amendment. Thus, the critical requirement that the item must 
be used or consumed in the actual manufacturing of tangible personal property 
for ultimate sale remains unchanged, and the construction of Section 
151.318(a)(2), articulated by the court of appeals in Tyler Pipe, provides 
guidance in ascertaining the Legislature’s intent behind Section 
151.318(a)(10). To be eligible for the claimed exemption, Claimant must 
demonstrate by clear and convincing evidence that the contested items are 
indispensable and integral to the compliance of the federal, state, or local 
law established for public health during the actual manufacturing of food for 
ultimate sale. 

STAR Accession No. 9911843L states that vent hoods qualify for the exemption 
under Code Section 151.318(a)(10) if they are necessary and essential to comply 
with federal, state, or local laws or rules that establish requirements related 
to public health. STAR Accession No. 200204008L states that a vent hood 
covering food-processing equipment, such as a grill or fryer, qualifies for the 
exemption under that subsection.

Based on the above-cited policy letters and Comptroller’s Decision, if the vent 
hood is used in the actual manufacturing of the food for ultimate sale, which 
it is, and is indispensable and integral to comply with federal or local laws, 
which it is inasmuch as the health codes specifically require mechanical 
ventilation or ventilation hoods, then it qualifies for the exemption. And, 
accordingly, the cleaning services for the vent hoods are exempt pursuant to 
Code Section 151.3111(a). 

Based on the above-discussion, Petitioner’s third contention is moot.

III. CONCLUSION

Because the vent hoods are tangible personal property that is used in the 
actual manufacturing of the food and are indispensable and integral to 
compliance with the state and local health codes, they are exempt from sales 
tax pursuant to Code Section 151.318(a)(10). As a result, cleaning of the vent 
hoods is an exempt taxable service pursuant to Code Section 151.3111(a). 
Accordingly, Exam 1 should be deleted from the audit and the liability reduced 
to zero.

IV. FINDINGS OF FACT

1. ************** (Petitioner) operated a restaurant in CITY A, Texas.

2. Petitioner was audited for sales tax compliance for the period of April 1, 
2002, through June 30, 2005. 

3. On March 30, 2006, the Texas Comptroller of Public Accounts (TCPA) issued 
Petitioner a Notification of Audit Results, in the amount of $**************, 
including tax and interest. 

4. On March 7, 2007, the TCPA issued a Notice of Hearing scheduling the hearing 
before the State Office of Administrative Hearings (SOAH) on April 30, 2007. 
All parties appeared and participated.

5. The notice of hearing contained a statement of the time, place, and nature 
of the hearing; a statement of the legal authority and jurisdiction under which 
the hearing was to be held; a reference to the particular sections of the 
statutes and rules involved; and a short, plain statement of the matters 
asserted.

6. During the audit period, Petitioner purchased cleaning services for the vent 
hoods in its restaurant, on which purchases it paid sales tax.

7. On May 31, 2005, Petitioner deducted from its sales tax report the taxes it 
paid on the vent hood cleaning services.

8. The deduction of those taxes were the only items scheduled in Petitioner’s 
audit, and the sole basis of the audit liability.

9. The vent hoods were trade fixtures and tangible personal property, not 
improvements to realty.

10. The vent hoods were located above, but not attached to, the grills used to 
cook food in the 
restaurant.

11. There is no evidence in the record that vent hoods are pollution control 
equipment required by either the EPA or the TCEQ.

12. Mechanical ventilation is required by state public health regulations for 
food establishments when necessary to keep rooms free of excessive heat, steam, 
condensation, vapors, obnoxious odors, smoke, and fumes.

13. Ventilation hoods are required by CITY A public health regulations for 
cooking equipment in restaurants.

V. CONCLUSIONS OF LAW

1. The Comptroller of Public Accounts of the State of Texas has jurisdiction of 
this matter under Tex. Tax Code Ann. chs. 111, 151 and 171.

2. The State Office of Administrative Hearings has jurisdiction over all 
matters relating to conducting a hearing in this proceeding, including the 
preparation of a proposal for decision with findings of fact and conclusions of 
law, pursuant to Tex. Gov’t Code Ann. Section 2003.

3. Petitioner received proper and timely notice of the proceedings and hearing, 
pursuant to Tex. Gov’t Code Ann. Section 2001.051 and 2001.052.

4. Petitioner showed by clear and convincing evidence that the vent hoods were 
tangible personal property used in the actual manufacturing of food for 
ultimate sale, and that their use was indispensable and integral to compliance 
with state and local requirements related to public health.

5. Petitioner showed by clear and convincing evidence that the cleaning 
services were performed on tangible personal property that was exempt from 
sales tax.

6. Based on the foregoing Findings of Fact and Conclusions of Law, Petitioner’s 
liability should be reduced to zero.



Hearing No. 48,097

ORDER OF THE COMPTROLLER

On May 7, 2007 the State Office of Administrative Hearings’ (SOAH) 
Administrative Law Judge, Roy G. Scudday, issued a Proposal for Decision in the 
above referenced matter. The parties were given fifteen days from the date of 
the Decision to file exceptions with SOAH. No exceptions were filed, and the 
Comptroller has determined that the Administrative Law Judge’s Proposal for 
Decision should be adopted as written.

The above decision resulting in Taxpayer’s liability as set out in “Attachment 
A,” which is incorporated by reference, is approved and adopted in all 
respects. This decision becomes final twenty days after the date Petitioner 
receives notice of this decision. If either party desires a rehearing, that 
party must file a Motion for Rehearing, which must state the grounds for 
rehearing, no later than twenty days after the date Petitioner receives notice 
of this decision. Notice of this decision is presumed to occur on the third day 
after the date of this decision.

Signed on this 4th day of December 2008.


SUSAN COMBS
Texas Comptroller of Public Accounts

by: Martin A. Hubert
Deputy Comptroller


ENDNOTE(S): 

(1) Texas Comptroller of Public Accounts (TCPA) State Tax Automated Research 
System (STAR) HomePage. 30 March 2007 
http://cpastar2.cpa.state.tx.us/index.html.

(2) Code Section 151.318(a)(2) provides:

a) The following items are exempted from the taxes imposed by this chapter if 
sold, leased, or rented to, or stored, used, or consumed by a manufacturer:. . 
. (2) 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 
directly makes or causes a chemical or physical change to: (A) the product 
being manufactured, processed, or fabricated for ultimate sale.”




ACCESSION NUMBER: 200812326H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 12/04/2008
TAX TYPE: SALES