Texas Comptroller of Public Accounts STAR System
TAX POLICY NEWS
BAKERY ITEMS – LET THEM BAKE CAKE!
Recent law changes allow Texans to legally sell baked goods, canned jams or
jellies, and dried herbs or herb mixes they have created in their homes.
(Senate Bill 81, 82nd Legislature, Regular Session amended Section 437.001 of
the Texas Health and Safety Code). The amendment says "baked goods" include
cookies, cakes, breads, Danishes, donuts, pastries, pies and other items baked
in an oven, but exclude a potentially hazardous food item as defined by
The amendment does not:
*change the taxability of baked goods for Texas sales tax purposes;
*amend the definition of bakery items in Tax Code Section 151.314(c-3); or
*impact whether a person must obtain a Texas Sales and Use Tax Permit.
TAXABILITY OF BAKERY ITEMS
For Texas sales and use tax purposes, bakery items are defined as baked goods
typically made by bakeries, including bread, rolls, buns, biscuits, bagels,
croissants, pastries, doughnuts, Danishes, cakes, tortes, pies, tarts, muffins,
bars (such as lemon bars), cookies, large pretzels and tortillas. See Tax Code
Section 151.314(c-3) and Comptroller Rule 3.293.
Bakery items are taxable only when sold on a plate or with other eating
utensils such as forks, knives and spoons. Napkins are not considered eating
utensils. A bakery item is considered to be served with eating utensils if the
seller actually hands the utensils to the customer or places the utensils on a
tray or plate. It does not include situations when a seller provides a central
station where customers can help themselves to items such as forks, knives,
spoons, straws and napkins.
The taxability of bakery items is not affected by:
*the size or quantity of the bakery items;
*whether they are kept refrigerated or sold heated; or
*whether they are baked on the premises where sold or offsite.
Jams, jellies, herbs and herb mixes are exempt as food items under Comptroller
Edible candy decorations, candy sprinkles, toys and similar items are often
used to decorate cakes. As a general rule, candy is taxable, but confections
used exclusively for cooking (such as chocolate sprinkles) are not. Items such
as nonpareils, candy pearls, dragees and chocolate chips are not taxable. Tax
must be paid, however, when purchasing inedible items such as toys, plastic
cake toppers, picks, floral decorations and candles that will be incorporated
into the final product (a nontaxable baked item).
Let's take some of the above information and put it into some everyday
Jane bakes special occasion cakes and sells them from her home. The cakes are
special-ordered and decorated to the customer's specifications. Jane is not
required to collect sales tax on the sale of her cakes, but she must pay tax on
any inedible items, such as birthday candles, included in the final product.
A mom ordered two dozen cupcakes from Jim's cupcake business for her son's
birthday party. The sale of the cupcakes is not subject to sales tax. Jim also
sells individual cupcakes at farmers' markets and weekend festivals. As Jim
sells each cupcake, he places the cupcake in a bag and hands it to the
customer, along with a napkin. The transaction is not subject to sales tax
since Jim did not serve the customer the cupcake with eating utensils.
Molly has a pie company. She sells whole pies, which are not taxable, but like
Jim, sometimes Molly will visit farmers' markets and festivals to sell her
pies. Molly often will sell pie by the slice. If a customer walks up and
purchases a slice of pie that has been placed in a plastic or Styrofoam hinged
“to go” container, the pie is not subject to tax since it was not sold with
eating utensils. If, however, Molly puts that same slice of pie on a plate, or
hands the customer a fork with the “to go” container, then that sale of the
slice of pie is subject to sales tax.
WRAPPING AND PACKAGING
Bakers can issue a Texas Sales and Use Tax Exemption Certificate (Form
01-339/back) for items they will use for packaging bakery items they have
produced. See Rule 3.293(h)(5). When someone is packaging bakery items they
have produced (as opposed to items they have simply purchased and repackaged),
items such as boxes, domes and boards are considered exempt wrapping and
packaging items under Comptroller Rule 3.314.
Bakers and other food processors can claim an exemption from sales tax when
purchasing qualifying manufacturing equipment under Texas Tax Code Section
151.318 and Comptroller Rule 3.300.
Tax Code Section 151.318(a)(2) exempts tangible personal property used directly
in or during the manufacturing of tangible personal property for sale if the
use 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 the product being manufactured, processed or fabricated for ultimate
sale. Food processors are considered manufacturers and therefore may claim
manufacturing exemptions from sales and use taxes on equipment that is used to
cook, mix, chop, brew, proof or blend food or beverages for sale. But equipment
that is used to store or maintain products, such as refrigerators and heat
lamps, does not qualify for exemption.
For example, an oven is essential to baking a cake. As the oven is being used
to bake the cake, the oven causes a chemical or physical change to the cake.
The oven would qualify for a manufacturing exemption under Tax Code Section
151.318(a)(2). A refrigerator used to store the cake ingredients (i.e., milk,
eggs and butter) or the finished cake, however, does not qualify for exemption
because it does not cause a chemical or physical change to the cake.
Hand tools such as knives, peelers, spatulas, spoons and other devices that are
used, managed and powered by hand, are not exempt, even if used in processing
food products. See Tax Code Sec. 151.318(c)(2). Equipment that is controlled or
operated by hand, but is moved or powered by electricity, gas, steam or other
fuel (such as an electric mixer) is not a hand tool and may qualify for
Home bakers who claim an exemption on manufacturing equipment should be aware
of the sales tax consequences associated with divergent use of such equipment.
Divergent use occurs when an item purchased tax free for use in manufacturing
is used for a personal or other non-exempt purpose and tax is due on such use.
For example, divergent use occurs if a home food processor issues an exemption
certificate for a stove, then uses the stove to cook dinner for her family. The
home food processor owes tax for the divergent use of the stove. See Tax Code
Section 151.3181 and Rule 3.300(k).
WHO NEEDS A PERMIT?
If you are selling only exempt food items, you are not required to hold a Texas
Sales and Use Tax Permit. Some suppliers of bakery supply items, however, may
require purchasers to fill out a resale or exemption certificate for certain
supplies. An exemption certificate does not require a Texas Sales and Use tax
permit number to be valid, but a resale certificate does.
If you have a sales tax permit, you must file sales tax reports even if you do
not have any taxable sales. You will show all of your sales as “total sales”
and will have a “zero” amount for “taxable sales”. Effective for reports due on
or after Oct. 1, 2011, a $50 late filing fee will be imposed on late-filed
sales tax reports, even if no tax is due with the report.
To apply for a Texas Sales and Use Tax Permit, see the Texas Online Tax
Registration Application section of our website.
ACCESSION NUMBER: 201109242L
DOCUMENT TYPE: L
TAX TYPE: SALES