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KSM Blog | Katz, Sapper & Miller CPA

Tax Court Issues Favorable Case for Restaurants

Posted 12:59 PM by

Burrito with Chicken

Which came last: the chicken or the burrito?

The Indiana Tax Court recently released its opinion in Aztec Partners, LLC v. Indiana Department of Revenue, which provided a restaurant industry-friendly interpretation of Indiana’s sales tax rules. As a result, restaurants may achieve cost savings by claiming a sales tax exemption on more of the utilities and equipment used in preparing food for customers.

Aztec operates multiple Qdoba restaurants in central Indiana and filed for a sales tax refund for electricity paid to run equipment that keeps meal ingredients fresh between the time it is prepared and when it is compiled into a final entrée for the customer (think walk-in coolers and food warmers). Restaurants can claim the utility sales tax exemption if the utility is directly used in the direct production of food. At issue in this case was where production ended:

  • The Department of Revenue argued that production ended with the preparation of the individual ingredients (e.g., the grilling of the chicken).
  • The taxpayer argued that production ended with the combination of the food items into entrées (e.g. combining the chicken, rice and beans into a burrito).

The Tax Court found in favor of the taxpayer because the act of compiling the multiple parts of the entrée ordered constituted a “substantial” change from the individual ingredients to a marketable product. The Tax Court also found that the electricity was part of Qdoba’s integrated process because the regular process of the restaurant was to cook the food in large quantities and then assemble the various components as a final meal. Since the equipment and utilities used to keep the ingredients fresh were necessary for the production process, they were able to be exempted.

Restaurants that have equipment that is used to heat and cool food ingredients, which are then compiled into larger entrées, may have an opportunity to save on sales taxes on this equipment and utilities consumed by this equipment. If your restaurant maintains a process where products are altered from their original state and then maintained in that state by equipment and electricity until put into a full entrée, a utility study should be considered to determine the percentage of exempt use.

About the Author
Kate Kelly is a state and local tax consultant in Katz, Sapper & Miller’s State and Local Tax Group. Kate provides consulting services on technical tax matters, including multistate income, property and sales taxes, as well as economic development services. Connect with her on LinkedIn.

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