Electricity used by Qdoba restaurants in food prep not taxable, court holds

The Indiana Tax Court has ruled in favor of a company that operates 19 Qdoba Mexican restaurants in Indiana on its request that electricity used to power certain equipment is not subject to Indiana sales tax.

The electricity at issue in Aztec Partners, LLC v. Indiana Department of State Revenue 49T10-1210-SC-67, is used in equipment to hold and preserve prepared food items at certain temperatures until they are combined into entrees that are sold to customers. None of the electrical equipment is used to cook food.  

Aztec Partners filed 12 refund claims with the Indiana Department of Revenue seeking a refund on the sales tax it paid on the electricity used to power the equipment between Jan. 1, 2010, and March 31, 2011. The department found it was taxable and later denied Aztec’s protest.

To qualify for the exemption, Aztec must show that it is engaged in production, it has an integrated production process, and the electricity is essential and integral to its integrated production process. Judge Martha Wentworth ruled in favor of Aztec.

She found Aztec’s preparation and combination of the food items into entrées substantially changed the individual food items into new, marketable products that have a character and form different from the food items first acquired, thus the company was engaged in production during the period at issue.

The evidence also shows that Aztec engages in several steps before an entrée is completed for sale, and there is no evidence that demonstrates that Aztec sells the prepared food items separately. Finally, Wentworth found that during the period at issue the electricity that powered the electrical equipment that held and preserved the food items was essential and integral to Aztec’s integrated production process.

The matter has been remanded to the DOR so it may take the actions necessary to give full effect to this opinion.