Tax Type
Retail Sales and Use Tax
Description
Leasing of pallets and containers to manufacturers and farmers
Topic
Property Subject to Tax
Taxability of Persons and Transactions
Date Issued
09-13-2000
September 13, 2000
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in reply to your letter of August 14, 2000, in which you request a ruling on the application of the retail sales and use tax to certain transactions involving ***** (the "Taxpayer").
FACTS
The Taxpayer is in the business of leasing pallets and containers to manufacturers and farmers. The manufacturers and farmers use the pallets to deliver merchandise to their distribution centers and stores. The pallets are constructed of heavy-duty materials and designed to be reusable. The Taxpayer indicates that the pallets restrain movement in more than one plain of direction without wrapping material to bind the product to the pallet. The Taxpayer requests a ruling regarding the application of the sales tax to its charges for the sale or rental of the pallets.
RULING
Title 23 of the Virginia Administrative Code (VAC) 10-210-400 addresses containers, packaging materials, and equipment. This regulation defines "transportation devices" to mean "items which are used to transport and protect products for sale and to restrain product movement in a single plane of direction. Examples of such items are pallets, dunnage, strapping and similar materials used to brace or secure cargo for transport." This regulation goes on to provide that "transportation devices" are not packaging materials and may not be purchased tax exempt unless purchased for resale.
An exception to this general rule is provided in VAC 10-210-920. This regulation notes that the tax does not apply to "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable)," when used or consumed by an industrial manufacturer or processor of products for sale or resale.
The Virginia Supreme Court, in Webster Brick Company v. Department of Taxation, 219 Va. 81, 245 S.E.2nd 252 (1978), held that the packaging exemption above was limited to items actually used in "packaging" products. The Court defined "packaging" as "putting into a protective wrapper or container for shipment or storage." In its opinion, the Court also referenced an Ohio Supreme Court opinion, Custom Beverage Packers. Inc. v. Kosydar, 33 Ohio St.2d 68, 294 N.E.2d. 672 (1973), which held that unbound pallets restrained movement in only one direction and were not "packages" within the meaning of that state's sales and use tax exemption.
Under Virginia law, pallets generally do not qualify as "packaging" materials and are therefore subject to the tax when used to transport products. However, the department has traditionally held that pallets qualify as "packaging" materials if the pallets are bound (such as by shrink-wrapping) to the items they carry so as to restrain product movement in more than a single plane of direction and if the packaging activity occurs at the manufacturing plant site. Such pallets and boards used to repair them qualify for the exemption. However, pallets and their repair parts for use at a general distribution facility are subject to the tax.
Based on the facts presented in your letter, the pallets do not meet the definition of "packaging" materials as set forth above. This being the case, I find that the pallets leased by the Taxpayer to its customers to ship their product do not automatically qualify for the manufacturing exemption. The manufacturing exemption is available only when the pallets are bound to the items they carry so as to restrain movement in more than a single plane of direction and the packaging activity occurs at the manufacturing plant site. I would also note that the pallets would not qualify for the agricultural exemption under Code of Virginia § 58.1609.2(1), as the agricultural production exemption does not extend to items used in distribution activities. Thus, the Taxpayer is required to collect the tax on the sale or lease of the pallets to its customers.
If you have additional questions regarding this matter, you may contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/30421T
Re: Request for Ruling: Retail Sales and Use Tax
Dear ****
This is in reply to your letter of August 14, 2000, in which you request a ruling on the application of the retail sales and use tax to certain transactions involving ***** (the "Taxpayer").
FACTS
The Taxpayer is in the business of leasing pallets and containers to manufacturers and farmers. The manufacturers and farmers use the pallets to deliver merchandise to their distribution centers and stores. The pallets are constructed of heavy-duty materials and designed to be reusable. The Taxpayer indicates that the pallets restrain movement in more than one plain of direction without wrapping material to bind the product to the pallet. The Taxpayer requests a ruling regarding the application of the sales tax to its charges for the sale or rental of the pallets.
RULING
Title 23 of the Virginia Administrative Code (VAC) 10-210-400 addresses containers, packaging materials, and equipment. This regulation defines "transportation devices" to mean "items which are used to transport and protect products for sale and to restrain product movement in a single plane of direction. Examples of such items are pallets, dunnage, strapping and similar materials used to brace or secure cargo for transport." This regulation goes on to provide that "transportation devices" are not packaging materials and may not be purchased tax exempt unless purchased for resale.
An exception to this general rule is provided in VAC 10-210-920. This regulation notes that the tax does not apply to "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale (whether returnable or nonreturnable)," when used or consumed by an industrial manufacturer or processor of products for sale or resale.
The Virginia Supreme Court, in Webster Brick Company v. Department of Taxation, 219 Va. 81, 245 S.E.2nd 252 (1978), held that the packaging exemption above was limited to items actually used in "packaging" products. The Court defined "packaging" as "putting into a protective wrapper or container for shipment or storage." In its opinion, the Court also referenced an Ohio Supreme Court opinion, Custom Beverage Packers. Inc. v. Kosydar, 33 Ohio St.2d 68, 294 N.E.2d. 672 (1973), which held that unbound pallets restrained movement in only one direction and were not "packages" within the meaning of that state's sales and use tax exemption.
Under Virginia law, pallets generally do not qualify as "packaging" materials and are therefore subject to the tax when used to transport products. However, the department has traditionally held that pallets qualify as "packaging" materials if the pallets are bound (such as by shrink-wrapping) to the items they carry so as to restrain product movement in more than a single plane of direction and if the packaging activity occurs at the manufacturing plant site. Such pallets and boards used to repair them qualify for the exemption. However, pallets and their repair parts for use at a general distribution facility are subject to the tax.
Based on the facts presented in your letter, the pallets do not meet the definition of "packaging" materials as set forth above. This being the case, I find that the pallets leased by the Taxpayer to its customers to ship their product do not automatically qualify for the manufacturing exemption. The manufacturing exemption is available only when the pallets are bound to the items they carry so as to restrain movement in more than a single plane of direction and the packaging activity occurs at the manufacturing plant site. I would also note that the pallets would not qualify for the agricultural exemption under Code of Virginia § 58.1609.2(1), as the agricultural production exemption does not extend to items used in distribution activities. Thus, the Taxpayer is required to collect the tax on the sale or lease of the pallets to its customers.
If you have additional questions regarding this matter, you may contact *****, Office of Tax Policy, at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/30421T
Rulings of the Tax Commissioner