03-79 | Virginia Tax

Tax Type

Retail Sales and Use Tax

Description

Tax of packaging materials

Topic

Appropriateness of Audit Methodology

Exemptions

Property Subject to Tax

Date Issued

11-03-2003

November 3, 2003

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear ***********************:

This is in reply to your letter in which you seek correction of the retail sales and use tax audit assessments issued to ******** (the "Taxpayer") for the period May 1998 through May 2001. I apologize for the delay in the Department's response.

FACTS

The Taxpayer is an industrial manufacturer of concrete block and masonry products including industrial aggregate products. The Taxpayer's products are shipped to its customers on pallets. The Department's audit held the pallets taxable. The Taxpayer disagrees with the assessment and states that the pallets are used in the manufacturing process in conjunction with a shrink-wrapping system to form a unitary package for its shipment of the product.

DETERMINATION

The application of the tax to packaging materials is set out in Title 23 of the Virginia Administrative Code (VAC) 10-210-400. This regulation distinguishes exempt packaging materials (such as sacks, cans, and boxes) from taxable transportation devices (such as pallets, strapping, and similar materials). The 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 or direction." The regulation further provides that transportation devices may not be purchased tax exempt unless purchased for resale.

An exception to this general rule is provided in 23 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.

While pallets generally do not qualify as "packaging" materials and are taxable, the Department has traditionally held that pallets qualify as exempt "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 the boards to repair them would qualify for the exemption.

The Taxpayer maintains that the cured concrete block is placed on pallets at the shrink-wrapping machine where a plastic bag is placed over the block and pallet. Heat is then applied to the plastic that encloses the blocks stacked on the pallet and, on average, covers two or more sides of the pallet including the corners. The Department's policy regarding pallets bound by plastic in a shrink-wrapping process and qualifying as "packaging" does not provide that all corners of the pallet must be bound by the shrink-wrap. This policy is set out in Public Document (P.D.) 98-47 (03/11/98), in which the Department found cause to exempt such pallets when the evidence demonstrated that sufficient quantities of the pallets were bound to a product by shrink-wrapping, and that the product's movement was restrained in more than one plane of direction.

In the instant case, however, the audit staff noted that the product completed the production line without any plastic covering. The audit staff also observed that most of the block being held in a staging yard before shipment was not covered with any plastic, and in those cases where a plastic covering was present, the plastic did not even reach the pallet. In most cases where the plastic did reach the pallets, the plastic was not shrink-wrapped to the pallet. Based on the information before me, the Taxpayer has not demonstrated that the pallets qualify for the manufacturing exemption in that sufficient quantities of pallets are not bound to products by a shrink-wrap process. Accordingly, while the plastic bags would continue to qualify for the packaging exemption under 23 VAC 10-210-920, the pallets would not qualify as they do not restrain movement of the product in more than one plane of direction. Consequently, the pallets are not considered packaging materials but are considered transportation devices and are taxable at the time of purchase unless purchased for resale.

Use or Sale of Pallets -Prior Audit

In a prior audit of the Taxpayer, percentages were established for pallets purchased by the Taxpayer for its use and pallets purchased for resale. It was determined that 70% of all pallet purchases were for the use of the Taxpayer. As noted above, these pallets do not qualify as packaging under the manufacturing exemption because they are not bound to the product by a shrink-wrap process.

The remaining 30% of the pallets were assumed to be purchased for resale. The Taxpayer could purchase these pallets exempt of the tax, and the sale of the pallet to the customer is subject to the sales tax. Documentation reviewed by the auditor, however, revealed that while the pallets purchased for resale were listed on invoices to the customer, there was no indication that the pallets were subjected to the tax. Accordingly, the auditor properly assessed tax on the pallets listed on the Taxpayer's invoices.

Based on all of the information before me, I do not find sufficient cause to allow for any adjustment to the Department's audit. Accordingly, I find that the assessments are correct. A revised bill, with interest accrued to date, will be sent to the Taxpayer separately. No further interest will accrue provided the outstanding balance is paid within 30 days from the date on the bill. Payment should be submitted to:

- - - Virginia Department of Taxation
      3600 West Broad Street, Suite 160
      Richmond, Virginia 23230
      *******************************

If you have any questions concerning payment of the assessment, you may contact ***** at *****.

The regulations and public documents cited are available on-line in the Tax Policy Library section of the Department of Taxation's website, located at www.tax.state.va.us. If you have any questions about this determination, you may contact ***** of the Department's Office of Policy and Administration, Appeals and Rulings, at *****@tax.state.va.us or at *****.

- - - - Sincerely,

- - - - Kenneth W. Thorson
        Tax Commissioner

AR/37029Q

Rulings of the Tax Commissioner