Tax Type
Retail Sales and Use Tax
Description
Packaging; Plastic containers, related items
Topic
Taxability of Persons and Transactions
Date Issued
10-24-1996
October 24, 1996
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear***************
This is in reply to your letter which you seek correction of a retail sales and use tax assessment for*********** (the "Taxpayer") for the period June 1992 through May 1995. I apologize for the delay in responding to your letter.
FACTS
The taxpayer is a manufacturer of gaskets and seals for resale to automobile manufacturers. The products are custom designed and conveyed to customers using rigid plastic shipping containers, trays, dividers, pallets, and strapping. Each item is custom designed in conjunction with the specific product size. The containers are returnable and designed to be used throughout the normal life of a specific project, usually three to six years. At the end of each project, the containers become the property of the customer, who either makes further use of the containers or disposes them.
An audit by the department revealed that the Taxpayer did not pay tax on its purchases of containers, trays, dividers, pallets, and strapping. In addition, the Taxpayer amortized the cost of the containers as a prepaid expense. The auditor assessed use tax on the cost price of the containers and related items. The Taxpayer contends that the containers and related items are not subject to tax because they are specifically designed for each project and become the property of the customer at the end of the contract. The Taxpayer also maintains that the items, when strapped together, are shipped as an inseparable unit.
DETERMINATION
Code of Virginia § 58.1-609.3(2)(iv) provides an exemption from the sales and use tax for materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale. Virginia Regulation (VR) 630-10-63 explains that the exemption is available only to industrial manufacturers or processors of products for sale or resale and applies whether the containers are returnable or nonreturnable. The regulation also states that tangible personal property (other than containers) used to protect manufactured products from damage during shipment to market or customers is taxable.
The department has consistently ruled that containers purchased by an industrial manufacturer are not subject to the tax if they restrain movement of the product in more than a single plane of direction. See Public Documents (P.D.) 90-110 (7/23/90) and 86-98 (5/22/86), copies enclosed. Based on the information provided, the plastic shipping containers qualify for the exemption under Code of Virginia § 58.1-609.3(2)(iv), as they restrain movement of the product in more than a single plane of direction. Accordingly, the cost of the containers should not have been included in the audit
In regard to the other items, (trays, dividers, pallets, and strapping), they do not appear to be materials for packaging tangible personal property. In Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978), the Virginia Supreme Court ruled that "packaging" means placing in a package or container. Based on the Virginia Supreme Court's interpretation, the manufacturing exemption for packaging materials is not applicable to the trays, dividers, pallets and strapping, as they are not materials in which the product is placed. These items appear to be tangible personal property used to protect the products from damage during shipment and, based on the language of VR 630-10-63 cited above, are taxable. The facts presented do not support your position that the items, when strapped together, form an inseparable unit that would qualify as a container exempt of the tax pursuant to Code of Virginia § 58.1-609.3(2)(iv).
The audit will be revised to remove the cost of the plastic containers, as noted above. The Taxpayer will shortly receive an updated bill with interest accrued through December 1, 1995. The bill should be paid within 30 days to avoid the accrual of additional interest.
If you have any questions regarding this matter, you may contact********** of the department's Office of Tax Policy at**************.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/10022F
Rulings of the Tax Commissioner