Tax Type
Retail Sales and Use Tax
Description
List of Exemptions, Exceptions and Exclusions
Topic
Exemptions
Date Issued
10-09-1998
October 9, 1998
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you request a ruling on the application of the retail sales and use tax to your client's business operations in Virginia. I apologize for the delay in responding to your letter.
FACTS
Your client (the "Taxpayer') is a manufacturer and distributor of food products. The Taxpayer packs its finished product onto leased pallets for shipment to either: (i) the retailer for resale to the public; (ii) the Taxpayer's warehouse and distribution facilities for subsequent delivery to a retailer; or (iii) a third party warehousing and distribution company for repacking and subsequent delivery to a retailer. In all scenarios, the pallets are not returned or reused by the Taxpayer. The Taxpayer does not retain title to the pallets, but can transfer the pallets to participating distributors. Also, in a conversation with a member of my staff, you indicate that all pallets used to ship the finished products go through a shrink-wrapping process at the manufacturing plant prior to shipment.
Under the terms of the agreement, the Taxpayer is charged a daily rental fee for the use of the pallets, an issue and delivery fee for the delivery of the leased pallets from a depot to the Taxpayer's location, and a transfer fee for the shipping of leased pallets to a participating distributor. The Taxpayer requests a ruling to the sales tax application in the scenarios mentioned above and to the various fees charged in connection with its rental of the pallets.
RULING
Pallets
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 "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 to repair them would qualify for the exemption. See Public Document 90-110 (7/23/90), copy enclosed.
Based on the information provided, the pallets qualify for the exemption extended to manufacturers set forth above. Because the shrink-wrap is applied to the pallets while at the manufacturing site prior to the shipment of the product, the exemption would apply in all three scenarios described above. The Taxpayer may purchase such pallets exempt of the tax, pursuant to sales and use tax certificate of exemption Form ST-11, copy enclosed.
Issue and Transfer Fees
Generally, all charges made in connection with the lease or rental of tangible personal property are taxable. See Code of Virginia Sec. 58.1-602, definition of "gross proceeds.' In this case, however, the manufacturing exemption applies to the pallets leased by the Taxpayer. Because the pallets are exempt, the issue fee and transfer fee charges to the Taxpayer associated with the lease of the pallets are also exempt.
I hope the foregoing has responded to your inquiry. If you have additional questions regarding this letter, please contact ***** Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13905T
Re: Request for Ruling: Retail Sales and Use Tax
Dear *****
This is in reply to your letter in which you request a ruling on the application of the retail sales and use tax to your client's business operations in Virginia. I apologize for the delay in responding to your letter.
FACTS
Your client (the "Taxpayer') is a manufacturer and distributor of food products. The Taxpayer packs its finished product onto leased pallets for shipment to either: (i) the retailer for resale to the public; (ii) the Taxpayer's warehouse and distribution facilities for subsequent delivery to a retailer; or (iii) a third party warehousing and distribution company for repacking and subsequent delivery to a retailer. In all scenarios, the pallets are not returned or reused by the Taxpayer. The Taxpayer does not retain title to the pallets, but can transfer the pallets to participating distributors. Also, in a conversation with a member of my staff, you indicate that all pallets used to ship the finished products go through a shrink-wrapping process at the manufacturing plant prior to shipment.
Under the terms of the agreement, the Taxpayer is charged a daily rental fee for the use of the pallets, an issue and delivery fee for the delivery of the leased pallets from a depot to the Taxpayer's location, and a transfer fee for the shipping of leased pallets to a participating distributor. The Taxpayer requests a ruling to the sales tax application in the scenarios mentioned above and to the various fees charged in connection with its rental of the pallets.
RULING
Pallets
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 "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 to repair them would qualify for the exemption. See Public Document 90-110 (7/23/90), copy enclosed.
Based on the information provided, the pallets qualify for the exemption extended to manufacturers set forth above. Because the shrink-wrap is applied to the pallets while at the manufacturing site prior to the shipment of the product, the exemption would apply in all three scenarios described above. The Taxpayer may purchase such pallets exempt of the tax, pursuant to sales and use tax certificate of exemption Form ST-11, copy enclosed.
Issue and Transfer Fees
Generally, all charges made in connection with the lease or rental of tangible personal property are taxable. See Code of Virginia Sec. 58.1-602, definition of "gross proceeds.' In this case, however, the manufacturing exemption applies to the pallets leased by the Taxpayer. Because the pallets are exempt, the issue fee and transfer fee charges to the Taxpayer associated with the lease of the pallets are also exempt.
I hope the foregoing has responded to your inquiry. If you have additional questions regarding this letter, please contact ***** Office of Tax Policy at *****.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13905T
Rulings of the Tax Commissioner