March 22, 2022
Re: § 58.1-1821 Application: Retail Sales and Use Tax
Dear *****:
This is in response to your letter submitted on behalf of ***** (the “Taxpayer”) in which you seek correction of the retail sales and use tax assessment issued for the period January 2015 through December 2017. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayer warehouses and repackages inventory owned primarily by affiliated and unrelated third party dealers, collectively the “retailers”. The Taxpayer repackages inventory items to fulfill orders placed by the customers of the retailers. The retailers provide instructions to the Taxpayer regarding what goods should be packaged together, as well as the address information to be printed on the labels applied to the packages. The Taxpayer does not provide delivery services but stores the packages for pickup. The retailers arrange and pay for the packages to be picked up from the Taxpayer’s facilities and delivered to its customers by a shipping company.
The auditor assessed use tax on purchases of packaging materials used by the Taxpayer to repackage the retailers’ inventories, finding that the Taxpayer provides packaging services and did not resell the packaging materials at issue to the retailers. The packaging materials assessed by the auditor include cartons, tape, labels, boxes and polybags. The Taxpayer disputes the assessment, contending the packaging materials were purchased for resale, and that it charged the retailers for the costs of the packaging materials and services. The Taxpayer requests that the purchases at issue be removed from the audit.
DETERMINATION
Title 23 of the Virginia Administrative Code (VAC) 10-210-400 B provides, in pertinent part, that “Packaging materials may be purchased tax exempt if the items are marketed with the product being sold and become the property of the purchaser. Packaging materials which do not become the property of the purchaser are subject to the tax.” This exemption primarily applies to manufacturers and processors that produce a product that the packaging goes with.
Based on the information before me, the Taxpayer did not sell the inventory in its possession, but merely provided storage and shipment preparation for the retailers. When a customer ordered inventory from one of the retailers, the Taxpayer repackaged the selected items to fulfill the order and get it ready for delivery.
Under these circumstances, the packaging materials would not have been considered to be marketed with the inventory being sold as prescribed in Title 23 VAC 10-210-400 B because the inventory being sold was not sold by the Taxpayer. As such, the packaging materials were not eligible to be purchased by the Taxpayer exempt of the tax.
Additionally, in accordance with Title 23 VAC 10-210-4040 E, I find that as a service provider, the Taxpayer is the taxable user and consumer of the packaging materials used to repackage the retailers’ inventory. Further, the Taxpayer is not registered for the retail sales and use tax in Virginia. While the Taxpayer may charge the retailers for the cost of the packaging materials or may pass the cost of the materials on to the retailers, the Taxpayer is not making retail sales of the packaging materials.
Public Document (P.D.) 14-103 (7/3/2014) was referenced in the audit to support the assessment issued on the packaging materials. In that ruling, the taxpayer was a service provider that received, preserved, packaged and shipped tobacco leaves on behalf of a tobacco manufacturer. The service provider requested a ruling on whether the manufacturing and processing exemption applied to the packaging products purchased to provide its services to the manufacturer. Because the service provider did not qualify as an industrial manufacturer or processor, the Department ruled it was the consumer of all materials used in providing packaging and shipping services to the manufacturer, and was required to pay the sales tax to its vendors on purchases of packaging and shipping materials. The facts addressed in P.D. 14-103 are analogous to this case in that the Taxpayer was a service provider that provided packaging services to the retailers and, therefore, was the user and consumer of the packaging materials and is thus liable for the tax on the purchase of such materials.
Accordingly, the purchases of cartons, tape, labels, boxes and polybags and other packaging materials was properly included in the audit, and the assessment is upheld. Because the assessment has been paid in full, no further action is required by the Taxpayer.
The Code of Virginia section and regulations cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions about this response, you may contact ***** in the Department’s Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/2161P