Document Number
90-110
Tax Type
Retail Sales and Use Tax
Description
Pallets; Packaging materials and containers
Topic
Taxability of Persons and Transactions
Date Issued
07-23-1990
July 23, 1990



Re: Request for Ruling/ Sales and Use Tax


Dear********************

This will reply to your letter of November 1, 1989, requesting a ruling on the application of the sales and use tax to the purchase of pallets by your firm.
FACTS

*************** (taxpayer), a manufacturer and bottler of soft drinks, purchases pallets for use in transporting the taxpayer's finished products from its production facility to its sales facility, away from the plant site, where the products are stored pending delivery to customers. The pallets may also be used to transport the products from the sales facility to the taxpayer's customer and may then be returned to the production facility.

The taxpayer requests a ruling whether the pallets and boards used to repair them may be purchased exempt of sales and use tax.
RULING

Virginia Regulation (VR) 630-10-26, copy enclosed, provides in pertinent part that,
    • [p]ackaging materials...may be purchased tax exempt by wholesalers and retailers as purchases for resale, if the items are marketed with the product being sold and become the property of the purchaser. Pallets...used to brace or secure cargo for transport and restrain product movement in a single plane of direction are not packaging materials and may not be purchased tax exempt unless purchased for resale. (Emphasis added).
An exception to this general rule is provided in VR 630-10-63. The regulation notes that the tax does not apply to "[m]aterials, 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. (Emphasis added).

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, upon which cases of soft drinks were transported, restrained movement in only one direction and were not "packages" within the meaning of that state's sales and use tax exemptions.

Under Virginia law also, pallets generally do not qualify as "packaging" materials and are therefore subject to the tax when used by the Taxpayer to transport its products to its sales facilities. 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 the boards used to repair them would then qualify for exemption. Pallets and their repair parts purchased for general use within the distribution facilities or to package products at the distribution facilities would be taxable.

Finally, for pallets used in both taxable and exempt activities, VR 630-10-63 requires that the pallets be totally exempt when fifty percent or more of their use is in exempt activities such as the "packaging" of products for sale or resale as discussed above. Likewise, the tax will apply in full when the preponderance of the pallets' use is in taxable activities such as those occurring at the distribution centers.

I hope this has answered your questions; however, please contact the department if you have additional questions or if we may be of any further assistance.

Sincerely,




W. H. Forst
Tax Commissioner

Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46