My company runs a warehouse that repackages inventory before shipping it to my own retail stores — are the boxes, tape, and wrap I buy for that internal shipping exempt from sales tax as packaging materials?

Plain-English summary

Petland Discounts, Inc., a chain of more than 100 retail pet-supply stores (mostly in New York, a few in New Jersey and Connecticut), runs a main warehouse in Brentwood, New York. Bulk inventory arrives at the warehouse, where Petland repackages it — using bubble wrap, stretch wrap, boxes, tape, labels, and skids — before shipping it out to the individual stores. Petland doesn't use these particular packaging materials to wrap merchandise for its retail customers; it uses them only for the internal warehouse-to-store leg of the trip, and it never hands these materials over to a customer. It does pass the cost of the materials along indirectly, by marking up its retail prices.

Petland asked whether it owes sales or use tax on these packaging purchases, and also whether it matters that it used to be organized as two separate companies (a wholesale company that shipped to an affiliated retail company) before merging into one.

The Department said Petland does owe tax on these materials. New York's packaging exemption (Tax Law §1115(a)(19)) only exempts wrapping and packaging supplies that a vendor "actually transfers" to the purchaser — meaning physically handed over to the customer, for the customer to do whatever they want with. Petland's warehouse packaging never reaches a customer; the stores unpack the merchandise and sell it, and the packaging materials stay behind. Because there's no transfer to a purchaser, the exemption doesn't apply, whether Petland buys the materials in New York (sales tax) or out of state and brings them in (compensating use tax).

The corporate-history question mattered more than it might seem: back when Petland was two separate companies, the wholesale company's packaging purchases were exempt, because it was shipping to a separate legal "person" — the retail company — that then resold the merchandise to real customers, satisfying the actual-transfer requirement. Once the two merged into a single company, that transfer between two persons disappeared; the warehouse and the stores are just two parts of the same taxpayer, so there's no longer a "transfer to a purchaser" at the warehouse-to-store stage at all.

What this means for you

Retail chains with their own distribution warehouses

If you operate a central warehouse that repackages and ships goods to your own stores, the packaging materials used for that internal leg are taxable — the exemption only kicks in for materials that get physically transferred to the end retail customer (e.g., the bag or box the customer walks out with). Marking up retail prices to cover the packaging cost doesn't change the tax analysis.

Companies considering a merger of affiliated wholesale/retail entities

Merging a wholesale supplier into its retail affiliate can eliminate a packaging-materials exemption that existed only because the two were separate "persons" transferring property to each other. If your corporate structure changes from two entities to one, revisit purchases that relied on an inter-company transfer to qualify for a resale or packaging exemption.

Accountants and tax professionals

The controlling test is the regulatory definition of "actually transferred" in 20 NYCRR §528.20(b)(4) — physical transfer to the purchaser, for whatever disposition the purchaser wishes. Internal-use packaging that never leaves the vendor's control (or moves only between commonly-owned parts of the same entity) fails that test even if the vendor is unquestionably a "vendor" making taxable retail sales downstream.

Common questions

Q: Are all packaging and shipping supplies exempt from New York sales tax?
A: No. Only wrapping/packaging materials that a vendor actually, physically transfers to the purchaser along with the goods being sold are exempt under Tax Law §1115(a)(19). Materials used purely for internal handling, storage, or inter-store shipping are taxable.

Q: Does it matter that the cost gets passed on to customers through higher prices?
A: No. Marking up retail prices to recover the cost of packaging materials doesn't make the materials "transferred" to the customer for tax purposes — the customer never receives the actual boxes, wrap, or tape used at the warehouse.

Q: Can I restructure into separate wholesale and retail entities to get this exemption back?
A: This opinion notes that when Petland previously operated as two separate companies, the wholesale company's packaging purchases were exempt because they were transferred to a separate legal "person" (the retail company) that resold the goods. But this is a fact-specific outcome from one taxpayer's history, not a blueprint — talk to a tax professional before restructuring for this reason.

Q: Does this ruling apply to my business?
A: Not automatically. This is an Advisory Opinion binding only on Petland Discounts, Inc. and only as to the facts it described. It shows how the Department reasons about internal packaging use, but your facts may differ.

Citations and references

Statutes and regulations:

• Tax Law §1101(b)(8) (definition of "vendor")
• Tax Law §1115(a)(19) (exemption for packaging materials actually transferred to the purchaser)
• 20 NYCRR §528.20(b)(4) (defining "actually transferred")

Cases:

• Upstate Farms Cooperative, Inc. v. Tax Appeals Tribunal of State, 290 A.D.2d 896

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a08_60s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-08(60)S
Sales Tax
October 15, 2008

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S080513A

The Department received a petition for an advisory opinion from Petitioner, Petland Discounts, Inc., on
May 13, 2008. Petitioner provided additional information relating to the petition on September 10th and 22nd, 2008.
Petitioner asks whether shipping and packing supplies it purchases and uses to ship its inventory from its main
warehouse to its retail pet stores are subject to sales and use taxes. Since Petitioner uses these supplies itself, and does
not actually transfer the supplies to its retail customers, Petitioner’s purchases and uses of these supplies are subject to
New York State and local sales or compensating use taxes.
Facts
Petitioner conducts business as a chain of retail pet supply stores. It has a main warehouse in Brentwood,
New York. It purchases inventory in bulk that is delivered to the Brentwood warehouse. At the warehouse, it
repackages the inventory items for delivery to its more than 100 retail stores. Most of the retail stores are in
New York; a few are in New Jersey or Connecticut. Petitioner purchases packaging materials, such as bubble wrap,
stretch wrap, boxes, tape, labels, and skids. It uses these packaging and shipping materials at the Brentwood
warehouse to pack and ship its inventory to its retail stores. Petitioner indicates the packaging and shipping materials
are expensive and it passes the costs of these materials on to its retail customers by marking up the prices of the items
it sells at retail. Petitioner does not use the subject materials to package or ship merchandise it sells to its customers.
Nor does it actually transfer those packaging or shipping materials used at the warehouse to its customers. In the past,
Petitioner operated as two separate companies. A wholesale company purchased inventory and used these types of
materials to ship products that the wholesale company sold to the affiliated retail chain company. The retail chain
stores then sold merchandise to customers. Those two companies merged to become Petitioner.
Issue
Petitioner asks whether its purchase or use of these shipping and packaging materials is subject to sales or
compensating use tax. Petitioner also wonders whether it makes a difference for the taxability of the packaging and
shipping materials that Petitioner used to be organized as two entities but now is organized as only one.
Analysis
As a retail seller of pet supplies with a warehouse and stores in New York, Petitioner is a “vendor” under
section 1101(b)(8) of the Tax Law. Shipping and packaging materials constitute tangible personal property. Retail
sales of tangible personal property are subject to state and local sales taxes, unless an exemption applies. Likewise, a
purchaser’s use in New York of any of these materials it purchased out of state is subject to state and local
compensating use taxes, unless an exemption applies. Section 1115(a)(19) of the Tax Law exempts from state and
local sales and use taxes cartons, containers, wrapping and packaging materials and supplies, and components of those
supplies and materials, for use and consumption by a vendor in packaging or packing tangible personal property for
sale, and actually transferred by the vendor to the purchaser. “Actually transferred,” by regulation, means “physically
transferred to the purchaser, for whatever disposition the purchaser wishes” (20 NYCRR 528.20[b][4]).

TSB-A-08(60)S
Sales Tax
October 15, 2008

-2-

In this case, Petitioner, the vendor, uses the wrapping and packaging materials and supplies to wrap, pack and
ship inventory from its New York warehouse to its retail stores. It does not use those materials and supplies to pack or
ship property to customers who purchase the merchandise from its retail stores. Nor does Petitioner actually transfer
those packaging and shipping materials to those customers when they purchase the merchandise. Rather, Petitioner
purchases and uses the supplies itself – for wrapping, packing and shipping inventory to its stores. Because it does not
use the materials to pack or ship the items it sells to the stores’ customers, and does not transfer the packaging and
shipping materials to its retail customers, the exemption in section 1115(a)(19) does not apply. See Upstate Farms Co­
op. Inc. v. Tax Appeals Tribunal of State, 290 A.D.2d 896. Petitioner must pay state and local sales tax when it
purchases these materials in this state. If it purchases the materials out of state and uses them in this state, it must pay
compensating use tax
In the past, when Petitioner consisted of two separate companies, each was a separate “person” for sales tax
purposes. At that time, the wholesale company purchased packaging and shipping materials to be used to pack and
ship merchandise it sold to the retail company. The wholesale company was able to purchase those materials exempt
from tax under section 1115(a)(19) because it actually transferred the materials to a purchaser -- the retail company -when it sold the merchandise to the retail company. But when the two companies merged to become Petitioner, there
was no longer any actual transfer of the materials to another person who purchased merchandise from a vendor,
because the retail stores do not purchase the inventory from another person. Rather, one part of Petitioner, the retail
stores, receives merchandise from another part of Petitioner, the warehouse.

DATED: October 15, 2008

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the person
or entity to whom it is issued and only if the person or entity fully and accurately
describes all relevant facts. An Advisory Opinion is based on the law, regulations, and
Department policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.