Are open-topped, returnable plastic crates that food producers rent to ship packaged food products to distributors and stores exempt from Tennessee sales and use tax as packaging materials?

Subject

Whether returnable shipping crates for packaged food products qualify for the sales tax packaging materials exemption.

Plain-English summary

The Tennessee Department of Revenue ruled that the rental of returnable plastic crates — used to ship packaged food products from producers to distributors and grocery stores — does not qualify for Tennessee's sales tax exemption for packaging materials, either before or after Tennessee's 2008 Streamlined Sales and Use Tax Agreement conforming legislation.

Tennessee exempts containers and packaging materials from sales tax only if three things are all true: (1) the item is a material, container, label, sack, bag, or bottle; (2) it's used for "packaging" tangible personal property; and (3) either the packaged product is sold directly to the consumer in that packaging, or using the packaging is "incidental" to a resale (meaning delivery is genuinely impracticable without it). The crates here — lidless trays with metal bars across the top and side handles — failed on two independent grounds. First, they don't actually "package" anything: "packaging" means enclosing or fully containing a product, and it's the inner plastic bag (not the open crate) that actually encloses the food packages. Second, even treating the crates as packaging, delivery of the food isn't genuinely "impracticable" without them — the individual product packaging already prevents contamination, and the crates just make shipping more convenient and economical, which isn't the same as necessary. The Department drew a direct parallel to Land-O-Sun Dairies, LLC v. Johnson, where open-topped milk crates similarly failed the exemption because "economic considerations are not the equivalent of the practical considerations" the rule requires — contrasted with Coca-Cola Bottling Co. v. Celauro, where pressurized soft-drink syrup tanks qualified because there was no alternative way to deliver the product at all.

The ruling also confirms this outcome doesn't change under Tennessee's 2008 Streamlined Sales and Use Tax Agreement conforming legislation: the packaging exemption was simply recodified at Tenn. Code Ann. § 67-6-329(a)(13) with identical language, and the same implementing rule continues to apply.

What this means for you

Food producers, distributors, and container/crate rental companies

Whether a shipping container qualifies as tax-exempt "packaging" turns on a strict two-part test: it must actually enclose or fully contain the product (not just facilitate its transport), and delivery must be genuinely impracticable without it — not merely more convenient or cheaper. Open trays, crates, or totes that hold already-packaged goods (where an inner wrapper or bag does the actual containing) are very likely to fail this test, even if there's no realistic economic alternative to using them. Fully sealed, product-specific containers (like the pressurized tanks in Coca-Cola Bottling Co. v. Celauro) are much more likely to qualify.

Accountants and tax professionals

This ruling collects the leading Tennessee cases on the packaging exemption in one place — Coca-Cola Bottling Co. v. Celauro and Evans v. Memphis Dairy Exchange on the "qualifies" side (full enclosure, no alternative delivery method), Land-O-Sun Dairies, LLC v. Johnson on the "doesn't qualify" side (open crates, economic-but-not-practical necessity) — plus the burden-of-proof reminder from American Airlines, Inc. v. Johnson that any well-founded doubt defeats an exemption claim. Useful template for analyzing any client's returnable-container or reusable-shipping-material program.

Common questions

Q: Does a container have to be sold with the product to qualify as exempt packaging?
A: No — it can also qualify if using it is "incidental" to a resale, meaning delivery of the product is genuinely impracticable without it. But an open container that doesn't fully enclose the product, or one that's simply convenient rather than necessary, fails this test either way.

Q: Is "the cheapest or most practical shipping option" the same as "impracticable without it" for this exemption?
A: No. Tennessee courts have specifically rejected that equivalence — economic considerations (cost, convenience) are not the same as the practical necessity the exemption rule requires.

Q: Did the 2008 Streamlined Sales and Use Tax Agreement changes affect this exemption?
A: No. The packaging materials exemption was recodified with identical language, and the same implementing rule and case law continue to apply.

Q: Does this ruling bind the Department for other container/crate rental arrangements?
A: No. This is a Revenue Ruling — advisory only and not binding on the Department, even for the taxpayer who requested it. Note also the ruling flags that crate rentals are generally subject to Tennessee's separate business tax as well.

Citations and references

Statutes, rules, and cases:

• Tenn. Code Ann. § 67-6-102(34)(A) (2006) (definition of "retail sale," includes lease/rental)
• Tenn. Code Ann. § 67-6-102(34)(E)(ii) (2006) (packaging materials exemption, three-part test)
• Tenn. Code Ann. § 67-6-204(a) (2006) (tax on lease/rental of tangible personal property)
• TENN. COMP. R. & REGS. 1320-5-1-.11(1) ("Rule 11(1)") (packaging exemption; "impracticable" delivery standard)
• Tenn. Code Ann. § 67-6-329(a)(13) (2007) (post-2008 recodified exemption, identical language)
• Coca-Cola Bottling Co. v. Celauro, 1993 WL 330303 (Tenn. 1993); Evans v. Memphis Dairy Exchange, 250 S.W.2d 547 (Tenn. 1952) (fully-enclosing containers with no delivery alternative qualify)
• Land-O-Sun Dairies, LLC v. Johnson, No. 01-699-II (Tenn. Chancery Ct. 2002) (open-topped milk crates fail exemption; economic convenience ≠ practical necessity)
• American Airlines, Inc. v. Johnson, 56 S.W.3d 502 (Tenn. Ct. App. 2000) (taxpayer bears burden; doubt defeats exemption)

Source

• Landing page: https://www.tn.gov/revenue/tax-resources/legal-resources/tax-rulings.html
• Original PDF: https://www.tn.gov/content/dam/tn/revenue/documents/rulings/sales/08-19.pdf

Original ruling text

TENNESSEE DEPARTMENT OF REVENUE
REVENUE RULING #08-19
WARNING
Revenue rulings are not binding on the Department. This presentation of the ruling in a
redacted form is information only. Rulings are made in response to particular facts
presented and are not intended necessarily as statements of Departmental policy.

SUBJECT
Whether crates used for transporting packaged [FOOD] products are exempt for purposes of the
Tennessee sales and use tax.
SCOPE
Revenue Rulings are statements regarding the substantive application of law and statements of
procedure that affect the rights and duties of taxpayers and other members of the public. Revenue
Rulings are advisory in nature and are not binding on the Department.
FACTS
The Taxpayer owns large quantities of returnable plastic containers, which are specially designed
to hold [FOOD] products (the “crates”). The Taxpayer enters into written agreements to rent the
crates to various [FOOD] producers, and sends the crates directly to [FOOD] producers located
in Tennessee and other places throughout the United States. The [FOOD] producers place
packaged [FOOD] products inside the crates, and send them directly to their distributors or to
large grocery store chains.
The crates can be described as lidless trays with two metal bars across the top and handles on
two sides; the crates are never used as direct food contact containers. A number of individual
packages of [FOOD] products may be placed inside a single large plastic bag before being
placed into a crate. The crates are not insulated, and are not shrink-wrapped.
The distributors ship the [FOOD] products to various stores in the crates. There is no separate
charge by the [FOOD] producer to its distributor or to a grocery store for the crates. Rather, the
cost is embedded in the price charged to the grocer, just as it would be with a corrugated
cardboard container. Some stores remove the packaged [FOOD] products from the crates and
place the packaged [FOOD] directly on the store shelves. Other stores place the crates directly on
their shelves, where the packaged product is then removed by the stores’ customers.
The [FOOD] producers use the crates to ensure that the packaged [FOOD] products are not
damaged or contaminated during shipment. Without the crates, the packaged [FOOD] products

could be damaged or contaminated if handled on an individual basis during shipment, resulting
in a product that could not be sold. The alternative to using the crates would be to ship the
[FOOD] products in non-returnable cardboard boxes. However, cardboard boxes are susceptible
to damage during the shipping process, which would likewise result in damaged and
unmarketable [FOOD] products. Once the crates are emptied, they are returned to the Taxpayer,
who cleans and sterilizes them before the next use.
QUESTIONS
1.
Prior to January 1, 2008, is the lease or rental of the crates by the Taxpayer exempt for
purposes of the Tennessee sales and use tax?
2.
Does the enactment of legislation conforming to the Streamlined Sales and Use Tax
Agreement, effective January 1, 2008, change the exemption determination under Question #1?
RULINGS
1.
No. Prior to January 1, 2008, the lease or rental of the crates by the Taxpayer is not
exempt for purposes of the Tennessee sales and use tax.
2.
No. The enactment of legislation conforming to the Streamlined Sales and Use Tax
Agreement, effective January 1, 2008, does not change the exemption determination under
Question #1.
ANALYSIS
1.

The Tennessee sales and use tax laws in effect prior to January 1, 2008.

Prior to January 1, 2008, the lease or rental of the crates by the Taxpayer is not exempt for
purposes of the Tennessee sales and use tax.
Retail sales in Tennessee are subject to sales and use tax under Tenn. Code Ann. § 67-6-101
(2006) et seq. Tenn. Code Ann. § 67-6-102(34)(A) (2006) defines a “retail sale” as “a taxable
sale of tangible personal property . . . for any purpose other than for resale.”1 However, Tenn.
Code Ann § 67-6-102(34)(E)(ii) (2006) specifically excludes from the definition of
“retail sale” the sale, use, storage, or consumption of “[m]aterials, containers, labels, sacks, bags
or bottles used for packaging tangible personal property when such property is either sold therein
directly to the consumer or when such use is incidental to the sale of such property for resale.”
Accordingly, the lease or rental of the crates by the Taxpayer will be subject to the Tennessee

1

The lease or rental of tangible personal property comes within the scope of the definition of “retail sale” because
Tenn. Code Ann. § 67-6-102(36)(A) (2006) defines a “sale” as “any transfer of title or possession, or both,
exchange, barter, lease or rental . . . of tangible personal property for a consideration.” (Emphasis added.)
Additionally, the rental or lease of tangible personal property in Tennessee is specifically subject to sales and use
taxation pursuant to Tenn. Code Ann. § 67-6-204(a) (2006).

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sales and use tax unless the crates come within the scope of the exemption for packaging
materials provided under Tenn. Code Ann § 67-6-102(34)(E)(ii) (2006).2
TENN. COMP. R. & REGS. 1320-5-1-.11(1) (“Rule 11(1)”) interprets the exemption provided
under Tenn. Code Ann § 67-6-102(34)(E)(ii) (2006). Note that Rule 11(1) must be read in
conjunction with the statute; while the Commissioner of Revenue is authorized pursuant to Tenn.
Code Ann. § 67-1-102 to prescribe reasonable rules and regulations not inconsistent with the
taxing statutes, such rules and regulations may not enlarge the scope of either a taxing statute or
an exemption. Covington Pike Toyota, Inc. v. Cardwell, 829 S.W.2d 132, 135 (Tenn. 1992);
Volunteer Val-Pak v. Celauro, 767 S.W.2d 635, 637 (Tenn. 1989); Coca-Cola Bottling Co. v.
Woods, 620 S.W.2d 473, 475-76 (Tenn. 1981). Rule 11(1) provides the following detailed
explanation of those items that fit within the exemption for packaging materials: “Items actually
accompanying the product sold or shipped, without which the delivery of the product is
impracticable on account of the character of the contents, and for which there is no separate
charge, are not subject to Sales or Use Tax. These items include such things as containers,
packing materials, labels or name plate affixed to products manufactured, and printed matter
containing only directions for use.”
In other words, under Tenn. Code Ann. § 67-6-102(34)(E)(ii) (2006), an item will be exempt
from the Tennessee sales and use tax provided that the following requirements are satisfied: (1)
the item is a material, container, label, sack, bag or bottle; (2) the item is used for packaging
tangible personal property; and (3) the tangible personal property is either sold directly to the
consumer in the packaging, or the use of the packaging is incidental to the sale of the tangible
personal property for resale.
The Taxpayer’s crates satisfy the first requirement, because the crates are containers. However,
the crates do not satisfy the second requirement of Tenn. Code Ann. § 67-6-102(34)(E)(ii)
(2006), because the crates are not used for “packaging” tangible personal property. Neither the
Tennessee Code nor the Tennessee courts have not defined the term “packaging” for purposes of
Tennessee sales and use taxation. The Tennessee Supreme Court has stated that when a statute
does not define a term, it is proper to look to common usage to determine the term’s meaning. See,
e.g., Tennessee Farmers Assur. v. Chumley, 197 S.W.3d 767, 782-83 (Tenn. 2006); Beare Co. v.
Tennessee Dept. of Revenue, 858 S.W.2d 906, 908 (Tenn. 1993). Webster’s Ninth New
Collegiate Dictionary (1991) defines the term “packaging” as “to enclose in a package or
covering.” The term “package” is in turn defined as “a covering, wrapping, or container.” These
definitions suggest that, to be considered “packaging,” the item in question should be used to

2

Based on the facts provided, the Taxpayer’s lease or rental of the crates does not come within the scope of any
other sales and use tax exemption.

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enclose, wrap, or otherwise fully contain tangible personal property.3
In the Taxpayer’s case, the totality of the circumstances indicates that the crates do not enclose,
wrap, or otherwise fully contain the [FOOD] products. Significantly, the crates are lidless trays
with two metal bars across the top and handles on two sides; the crates do not provide full
enclosure or containment of the [FOOD] products. While a number of individual packages of
[FOOD] products may be placed inside a single large plastic bag before being placed into a crate,
it is the plastic bag, and not the crate, that encloses or otherwise fully contains the [FOOD]
products. Accordingly, the crates are not properly considered “packaging” for Tennessee sales
and use tax purposes.
Even if the crates could be considered packaging, the crates would still fail to satisfy the third
element of Tenn. Code Ann. § 67-6-102(34)(E)(ii) (2006), which requires either (1) that the
tangible personal property be sold directly to the consumer in the packaging, or (2) that the use
of the packaging be incidental to the sale of the tangible personal property for resale. In the
Taxpayer’s case, the [FOOD] products are not sold directly to the consumer in the crates (while
the retail stores sometimes use the crates to display the [FOOD] products, the consumer never
purchases a crate along with the [FOOD] products). Accordingly, the use of the crates must be
“incidental” to the sale of the [FOOD] products for resale for the exemption to apply.
As noted above, Rule 11(1) interprets the exemption provided under Tenn. Code Ann § 67-6102(34)(E)(ii) (2006). Rule 11(1) explains that delivery of the product must be “impracticable”
without the item in question, on account of the character of the contents. For delivery to be
impracticable, delivery of the product must generally necessitate the use of the item in question.
For example, the Tennessee Supreme Court held that five-gallon, pressurized, cylindrical tanks
that were used to deliver syrup, water, and carbon dioxide for resale to customers as soft drinks
were exempt from the sales and use tax as containers used for packaging, because the tanks were
incidental to the sale of the soft drinks. Coca-Cola Bottling Co. v. Celauro, 1993 WL 330303 at
*2 (Tenn. August 30, 1993). Importantly, the court based its decision on the fact that the
taxpayer had no alternative method of delivering the soft drinks to the customers in the absence
of the tanks. Id. Conversely, a Tennessee chancery court held that open-topped milk crates used
to transport cartons and plastic jugs of milk were not packaging material because the crates
simply facilitated delivery of the milk. Land-O-Sun Dairies, LLC v. Johnson, No. 01-699-II
(Chancery Court for the State of Tennessee, 20th Judicial District, Davidson County)
3

This approach is consistent with the outcomes of the few Tennessee court cases that discuss the sales and use tax
exemption for packaging materials, even though none of the cases address the issue of whether the items in question
constituted “packaging.” For example, the Tennessee Supreme Court held that five-gallon, pressurized, cylindrical
tanks that were used to deliver syrup, water, and carbon dioxide for resale to customers as soft drinks were exempt
from the sales and use tax as containers used for packaging, under Tenn. Code Ann. § 67-6-102(34)(E)(ii) (2006)
(then codified at Tenn. Code Ann. § 67-6-102(22)(E) (1993)). Coca-Cola Bottling Co. v. Celauro, 1993 WL 330303
(Tenn. August 30, 1993). Similarly, the Tennessee Supreme Court held that glass milk bottles were exempt as
containers used for packaging, under an earlier, more broadly worded version of the exemption. Evans v. Memphis
Dairy Exchange, 250 S.W.2d 547, 547 (Tenn. 1952). Notably, in each of these cases, the containers in question
completely enclosed or otherwise fully contained the tangible personal property. In contrast, a Tennessee chancery
court held that open-topped milk crates used to transport cartons and plastic jugs of milk did not qualify for the
exemption. Land-O-Sun Dairies, LLC v. Johnson, No. 01-699-II (Chancery Court for the State of Tennessee, 20th
Judicial District, Davidson County) (Memorandum and Final Order, October 3, 2002).

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(Memorandum and Final Order at 9, October 3, 2002). The court found that the “sale of the
milk necessitates that the liquid be stored in a container; the sale of the milk does not necessitate
that the containers be transferred to the point of sale in any particular type of crate.” Id. at 8.
The court also remarked that while the alternatives to the milk crates were economically
prohibitive, “economic considerations are not the equivalent of the practical considerations to
which Rule 11 alludes.” Id.
In the Taxpayer’s case, delivery of the [FOOD] products is not impracticable without the crates.
Generally speaking, the sale of [FOOD] products necessitates some form of packaging to prevent
contamination; however, the individual packages in which the [FOOD] products are wrapped
serve this purpose. While the crates are likely the most convenient and economical way to
deliver the [FOOD] products, the sale of the [FOOD] products does not necessitate the use of the
crates. Rather, the crates simply facilitate delivery of the [FOOD] products to the stores in which
they are sold. As with the sale of milk, the Taxpayer could choose an alternate method of
delivery. Accordingly, the crates are not incidental to the sale of [FOOD] products for resale, and
fail to satisfy the third element of Tenn. Code Ann. § 67-6-102(34)(E)(ii) (2006).
The burden is on the taxpayer to establish entitlement to an exemption from taxation. The
Tennessee Supreme Court has stated that “[a]lthough the rule is well-established that taxing
legislation should be liberally construed in favor of the taxpayer and strictly construed against
the taxing authority, it is an equally important principle of Tennessee tax law that ‘exemptions
from taxation are construed against the taxpayer who must shoulder the heavy and exacting
burden of proving the exemption.’” American Airlines, Inc. v. Johnson, 56 S.W.3d 502, 506
(Tenn.Ct.App. 2000) (quoting Rogers Group, Inc. v. Huddleston, 900 S.W.2d 34, 36
(Tenn.Ct.App. 1995)). The Tennessee Supreme Court has also stated that the burden is on the
taxpayer to establish the exemption, and any well-founded doubt is sufficient to defeat a claimed
exemption from taxation. American Airlines, Inc. v. Johnson, 56 S.W.3d at 506 (citing Tibbals
Flooring Co. v. Huddleston, 891 S.W.2d 196, 198 (Tenn. 1994); United Canners, Inc. v. King,
696 S.W.2d 525, 527 (Tenn. 1985)). For the reasons stated above, there is sufficient doubt as to
the Taxpayer’s entitlement to claim an exemption under Tenn. Code Ann. § 67-6-102(34)(E)(ii)
with respect to the crates.
Because the requirements under Tenn. Code Ann. § 67-6-102(34)(E)(ii) (2006) are not satisfied
in their entirety, the lease or rental of the crates by the Taxpayer is subject to Tennessee sales and
use taxation.4
2.

The Tennessee sales and use tax laws in effect beginning January 1, 2008.

The enactment of legislation conforming to the Streamlined Sales and Use Tax Agreement,
effective January 1, 2008, does not change the determination that the Taxpayer’s crates are not
exempt for Tennessee sales and use tax purposes as packaging materials.

4

Note that the rental of the crates by the Taxpayer will also generally be subject to the Tennessee business tax. See Tenn. Code
Ann. §§ 67-4-701 et seq. for details.

5

In 2007, Tennessee enacted a number of provisions related to the Streamlined Sales and Use Tax
Agreement, effective January 1, 2008. However, the exemption for packaging materials is not
affected by this legislation. Accordingly, for purposes of the Tennessee sales and use tax, the
lease or rental of the crates by the Taxpayer continues to be subject to sales and use taxation after
the legislation’s effective date. Note that the exemption for containers and packaging materials is
codified effective January 1, 2008, under Tenn. Code Ann. § 67-6-329(a)(13) (2007). The
language of Tenn. Code Ann. § 67-6-329(a)(13) (2007) is identical to that found under Tenn.
Code Ann. § 67-6-102(34)(E)(ii) (2006). Furthermore, Rule 11(1) remains in force, and
therefore applies to the exemption of packaging materials under the Tennessee sales and use tax
laws in effect beginning January 1, 2008.

Kristin Husat
Senior Tax Counsel

APPROVED:

Reagan Farr
Commissioner of Revenue

DATE:

2/29/08

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