Is renting reusable/returnable pallets and containers in Utah exempt from sales and use tax, the way one-time-use packaging is exempt?

Plain-English summary

A company that rents reusable pallets and containers to Utah businesses — joined by a coalition of similar manufacturers, renters, and sellers of reusable packaging (whose customers include major retailers and manufacturers) — asked the Commission for help eliminating what it saw as an environmentally perverse tax policy: Utah's packaging exemption covered one-time-use, disposable packaging (like cardboard boxes and disposable pallets), but not reusable, returnable alternatives that produce far less solid waste. The company estimated its Utah customers paid about $400,000 in sales tax on reusable pallet/container rentals in 1999 alone, and pointed to successes getting the tax eliminated (administratively in one state, legislatively in another) as a model for Utah.

The Commission's answer confirmed the problem the company described, but explained why it couldn't fix it administratively:

• The packaging exemption is narrow by its own terms. § 59-12-104(23) exempts only the sale of nonreturnable containers, labels, bags, shipping cases, and casings. The Commission clarified an important nuance the requester's letter blurred: "reusable" and "returnable" aren't the same thing — a nonreturnable container can technically be reusable, and a returnable container can be non-reusable. But since returning an item is inherent to any rental transaction, the Commission reasonably assumed the coalition's pallets and containers were "returnable" for purposes of the analysis.
• Renting is treated the same as selling. Under § 59-12-102(24), a lease or rental transaction is legally equivalent to a sale for Utah sales tax purposes. So it doesn't matter whether returnable pallets/containers are sold or rented — either way, they fall outside the nonreturnable-items exemption and remain taxable.
• The agricultural angle doesn't help either. The company also asked whether an exemption existed specifically for returnable pallets/containers used to distribute or transport farm products. Utah's farming operations exemption (§ 59-12-104(20)) covers various farm-related property, but it explicitly carves out and excludes property used in the distribution or transportation of farm products — so neither returnable nor nonreturnable pallets/containers used for that purpose are exempt.
• This is a deliberate legislative choice, not an oversight the Commission can fix. The Commission has no authority to administratively create an exemption the statute specifically excludes. It noted that the Legislature actually revisited this exact question in 1994, amending the packaging exemption statute to specifically exclude returnable items — a direct response to Mt. Olympus Waters, Inc. v. Utah State Tax Comm'n (Utah Ct. App. 1994), where the Court of Appeals had read the prior (broader) exemption language as covering both nonreusable items consumed by the end purchaser and reusable items the manufacturer itself reused. The 1994 amendment narrowed that language specifically to shut out returnable/reusable items.

Bottom line: any fix would require new legislation from the Utah Legislature, not an administrative change by the Commission.

What this means for you

Companies renting or selling reusable/returnable pallets and containers in Utah

Budget for sales/use tax on these transactions — there's no packaging exemption available for returnable items regardless of their environmental reusability, and this applies equally whether you sell or rent them.

Agricultural shippers using returnable pallets or containers

Don't assume the farming exemption covers your packaging costs — Utah's farming exemption specifically excludes property used to distribute or transport farm products, so pallets and containers used for that purpose are taxable regardless of whether they're returnable or not.

Industry groups or businesses seeking a similar exemption

Recognize this requires a legislative fix, not an administrative ruling — the Commission has already confirmed it lacks authority to create the exemption by rule or interpretation, since the Legislature specifically excluded returnable items from the packaging exemption in a targeted 1994 amendment.

Common questions

Q: Is renting reusable pallets and containers exempt from Utah sales tax?
A: No. Utah's packaging exemption covers only nonreturnable containers, and rentals are treated the same as sales — so returnable/reusable pallets and containers remain taxable whether sold or rented.

Q: Is there a special exemption for pallets/containers used to ship agricultural products?
A: No. Utah's farming exemption specifically excludes property used in the distribution or transportation of farm products, so this exemption doesn't reach packaging used for that purpose.

Q: Can the Utah Tax Commission create this exemption on its own?
A: No. The Commission has no authority to administratively enact an exemption the statute specifically excludes — only the Utah Legislature can change this through new legislation.

Q: Why did Utah's packaging exemption get narrowed to exclude returnable items?
A: The Legislature amended the exemption statute in 1994 specifically to exclude returnable items, in direct response to a Utah Court of Appeals decision (Mt. Olympus Waters) that had read the prior, broader language as covering reusable packaging too.

Q: Does this ruling apply to my company's packaging rental business?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts. It can't be relied on as binding by anyone else, though it may carry weight if your facts closely match.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-104(23) (packaging exemption — nonreturnable containers, labels, bags, shipping cases, casings only)
• Utah Code Ann. § 59-12-102(24) (rental/lease treated the same as a sale)
• Utah Code Ann. § 59-12-104(20) (farming operations exemption — excludes distribution/transportation of farm products)
• Mt. Olympus Waters, Inc. v. Utah State Tax Comm'n, 877 P.2d 1271 (Utah Ct. App. 1994)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/00-018.pdf

Original ruling text

00-018

Response May 23, 2000

REQUEST LETTER

April 14, 2000

Dear Mr. McKeown

I am writing you at the suggestion NAME. NAME and I worked together when I served in the PLACE.

NAME tells me you are a tax expert. I am not, so please forgive me if I don=t get the technical terms quite correct, but the problem is essentially as follows. Almost every state has some sort of packaging exemption from its sales tax, so a farmer who buys cardboard boxes in which to ship his fruit, or a manufacturer who buys pallets on which to ship his wares, typically does not pay a sales tax on those purchases. While I do not pretend to be an expert on the Utah sales tax code, the research I have been able to conduct suggests that Utah has such a packaging exemption. Unfortunately, in about half the states apparently including Utah, there is no packaging exemption for the rental of reusable pallets or containers. In these states there is a sales tax imposed in the relatively non-polluting transaction, and no sales tax imposed on the relatively more polluting transaction. Therefore the Utah State sales tax creates incentives to generate solid waste, and financially penalizes Utah businesses that employ reusable packaging that virtually avoids the creation of waste. These reusable products are substitutes for disposable pallets and cardboard boxes, and have been embraced by major retailers such as Wal-Mart and The Home Depot, and manufacturers like Proctor and Gamble.

My company is in the business of renting reusable pallets and containers, and our Utah customers are paying sales tax that amounted to about $400,000 in 1999. About a year ago my company joined with a dozen other small firms that are in the business of manufacturing, renting, or selling reusable pallets and containers, and formed the COALITION (COALITION).

The COALITION has been successful in administratively eliminating the sales tax on pallet and container rentals in STATE, and in legislatively eliminating it last fall in STATE. We would like to see this anti-environmental tax eliminated in Utah, as well. Given Governor Leavitt's leadership on Enlibra, I suggest it would be particularly fitting if his Administration would take the initiative in eliminating this tax. I frankly don't know if this could be done administratively, or it if would require a statutory change. Although in August of 1999, the National Governors= Association (NGA) amended its solid waste policy to call for the elimination of barriers to source reduction and reuse, so far no other Governor has made this project part of his personal program, so Governor Leavitt could once again stand out from the crowd, and lead by example.

Can you help us?

I am enclosing materials on the revised ##### solid waste policy, ####, the COALITION and our successes in STATE and STATE, for your information.

Thank you very much for your kind attention to this matter.

Sincerely,

NAME

RESPONSE LETTER

May 23, 2000

NAME

COMPANY

RE: Utah Sales and Use Tax - Application to Reusable Pallets and Containers

Dear NAME,

Rich McKeown has forwarded to the Utah State Tax Commission your letter of April 14, 2000, and asked us to respond to your request. Your concern is whether an exemption from Utah sales and use tax is available on the rental of reusable pallets and containers and, if not, how such an exemption may be effected in Utah. Utah Code Ann. '59-12-104(23) provides an exemption only on the sale of nonreturnable containers, labels, bags, shipping cases, and casings. As you specifically ask about Areusable@ pallets and containers, we must clarify that the terms Areusable@ and Areturnable@ are not necessarily synonymous. Specifically, a nonreturnable container may be reusable, and a returnable container may be nonreusable. Accordingly, we will assume for purposes of this opinion that the pallets and containers you ask about are Areturnable@ items. This assumption is supported by the fact that returning an item is an inherent part of any rental transaction. For sales tax purposes, a rental or lease transaction is considered the same as a sale. Utah Code Ann. '59-12-102(24). Accordingly, whether one rents or sells a returnable pallet or container, the transaction is not exempt under Section 59-12-104(23).

You also asked by telephone whether an exemption exists when the returnable pallets and containers are used to distribute or transport agricultural products. Utah Code Ann. '59-12-104(20) provides an exemption for certain sales (or rentals) of tangible personal property used in farming operations; however, it specifically excludes from the exemption the sale (or rental) of tangible personal property used in the distribution or transportation of farm products. Accordingly, there is no exemption for returnable or nonreturnable pallets and containers used to distribute or transport agricultural products.

The Tax Commission does not have the authority to administratively enact an exemption for the rental of returnable pallets or containers when the statute specifically mandates otherwise. Accordingly, the only means to obtain the exemption you request is through statutory action by the Utah Legislature. However, we point out that the Utah Legislature previously addressed whether to exempt returnable containers and packaging materials in 1994. In that year, the Legislature specifically amended the containers and packaging materials exemption statute to exclude returnable items. That action was in response to Mt. Olympus Waters, Inc. v. Utah State Tax Comm =__n , 243 Utah Adv. Rep. 10, 877 P.2d 1271, (Ct. App. 1994), in which the Utah Court of Appeals found that the packaging exemption language in effect prior to the 1994 amendment was sufficiently broad to include both nonreusable items (consumed by purchasers of the manufactured product) and reusable items (consumed by the manufacturer).

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner