Did a lumber manufacturer's strapping machine and reusable strapping qualify as exempt packaging materials?

Subject

Lumber strapping was a taxable transportation device, not exempt packaging

Plain-English summary

Virginia upheld tax on a lumber strapping machine and its supplies because the strapping was a transportation device rather than exempt packaging material. The company used it to bundle lumber so the product could be shipped easily to customers.

Under the court definition applied by the Department, packaging meant placing goods into a protective wrapper or container for shipment or storage. Strapping instead restrained and secured cargo for transport. The regulation classified pallets, dunnage, strapping, and similar bracing as transportation devices, which were not exempt packaging materials.

The reusable strapping also was not purchased for resale. The manufacturer had paid the assessment in full and received no refund.

What this means for you

• A shipping-related item is not automatically “packaging” for the manufacturing exemption.
• Property used to brace, restrain, or secure cargo can be a taxable transportation device.
• Reusable transportation property does not qualify as purchased for resale merely because it accompanies the product.
• Manufacturing exemptions are strictly construed against the claimant when doubt remains.

Common questions

Did the strapping protect the lumber during shipment?

Yes, but that function made it a transportation device rather than a wrapper or container.

Did the strapping qualify for resale?

No. It was reused and not purchased solely for resale.

What was the final result?

The assessment remained correct, and no refund was due.

Citations and references

• Va. Code § 58.1-609.3(2)(iv).
• 23 VAC 10-210-920(A)(4) and 23 VAC 10-210-400.
• Webster Brick Co. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978).
• Golden Skillet Corp. v. Commonwealth, 214 Va. 276, 199 S.E.2d 511 (1973).
• Virginia Public Document 96-301.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-85

Original ruling text

June 4, 2010

Re: § 58.1-1821 Application: Retail Sales and Use: Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period October 2005 through June 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a lumber manufacturer. As a result of the Department's audit, the Taxpayer was assessed tax on a strapping machine and associated supplies used to bundle lumber for sale and delivery to customers. The Taxpayer contests the assessment and claims that the strapping machine is used on the production line to strap bundles of lumber prior to storage at the Taxpayer's manufacturing facility and qualifies for the manufacturing exemption set out in Va. Code § 58.1-609.3 2 and Title 23 of the Virginia Administrative Code (VAC) 10-210-920 A 4.

DETERMINATION

Virginia Code § 58.1-609.3 2 (iv) provides an exemption from the sales and use tax for materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale. Title 23 VAC 10-210-920 A 4 provides an exemption for "[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).

In this case, the auditor relied on Public Document (P.D.) 96-301 (10/24/96) in assessing the tax to the strapping equipment and associated supplies. In P.D. 96-301, strapping was used to protect manufactured products from damage during shipment to market. The Tax Commissioner determined that the manufacturing exemption for packaging materials was not applicable to strapping materials based on the Virginia Supreme Court's opinion in Webster Brick Company v. Department of Taxation , 219 Va. 81, 245 S.E.2nd 252 (1978). Further, because the strapping was reused and not purchased for resale purposes only, it was held taxable.

In Webster Brick , the Court held that the packaging exemption 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 this case, the strapping is used to bundle wood products so that the bundle can easily be shipped to customers. The strapping does not constitute materials used to place goods into a package or container for shipment or sale. The Department's policy with respect to exemption from the sales and use tax is dictated by the rule of strict construction established by the Virginia courts. The Virginia Supreme Court has consistently held that "exemption from taxation is the exception, and where there is any doubt, the doubt is resolved against the one claiming exemption." See Golden Skillet Corn. v. Commonwealth , 214 Va. 276, 199 S.E.2d 511 (1973). Based on the narrow construction given the exemption by the courts, the strapping and associated equipment does not qualify for the packaging exemption noted above.

Title 23 VAC 10-210-400 addresses containers, packaging materials, and equipment and defines "transportation devices" to mean "items which are used to transport and protect products for sale and to restrain product movement in a single plane of direction. Examples of such items are pallets, dunnage, strapping and similar materials used to brace or secure cargo for transport." This regulation goes on to provide that "transportation devices" are not packaging materials and may not be purchased tax exempt unless purchased for resale. Because the Taxpayer used the strapping for transportation purposes, the resale exemption is not applicable.

CONCLUSION

Based on this determination, the assessment is correct. The Taxpayer has paid the assessment in full and is not entitled to receive a refund.

The Code of Virginia section, regulations and public document cited are available on­line at www.tax.virginia.gov in the Tax Policy Library Section of the Department's web site. If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3167246752.T