Could a yarn manufacturer buy nonreturnable strapping exempt when it passed to customers with shipped products?

Plain-English summary

Virginia removed the nonreturnable strapping under the resale exemption, even though it rejected the manufacturer's packaging argument. Strapping used to brace or secure cargo is a transportation device, not material used to put goods into a protective wrapper or container. It therefore did not qualify for the manufacturing packaging exemption merely because it reinforced boxes or bundled waste yarn.

The resale analysis produced a different result. The plastic and steel strapping became the customer's property, the manufacturer provided no transportation services, and it made no taxable use of the strapping. As a registered Virginia dealer, it could use Form ST-10 to purchase those materials for resale.

Virginia ordered the audit revised and the paid overage refunded with interest. The ruling specifically says the strapping materials would be removed; although the appeal also mentioned strapping-machine parts, the determination does not separately state that all such parts qualified.

Common questions

Q: Did strapping qualify as exempt packaging?
A: No. Virginia classified it as a transportation device used to secure cargo.

Q: Why was the strapping nevertheless exempt?
A: It was nonreturnable property transferred to customers, and the manufacturer made no taxable transportation use, so the resale exemption applied.

Citations and references

• Va. Code §§ 58.1-609.3(2)(iv) and 58.1-1833.
• 23 VAC 10-210-400 and 23 VAC 10-210-920.
• Webster Brick Company, Inc. 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.

Subject

Resale exemption certificate; Yarn manufacturer; No transportation services provided

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-55

Original ruling text

April 25, 2012

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") as a result of an audit for the period November 2006 through October 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a yarn manufacturer. An audit resulted in the assessment of consumer use tax on various untaxed items of tangible personal property used in the Taxpayer's operations. I understand that the Taxpayer provides no transportation services.

The Taxpayer takes exception to the tax assessed on plastic and steel strapping materials and strapping machines parts. The Taxpayer contends that strapping is used in two exempt applications. First, the Taxpayer contends that strapping serves as an inseparable part of corrugated boxes to reinforce and strengthen the structural integrity of the boxes. The Taxpayer presents photographic evidence indicating that no product can be delivered from its factory without the appropriate strapping.

The Taxpayer also contends that strapping is used to bundle bales of waste yarn and should be considered an exempt package.

DETERMINATION

Virginia Code § 58.1-609.3 2 (iv) provides an exemption from the retail 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 Virginia Administrative Code (VAC) 10-210-920 explains that the exemption is available only to industrial manufacturers or processors of products for sale or resale and applies whether the containers are returnable or nonreturnable. The regulation also states that tangible personal property (other than containers) used to protect manufactured products from damage during shipment to market or customers is not eligible for the manufacturing exemption.

In this case, the auditor relied upon Public Document (P.D.) 96-301 (10/24/96) in assessing the tax on strapping materials and strapping machine parts. 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, Inc. v. Department of Taxation , 219 Va. 81, 245 S.E.2d 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 boxes containing yarn and to bundle bales of waste yarn to aid in the shipment of such items. 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 Corp. 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 parts do 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.

In this case, the plastic and steel strapping is nonreturnable and becomes the property of the customer. As such, the ownership of the strapping is conveyed to the customer. Furthermore, the Taxpayer provided no transportation services and thus did not make a taxable use of such strapping. In addition, the Taxpayer is a Virginia dealer registered to collect the sales tax and is thus entitled to use the resale exemption certificate, Form ST-10, when making purchases of strapping. Based on all of the foregoing, I find that the resale exemption is applicable to the strapping materials. Such materials will be removed from the audit.

CONCLUSION

The audit will be revised in accordance with this determination. Because the assessment is paid, the overpaid amount will be refunded to the Taxpayer as soon as practical. Interest on the overpaid amount is owed to the Taxpayer in accordance with Va. Code § 58.1-1833.

The Code of Virginia section, regulations and public document cited are available on-line 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,

Craig M. Burns

Tax Commissioner

AR/1-4748124727.R