Could a wholesaler buy heat-treated export pallets for resale when it used them once to deliver federal commissary supplies to the port?

Plain-English summary

Virginia treated the heat-treated pallets as property bought for resale rather than taxable transportation devices retained by the wholesaler. The distributor used the pallets to fulfill federal commissary supply orders bound for Europe.

The wholesaler billed pallets separately from goods and delivery, showing an intent to sell them. Heat treatment was required for export and benefited the customer, and the government would not accept noncompliant loaded pallets.

The contract treated each pallet as expendable and nonreturnable. Title passed when the loaded pallets were accepted at the port, and the wholesaler did not reuse them until worn out or operate them as a continuing transportation fleet.

Its single delivery use was incidental to and consistent with the sale. Virginia removed the pallets from the audit and ordered a refund of the paid tax with interest, without reaching the separate interstate-commerce exemption claim.

Common questions

Q: Are pallets always taxable transportation devices?
A: No. They can be bought for resale when the facts show title passes and the seller does not retain or reuse them.

Q: Did delivery to the port defeat resale treatment?
A: No. The one-time use was de minimis and part of fulfilling the customer's sale conditions.

Citations and references

• Va. Code §§ 58.1-609.3(2)(iv) and 58.1-1833.
• 23 VAC 10-210-400(A), (B), (C).

Subject

Pallets used by Taxpayer was incidental to but consistent with the conditions of the sale.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-87

Original ruling text

May 24, 2012

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

Dear *:

This is in response to your letter requesting correction of the consumer use tax assessment issued to * (the "Taxpayer"), as a result of an audit for the period August 2007 through June 2010. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a wholesale distributor with a distribution center in Virginia. Its primary business is the resale of goods for the domestic and international markets. It contracts with the Defense Commissary Agency (DCA), an agency of the federal government, to provide and deliver a wide assortment of operating supplies for resale or use by commissaries located in Europe. To fulfill its contract, the Taxpayer buys supplies from various manufacturers. When an order is received from the DCA for international shipment, the Taxpayer pulls the supplies from its inventory, re-palletizes with heat treated pallets in accordance with European regulations, and arranges for their shipment to the port of embarkation. When the supplies are delivered at the port and accepted by the DCA, they are loaded onto a vessel and delivered by ocean carrier to the foreign destination.

An audit assessed use tax on heat treated pallets purchased by the Taxpayer on the basis that they are taxable transportation devices as defined in Title 23 Virginia Administrative Code (VAC) 10-210-400. The Taxpayer maintains, however, that such pallets were purchased for resale purposes. The Taxpayer also maintains that the subsequent sales of pallets are exempt from the tax based on the interstate commerce exemption set out in Va. Code § 58.1-609.10 4. The Taxpayer issues monthly invoices for the pallets and issues bimonthly invoices for the supplies and shipping charges.

According to the Taxpayer, the manufacturers sell supplies to the Taxpayer. When an order is received from the DCA or the manufacturers, the Taxpayer indicates that it resells the supplies back to the manufacturers who resell them to the DCA. In conjunction with these international orders, the Taxpayer delivers the products to the port of embarkation using its trucks or a transportation service. According to the delivery terms, the palletized goods are accepted by the federal government at the port of embarkation.

DETERMINATION

While Va. 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," such exemption is not available to the Taxpayer because it is not engaged as an industrial manufacturer or industrial processor. On the other hand, the Taxpayer is a wholesaler and is entitled to the resale exemption for tangible personal property purchased for sale or resale.

Title 23 VAC 10-210-400 addresses the application of the tax to packaging materials and transportation devices. As set out in subsection A of such regulation, pallets are deemed transportation devices when used to brace or secure cargo for transport. Subsection B of the regulation states that "[t]ransportation devices are not packaging materials and may not be purchased tax exempt unless purchased for resale." Subsection C of the regulation sets out taxable uses as follows:

Packaging materials and transportation devices, the ownership of which remains with the seller and does not pass to the customer are taxable. Persons who provide packaging and transportation services must pay the tax on all material used in providing such services unless the materials are resold to a customer and no transportation services are provided therewith.

For those businesses that are not an industrial manufacturer or an industrial processor, the first sentence of this regulation is intended to demonstrate that the tax applies to returnable transportation devices and returnable packaging materials as defined in subsection A of the regulation. Whereas, the second sentence of this regulation holds that the tax will not apply when the packaging materials or transportation devices are resold without transportation services. Thus, the resale of materials is permitted by the regulation if no transport use is made by the seller.

Notwithstanding, it is not practical for a regulation to address all possible situations. Rather, a regulation is intended to provide guidance on how the tax generally applies. Because of the unique facts of this case, the pallet issue raised by the Taxpayer is not readily addressed by the above regulation. Accordingly, we must determine the answer based on a valid application of the law to the specific facts presented.

In this case, the Taxpayer demonstrates an intention to resell the pallets by the itemized amounts that it billed for pallets on invoices that were issued separate from the billing for goods and delivery. Despite these separate billings, the pallet charges are directly tied to the sale of supplies because heat treated pallets are required for the delivery of the supplies to the customer. Because of these separate charges, the pallets are not treated as incidental to any transportation services, provided. Rather, the pallets are acquired for the sole purpose of fulfilling sales orders submitted by the DCA or manufacturers who also contract with the DCA. Thus, these facets establish that the Taxpayer intended at the time of purchase to resell the pallets in the mariner described.

In addition, the heat treatment applied to the pallets is an essential element of the sale. The customer would not accept a loaded pallet destined for foreign export without such heat treatment. As such, the heat treatment is for the sole benefit of the customer and is an integral and essential part of the sale to the customer.

Furthermore, the pallets are not returnable to the Taxpayer but are specifically deemed "expendable" by the DCA contract. As such, the Taxpayer transfers title to such pallets upon the acceptance of the loaded pallets by the DCA. Title transfers immediately to the customer and then to the federal government. There is also no indication that the pallets are regularly used by the Taxpayer in ongoing transport operations, such as to reuse until worn out. Rather, the Taxpayer's use in taxable activities is de minimis in nature.

While it is responsible for the delivery of such goods to its customers, the Taxpayer is primarily engaged in the business of reselling tangible personal property and is entitled to the resale exemption on goods purchased for sale or resale. Based on the facts presented, the Taxpayer did not regularly use the contested pallets on a continuous and ongoing basis but only made a one-time use of each pallet. They were not returnable and thus not reusable by the Taxpayer. As such, the use of the pallets by the Taxpayer was incidental to but consistent with the conditions of the sale. For these reasons and because the resale exemption applies to the customers' purchases of supplies and pallets ( i.e. , resold to the DCA), I find no basis for assessing tax on the contested pallets. Such pallets will be removed from the Department's audit.

Based on the foregoing, it is not necessary to address the Taxpayer's claim that the pallets are exempt pursuant to the exemption set out in Va. Code § 58.1-609.10 4.

CONCLUSION

The audit will be revised in accordance with this determination. Because the contested assessment has been paid, a refund of the overpaid amount will be issued as soon as practical. Pursuant to Va. Code § 58.1-1833, interest on the overpaid amount will also be paid to the Taxpayer.

The Code of Virginia sections and regulation 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 Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4697116193.R