Were pallets sold to a farmer exempt when the farmer sold food products on them to wholesalers and did not get them back?

Plain-English summary

A farmer bought pallets, placed food products on them, sold the products to wholesalers together with the pallets, and did not receive the pallets back.

California treated pallets as containers and concluded that the sales could be exempt if the farmer made no other use of them and customers did not customarily return them.

Without an exemption certificate, the pallet seller would have to prove those facts. A timely, valid certificate taken in good faith shifted the practical proof burden and should state both the exclusive container use and the absence of customary return.

Common questions

Did pallets count as containers?

Yes. Regulation 1589 specifically included articles on which property is placed for shipment.

Was the farmer's statement alone the recommended proof?

No. The opinion recommended a timely, valid exemption certificate.

Citations and references

• Cal. Rev. & Tax. Code §§ 6051 and 6364 and Regulation 1589 — retail-sale presumption and nonreturnable-container exemption
• Cal. Rev. & Tax. Code § 6421 and Regulation 1667(b) and (c)(1) — timely, valid good-faith exemption certificates
• Requester's June 23, 1992 letter — farmer's pallet use, wholesale food sales, nonreturn, and taxability question quoted or summarized; separate letter not reproduced in the official PDF
• Regulations 1589 and 1667 — copies listed as enclosed but not included in the official PDF

Source

• Annotated Legal Opinions collection: https://cdtfa.ca.gov/taxes-and-fees/annotations-menu.htm
• Annotation page: https://cdtfa.ca.gov/lawguides/vol2/suta/195-0000-all.html
• Original supporting opinion: https://cdtfa.ca.gov/lawguides/annotations/195-0725.pdf

Original ruling text

195.0725

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

WILLIAM M. BENNETT
First District, Kentfield

1020 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-5550

BRAD SHERMAN
Second District, Los Angeles
ERNEST J. DRONENBURG, JR.
Third District, San Diego
MATTHEW K. FONG
Fourth District, Los Angeles

July 14, 1992

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Mr. J--- B--P--- R--XXXX-XX --- ---, Suite XXX
---, California XXXXX
Re:

S- -- XX-XXXXXX

Dear Mr. B---:
This is in response to your letter dated June 23, 1992. You have sold pallets to a farmer who believes your sale is exempt from sales tax under Regulation 1589. He has advised you that he sells his food product on the pallets to various wholesalers and he does not get the pallets back. You ask whether your sales of pallets to the farmer are subject to sales tax. All your retail sales of tangible personal property are subject to sales tax unless specifically exempt by statute. (Rev. & Tax. Code § 6051.) Revenue and Taxation Code section 6364 provides an exemption for certain sales of containers. Subdivision (a) exempts from sales tax sales of: “Nonreturnable containers when sold without the contents to persons who place the contents in the container and sell the contents together with the container.” The exemption for containers is explained in Regulation 1589, a copy of which is enclosed. The term container includes articles on which tangible personal property is placed for shipment, and specifically includes pallets. Assuming the farmer does not use the pallets except to place his product on them and sell the product together with the pallets, the remaining question is whether the pallets are returnable or nonreturnable containers. (If they are returnable containers, your sale to the farmer would not be exempt from tax.) The farmer stated that he does not get the pallets back. Thus, they would be considered nonreturnable containers.

Mr. J--- B---

-2-

July 14, 1992
195.0725

As relates to your inquiry, unless you take an exemption certificate, your sale of pallets will be presumed to be a taxable retail sale until you establish otherwise. Proving that your sale is exempt would involve establishing that the farmer made no use of the pallets other than to place his product on them and sell the product together with the pallets as well as establishing that the farmer's customers did not customarily return the pallets to him. Needless to say, you do not want to be in the position of having to make this showing. The way you avoid it is by taking an exemption certificate. If you take a timely and valid exemption certificate in good faith, you will not owe sales tax on the transaction(s) to which it relates. (Rev. & Tax. Code § 6421.) Since Regulation 1589 does not set forth a specific exemption certificate for sales of nonreturnable containers, the applicable rules are set forth in Regulation 1667, a copy of which is enclosed. What constitutes a “timely” certificate is explained in subdivision (b) of Regulation 1667. “Good faith” means that you believe that the contents of the certificate are accurate. Subdivision (c)(1) of Regulation 1667 describes what a valid certificate must contain. The description in the regulation of the contents of a valid certificate is self-explanatory, so I will not repeat it here. The last item mentioned is a statement of the manner in which the property will be used so as to make the sale exempt from tax. As pertains to your inquiry, the farmer should certify that he will not make any use of the pallets except to place his product on them and then sell the product along with the pallets. He must also certify that his purchasers do not customarily return the pallets to him. If you have further questions, feel free to write again. Sincerely,

David H. Levine
Senior Tax Counsel
DHL:cl
Enclosures (2)