How much of a $15 pallet charge was a nontaxable deposit when only $13 was refunded after return?

Plain-English summary

A landscaping business sold retaining walls and patio pavers on wooden pallets. It charged customers $15 per pallet and refunded $13 when a pallet came back.

California treated the pallets as returnable containers because the charge was intended to secure their return. The refundable $13 was a deposit and was not subject to sales tax.

The retained $2 was not a deposit because it would not be repaid. It was part of the sales price and was included in the tax measure when the retail sale was taxable.

Common questions

Was the full $15 exempt as a deposit?

No. Only the $13 that would be repaid on return qualified.

What happened to the retained $2?

It became part of the price of the property sold and entered the measure of tax for a taxable retail sale.

Citations and references

• Cal. Rev. & Tax. Code § 6051 — general retail-sales tax rule stated
• Cal. Rev. & Tax. Code § 6364 — returnable-container exemption and definition quoted
• Regulation 1589(a) and (b)(1) — returnable-container and deposit rules applied; copy listed as enclosed but not included in the official PDF
• Requester's December 16, 1993 letter to the Union City District Office — landscaping sales, vendor and customer pallet charges, refunds, and tax question quoted or summarized; separate letter not reproduced 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/195-1448.pdf

Original ruling text

195.1448

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 322-2976

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

February 25, 1994

GRAY DAVIS
Controller, Sacramento

BURTON W. OLIVER
Executive Director

Ms. D--- -. C--XXXX G--- Road
---, CA XXXXX
Re:

Application of Sales Tax on
Deposits For Wooden Pallets

Dear Ms. C---:
This is in response to your letter of December 16, 1993 to the District Office in Union City in which you inquire as to the application of tax to deposits for wooden pallets you provide to your customers. Your letter states that your landscaping business sells retaining walls and patio pavers. These items are purchased from a vendor on wooden pallets. The vendor charges a $15.00 deposit for the pallet, $13.00 of which is refunded upon return of the pallet. You do not pay any sales tax on the deposit. When you sell the patio pavers and retaining walls to your customers, you similarly provide these items on the wooden pallets. You also charge a $15.00 deposit and refund $13.00 when the customer returns the pallet. You ask whether sales tax applies to the deposit. Retail sales of tangible personal property within this state are subject to sales tax unless specifically exempt by statute. (Rev. & Tax. Code § 6051.) The exemption relevant to the wooden pallets described in your letter is found in Revenue and Taxation Code Section 6364, which states in relevant part: "Containers. There are exempted from the taxes imposed by this part, the gross receipts from sales of and the storage, use, or other consumption in this State of: "(a) Nonreturnable containers when sold without the contents to persons who place the contents in the container and sell the contents together with the container. ".... "(c) Returnable containers when sold with the contents in

Ms. D--- -. C---

-2-

February 25, 1994
195.1448

connection with a retail sale of the contents or when resold for refilling. "As used herein the term returnable containers' means containers of a kind customarily returned by the buyer of the contents for reuse. All other containers arenonreturnable containers'." This exemption for containers, including pallets, is explained in Regulation 1589 (copy enclosed). Regulation 1589(b)(1) states that tax does not apply to sales of returnable containers when sold with the contents in connection with a retail sale of the contents, or when sold for refilling. A container is returnable if it is of a kind customarily returned by the buyer of the contents for re-use by the seller of the commodities contained therein. If title to the container is retained by the seller of the contents or the seller takes a deposit to insure return of the container, it is a returnable container. All other containers are nonreturnable. (Reg. 1589(a).) A deposit, defined as an amount "charged to the purchaser of the contents of the container with the understanding that such amount will be repaid when the container or a similar container is delivered to the seller", is not subject to tax. Because the customers make a deposit for the pallets, we regard the pallets as returnable containers as defined in subdivision (a) of Regulation 1589. Because the pallets are returnable containers, your customer's deposit with you is not subject to sales tax. However, your letter states that the entire $15.00 is not returned. As stated above, "deposit" is defined as only "such amount" that will be repaid when the container is returned. We regard only $13.00 of the $15.00 amount as a deposit within the meaning of the regulation. The $2.00 amount which is not returned is considered to be a part of the sales price of the property. When the sale is at retail, that $2 is included in the measure of tax. In your case, if the sale of the pallets is taxable, the
$2.00 amount not repaid is included in the price of the property sold subject to sales tax. If you have any further questions please feel free to write us again. Sincerely,

Sukhwinder K. Dhanda
Staff Counsel
SKD:plh
Enclosure - Regulation 1589