Could a retailer deduct separately stated packing charges for loading products into returnable cylinders?

Plain-English summary

A retailer shipped taxable property to customers in returnable cylinders and deducted a separately stated amount for packing from taxable gross receipts.

California explained that a qualifying returnable container sold with the contents could be exempt, and the customer's sale of the container back for refilling could also be exempt. Tax still applied when the retailer acquired the returnable container.

The packing charge was different. There was no exemption for labor or services used to pack the property. If packing was required to make the sale or customers had to buy it as a condition of purchase, the charge was taxable.

The sample invoice did not separately state transportation, so counsel found no basis for excluding a transportation charge from taxable gross receipts.

Common questions

Did the returnable-container exemption cover packing labor?

No.

Was the cylinder charge itself necessarily taxable to the customer?

No. A qualifying returnable container sold with the contents could be exempt.

Why was there no freight deduction?

The reviewed invoice did not separately state transportation.

Citations and references

• Cal. Rev. & Tax. Code § 6364 — container exemptions quoted
• Regulation 1589 — returnable-container treatment applied; copy listed as enclosed but not included in the official PDF
• Regulation 1628 — transportation-charge guidance supplied; copy listed as enclosed but not included in the official PDF
• Requester's October 15, 1993 letter to Board employee Rick Edelen — transaction description, packing-cost characterization, invoice practice, and container-exemption position quoted or summarized; separate letter and referral record not reproduced in the official PDF
• P--- invoice No. 0912 — reported to show a $3,564 packing deduction and no transportation charge; copy reviewed by counsel 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/195-1605.pdf

Original ruling text

195.1605

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

MEMBER
First District

450 N STREET, SACRAMENTO, CALIFORNIA
(P.O. BOX 942879, SACRAMENTO, CALIFORNIA 94279-0001)
(916) 445-6450

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

March 11, 1994

GRAY DAVIS
Controller, Sacramento
────────
BURTON W. OLIVER
Executive Director

Ms. C--- T--Accountant
S--- D. H---, CPA
XXX --- Road
---, CA XXXXX
Re:

P--- - A--- S---, INC.
SR --- XX-XXXXXX

Dear Ms. T---:
Your October 15, 1993 letter to Mr. Rick Edelen of the State Board of Equalization has been referred to the Board's legal staff for reply. From your description of the facts, we understand that P--- - --- S---, Inc., (P---) sells tangible personal property at retail and ships the property to customers in returnable containers. P--- deducts from the taxable gross receipts of the sale an amount for freight and packing charges. You sent a copy of P---'s invoice No. 0912 for our review. The invoice shows that P--deducted $3,564 for "packing" from the taxable gross receipts of the sale. Your October 15 letter notes that the packing charges are charges for "the cost of packing contents into cylinders that are returnable and resold for filling." You note these charges are separately stated from transportation charges on P---'s invoices; however, invoice No. 0912 does not show a charge for transportation. Your letter also refers to the exemption from sales tax for sales of certain containers provided by Revenue and Taxation Code section 6364, which provides:

Ms. C--- T---

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March 11, 1994
195.1605

"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. (b) Containers when sold with the contents if the sales price of the contents is not required to be included in the measure of the taxes imposed by this part. (c) Returnable containers when sold with the contents in 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 are 'nonreturnable containers.'" Enclosed is a copy of Sales and Use Tax Regulation 1589, Containers and Labels, for your further information. Under the exemption, if P--- provides returnable containers to the customers, tax does not apply to P---'s charge for the containers when P--- sells them in connection with a retail sale of the contents. Also, tax does not apply to the customer's sale of the container back to P--- for refilling. Tax applies to the sale of the returnable containers to P--. You have not provided a description of the facts regarding P---'s transportation of the property to the customer; however, if invoice No.0912 is indicative of a typical transaction, the charge for transportation is not separately stated. Therefore, there is no basis for excluding any charge for transportation from the taxable gross receipts. There is no exemption in the law for a charge for the labor or service cost of packing the property sold. If P--- must perform the packing in order to sell the tangible personal property or if the purchaser must purchase the packing from P--- as a condition of the purchase, tax applies to the charge. Therefore, unless there are circumstances of which we are unaware, tax applies to P---'s charges for "packing" the returnable container it provides to the customer. Enclosed for your further information is a copy of Sales and Use Tax Regulation 1628, Transportation Charges.

Ms. C--- T---

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March 11, 1994
195.1605

We hope this answers your questions; however, if you need further information, feel free to write again. Very truly yours,

Ronald L. Dick
Senior Tax Counsel
RLD:plh

Enclosures