Could a shrimp seller buy reusable gel packs for resale when it froze them before separately selling them with shipments?

Plain-English summary

California appeals staff concluded that a live-brine-shrimp seller used reusable refrigerant gel packs before selling them. The seller bought Zeropacs under resale certificates, froze them, put them in boxes for customers who ordered them, and charged about 66 cents apiece using its standard markup.

Even though the packs were reusable, optional and unnecessary for shrimp to arrive in good condition, freezing them supplied a packing use before transfer. That use triggered use tax under section 6244(a). The recommendation said selling and shipping packs unfrozen would instead support purchase for resale only.

The protested table lists $11,700 for state/local/county/BART and $6,000 for ACTA as measures. Hearing Officer Janet Saunders recommended redetermination without adjustment, but the source gives no rates, tax liability or final Board action.

Shrimp operation, customer choice, cold window, and missing evidence

Petitioner harvested live brine shrimp from local salt pools and sold them to fish stores as tropical-fish feed, with significant out-of-state sales. It held shrimp in saline solution before placing them in bags around 5:00 a.m., putting bags in cardboard boxes and adding frozen Zeropacs only when ordered. Boxes went to the airport and onto a plane by 8:00 a.m.; customers picked them up, and shrimp needed new water within 24 hours to maintain adequate oxygen.

Zeropacs were a reusable refrigerant-gel brand. Frozen packs stayed cold for two to three hours and could be refrozen. No manufacturer information, composition, pack size, inventory, freezing equipment, temperature data, shrimp condition or customer reuse is supplied.

About half of customers bought packs, and choice reportedly did not vary with distance. Petitioner offered invoices showing a New York customer declined and a Maryland customer purchased despite similar shipping times. The invoices and customer facts are absent.

The source notes that cold capacity deteriorated within three hours, making packs most effective from 5:00 to 8:00 while boxes awaited plane loading in San Francisco, described as usually chilly then. The hearing officer called customer benefit possibly illusory but presumably valuable because customers ordered frozen packs. No weather, temperature, delay, spoilage, preservation or valuation evidence is included.

Audit measures, resale certificates, assumption, cases, and recommendation

The September 17, 1990 Oakland hearing covered January 1, 1985 through December 31, 1987. Petitioner's redacted senior vice president appeared; Supervising Tax Auditor John F. Grgurina and Senior Tax Auditor Kpazawala W. Ballayan appeared for the Department. The Notice, petition, hearing transcript and exhibits are absent.

The table describes supply items bought under resale certificates and not reported, with $11,700 and $6,000 measures. These are not stated tax liabilities. Petitioner claimed it sold Zeropacs for resale; the Department claimed shipping use made petitioner consumer.

Section 6091 governed the resale-certificate purchases. Section 6244(a) made storage or use taxable when it went beyond retention, demonstration or display while holding property for sale. The issue was whether petitioner used the packs first.

People v. Monterey County Ice & Development Co., 29 Cal.App.2d 421, was cited for lettuce packers consuming ice as refrigeration even if cost entered the lettuce price. The reporter and named case verified.

The source prints People v. Puritan Ice Company as 24 Cal.App.2d 645. The named California Supreme Court case is at 24 Cal.2d 645; there is no App. in the reporter. As the recommendation summarized it, vegetable packers consumed ice despite separate customer charges. The printed text is preserved and the conflict disclosed.

Saunders expressly assumed petitioner bought and stored Zeropacs unfrozen and froze them as needed. Freezing was a packing use under Regulations 1589 and 1630. The source supplies no purchase invoice, product condition on receipt, storage or freezing record, so the decisive fact remains an assumption.

Reusability, optional use and lack of necessity did not overcome pre-sale use. Customers also received some pre-resale benefit, even if illusory. Unfrozen sale and shipment would have established resale-only treatment on counsel's analysis.

Because the ex-tax purchase was not for resale, petitioner owed use tax. The recommendation says Redetermine without adjustment. No final redetermination, Board order, tax calculation, payment, claim or appeal appears.

The live 400.0230 annotation preserves frozen gel packs, reusable property, out-of-state shrimp shipments, separate customer charge and taxable freezing use. It omits the audit period and measures, hearing, shrimp operation, times and oxygen need, two-to-three-hour cold window, 66-cent price and markup, 50-percent customer choice, invoices, assumption, cases, unfrozen alternative and recommendation-only posture.

The official three-page PDF has a clean rendered text layer and no body-page image. Two fresh downloads and extractions matched exactly, and the preserved source tail remains byte-identical after removal of only pdftotext's terminal newline and form feed.

What this means for you

Sellers of reusable shipping aids

A separate marked-up sale did not prevent tax where the seller altered or used the item for packing before transfer. Document condition at purchase, inventory storage, preparation, customer choice, transfer and later reuse.

Accountants and tax professionals

Test the first storage or use under section 6244(a), not only invoices and resale certificates. Preserve the audit measure, local-tax components and actual tax calculation; the source gives only measures and a recommendation.

Common questions

Did the separate customer charge establish resale treatment?

No. A separate charge and markup did not undo the seller's prior freezing use.

Did it matter that only about half the customers ordered gel packs?

No. Optional choice did not eliminate freezing before transfer; the officer also treated customer-selected protection as some benefit.

Why was tax due despite resale certificates?

The officer found freezing was a packing use beyond retention, demonstration or display while holding the packs for sale.

What alternative did the recommendation identify?

Selling and shipping the Zeropacs unfrozen, which would have supported resale-only treatment.

What price did customers pay?

About 66 cents per pack, calculated with petitioner's standard markup. The invoices are absent.

Was frozen storage proven?

No. The hearing officer assumed the packs were bought and stored unfrozen, then frozen as needed.

What amounts were upheld?

The table lists $11,700 and $6,000 measures. No rates or tax-liability amount is supplied.

Was the petition finally denied?

The hearing officer recommended no adjustment. The final Board redetermination is absent.

Citations and references

• California Revenue and Taxation Code section 6091 — resale-certificate purchase described
• California Revenue and Taxation Code section 6244(a) — taxable storage or use after a resale purchase quoted
• California Sales and Use Tax Regulations 1589 and 1630 — packaging-material treatment cited
• People v. Monterey County Ice and Development Company, 29 Cal.App.2d 421 — refrigeration-use analogy cited
• The source prints People v. Puritan Ice Company as 24 Cal.App.2d 645; the named case is reported at 24 Cal.2d 645
• Notice of Determination, petition, hearing record and invoices — described or implicated but not included
• Taxpayer, shrimp and salt pools; customers and fish stores; Zeropacs and inventory; purchases, resale certificates, freezing and shipments; prices and calculations; tax rates and liability; audit workpapers; final redetermination; Board order; payment; claim; appeal; and outcome — described, assumed or implicated but not included

Verbatim support

From the official November 30, 1990 hearing decision and recommendation:

It is assumed by this Hearing Officer that petitioner purchases and stores its inventory of Zeropacs in an unfrozen condition and that it freezes the Zeropacs as needed.

Petitioner’s activity of freezing the Zeropacs constitutes a use, particularly a packing use.

If petitioner sold and shipped Zeropacs in an unfrozen state, it would have made its case for purchasing for resale only and no tax would be owed.

Redetermine without adjustment.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 400.0230
• Original supporting opinion: 400.0230 PDF

Original ruling text

STATE OF CALIFORNIA

400.0230

BOARD OF EQUALIZATION
APPEALS DIVISION
In the Matter of the Petition
for Redetermination Under the
Sales and Use Tax Law of:
[S]
Petitioner

)
)
)
)
)
)
)

HEARING
DECISION AND RECOMMENDATION

No. S- -- XX-XXXXXX-010

The above-referenced matter came on regularly for hearing before Hearing Officer Janet Saunders on September 17, 1990 in Oakland, California. Appearing for Petitioner:

--- -. --Senior Vice President

Appearing for the
Department of Business Taxes:

John F. Grgurina
Supervising Tax Auditor
Kpazawala W. Ballayan
Senior Tax Auditor
Protested Item

The protested tax liability for the period January 1, 1985 through December 31, 1987 is measured by:

Item

State, Local
County and BART

ACTA

Purchases subject to use tax:

Supply items purchased under
Resale certificates not reported

$11,700

$6,000

Parties’ Contentions
At issue is whether or not the refrigerant gel packs (Zeropacs) purchased by petitioner are items purchased for resale. Petitioner contends that it sells these Zeropacs to its customers for resale. The Department of Business Taxes (DBT) contends that Zeropacs are used for shipping, that petitioner is the consumer and that use tax applies.

[S]
S- -- XX-XXXXXX-010

-2-

November 30, 1990
400.0230

Summary
Petitioner is in the business of harvesting and selling live brine shrimp to fish stores for use in feeding tropical fish; his business does a significant amount of out-of-state sales. Petitioner harvests brine shrimp from local salt pools; the harvesting process is somewhat complicated. After harvest, petitioner maintains the live brine shrimp in a saline solution until it is time to package them for shipping. The packaging process involves placing the live brine shrimp into bags of saline solution at approximately 5:00 a.m.; the bags are then placed in cardboard boxes. Frozen Zeropacs are placed into the cardboard boxes if the customer has ordered them. The boxes are then delivered to the airport and placed on a plane by 8:00 a.m. Customers pick up the boxes upon delivery. To maintain adequate oxygen, it is necessary that the live brine shrimp arrive at their destinations and be placed in new water within 24 hours of shipment. Zeropacs are a brand name for a refrigerant gel pack. Zeropacs are frozen prior to use and stay cold for two to three hours. They may be refrozen and reused. Petitioner purchased Zeropacs under resale certificates. The Zeropacs are sold by petitioner at about 66 cents each and are listed as a separate item along with the prices of live brine shrimp; petitioner uses its standard markup to determine the selling price of Zeropacs. It is not necessary that frozen Zeropacs be used in the shipping process. Approximately 50% of petitioner's customers purchase Zeropacs when they purchase live brine shrimp. The 50% breakdown does not vary with distance, but rather upon the personal preference of the customer. Petitioner presented invoices to show that a New York customer did not order Zeropacs with his purchase of live brine shrimp and that a Maryland customer did purchase Zeropacs. (Shipping time to Maryland and New York is about the same.) It is noted that the cold capacity of the Zeropac deteriorates within three hours; thus, the Zeropacs are most effective from 5:00 a.m. to 8:00 a.m. while the boxes await plane loading in San Francisco, a city which is usually chilly during those hours. Analysis and Conclusions Petitioner purchased Zeropacs under resale certificate pursuant to Revenue and Taxation Code section 6091. Revenue and Taxation Code section 6244(a) provides: If a purchaser who gives a resale certificate or purchases property for the purpose of reselling it makes any storage or use of the property other than retention, demonstration, or display while holding it for sale in the regular course of business, the storage or use is taxable as of the time the property is first so stored or used. At issue is whether or not petitioner made use of the Zeropacs prior to sale.

[S]
S- -- XX-XXXXXX-010

-3-

November 30, 1990
400.0230

The court in People v. Monterey County Ice and Development Company (1938) 29 Cal.App.2d 421, addressed a similar issue when it found that ice sold to lettuce packers was sold at retail and was not sold for resale. The court found that the ice was purchased for the primary purpose of furnishing a refrigeration service that was a necessary incident of the packers' business of selling lettuce. The sale was held to be taxable even though the cost of the ice might be reflected in the price charged for the lettuce. The court in People v. Puritan Ice Company (1944) 24 Cal.App.2d 645, has further held that sales of ice to vegetable packers were taxable retail sales even though the packers charged their customers separately for the ice. The court found that the ice was not sold for the purpose of resale but was sold to be used as a refrigeration device. Petitioner's case is distinguished on its facts in that the Zeropacs are reusable and are not necessary to the shipping process, i.e., the live brine shrimp will arrive at their destination in good condition even if Zeropacs are not used. However, these distinctions are not determinative. It is assumed by this Hearing Officer that petitioner purchases and stores its inventory of Zeropacs in an unfrozen condition and that it freezes the Zeropacs as needed. Petitioner's activity of freezing the Zeropacs constitutes a use, particularly a packing use. Packaging materials are taxable. California Code of Regulations, title 18, sections 1589 and 1630. That the cold packaging is not necessary is of less relevance than the fact that petitioner used the Zeropac in some way prior to sale. Further, petitioner's customers also use the Zeropac in some way prior to resale, i.e., they have the benefit of knowing that their goods have had the added protection of being shipped with a frozen Zeropac. This benefit may be illusory; nevertheless, it is presumably of value to the customers who make the purchase. If it was of no value, there would be no reason for petitioner to freeze the Zeropac prior to sale. If petitioner sold and shipped Zeropacs in an unfrozen state, it would have made its case for purchasing for resale only and no tax would be owed. Petitioner has purchased the Zeropacs ex-tax and has issued resale certificates at time of purchase. Petitioner's purchase of this product is found herein not to be a purchase for resale; thus, petitioner owes use tax. Recommendation Redetermine without adjustment.

________
JANET SAUNDERS, Hearing Officer

November 30, 1990
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Date