Could a frozen-epoxy seller buy dry ice for resale when it used the ice to quick-freeze and ship the product?

Plain-English summary

California appeals staff concluded that the frozen-epoxy seller consumed all the dry ice it bought ex-tax. About 25 to 30 percent quick-froze the premixed resin, while the rest surrounded tubes and syringes to keep the product frozen during shipment.

The dry ice did not become a component of the resin. Its primary purpose was processing, preservation, and protection; any cushioning benefit was secondary. The statutory ice exemption cited applied only to packing and transporting food for human consumption, not the aerospace-oriented resin systems.

The hearing officer recommended redetermination without any adjustment to the redacted audited measure. The official source contains no signed audit review, redetermination, final Board decision, payment or refund outcome.

Audit, hearing, product, and disputed dry ice

The source captions the matter as a petition for redetermination of state and local sales and use tax. It says the audit covered January 1, 1982 through December 31, 1984, the Board sent a determination on August 20, 1985, and the petitioner filed a timely petition ten days later. The exact notice, petition and tax computation are absent; the dry-ice measure is redacted as $XX,XXX.

At the February 24, 1987 hearing, the petitioner's president appeared against a Board auditor. No transcript or exhibits are supplied. The source calls this the business's first Board audit and says the corporation began in the first quarter of a redacted year.

The firm sold premixed, degassed frozen epoxy resin systems custom-packaged for particular applications, mostly aerospace use. It quick-froze the product in mini tubes or polyethylene syringe-type containers ranging from 1 cc to 12 ounces to prevent a reaction between catalyst and adhesive.

The seller used 25 to 30 percent of its dry ice for quick-freezing. That ice vaporized. The balance filled a Styrofoam box around the resin tubes and syringes so they remained frozen in transit and retained the longest stated potlife after thawing. No quantities, invoices, prices, customers, routes, carriers, contracts, resale certificate, product specifications or shipping records are included.

Seller's theories, staff analysis, and recommendation

The petitioner argued that freezing transferred cold to the resin so the quick-freezing ice became a product component. It characterized the shipping ice as exempt dunnage because it also kept the brittle frozen containers from colliding and breaking. It twice invoked Tax Counsel Opinion 400.0190 for the position that resale treatment could apply where preservation and packaging were incidental to the sales activity.

The hearing officer rejected each theory. The quick-freezing ice did not become a resin component. The shipping ice primarily preserved the frozen product; cushioning was only a secondary benefit. Applying the stated primary-purpose test, staff treated both uses as consumption.

The source says section 6359.7 exempted ice used to pack and transport human-consumption food, but this petitioner expressly had nothing to do with such food. It distinguishes 400.0190 because that opinion concerned container property used by a shipper that was not the seller of the contents; here the dry ice was not a container and the petitioner sold the resin inside the container.

The source relies on three ice cases and quotes Tax Counsel Opinion 400.0380, which treated a heat-treating company as consumer of dry ice used to keep aluminum parts cold after treatment. It concludes that preserving frozen resin was likewise a necessary incident of the seller's business.

The recommendation says Redetermine without adjustment to the audited measure of tax. The Reviewed for Audit and date lines are blank, and no later action appears in the source.

Live annotation, source date, and reporter conflicts

The live 400.0266 annotation condenses the source to the two dry-ice uses and consumer conclusion. It records 4/24/87; the supporting document instead prints April 1, 1987 on pages 2 through 4 and 4-1-87 beside the hearing officer's signature. This page uses the twice-confirmed source-body date and discloses the live conflict.

The live annotation omits the redacted tax measure, audit and petition dates, hearing, dunnage and product-component theories, reliance on 400.0190, three ice cases, 400.0380 quotation, recommendation-only posture, blank review lines and absence of a final action.

The current live pages for 400.0190 and 400.0380 retain the general packaging and aluminum-cooling propositions described in the 1987 source. They do not supply this petitioner's missing transaction or final outcome.

The source prints Kaiser Steel Corporation v. State Board of Equalization as a 1972 decision at 24 Cal.App.3d 188. Citation research instead resolves that reporter to unrelated People v. Neustice and identifies the named 1979 California Supreme Court case at 24 Cal.3d 188. The source also prints Monterey County Ice & Development Co. at 29 Cal.App.2d 241; the named 1938 case is at 29 Cal.App.2d 421. Myers, Puritan Ice, and Good Humor resolve at the reporters printed. These corrections explain the defects but do not rewrite the preserved official text.

What this means for you

Sellers of temperature-sensitive nonfood products

Do not assume that refrigerant travels for resale merely because it accompanies the goods or protects them. The source focuses on whether it becomes a component and on the primary purpose for which it was bought.

Accountants and tax professionals

Separate manufacturing or processing use from shipping use, then document component incorporation, packaging function, title, customer charges, carrier facts and any claimed exemption. This historical recommendation does not establish current treatment or a final liability even for the petitioner.

Common questions

Was the quick-freezing dry ice incorporated into the epoxy?

No. The source said it vaporized and did not become a component.

Did calling the shipping ice dunnage make it exempt?

No. Its primary purpose was keeping the resin frozen; cushioning was incidental.

Did the food-shipping ice exemption apply?

No. The product was nonfood epoxy.

What tax amount was disputed?

The measure is redacted as $XX,XXX; no rate or computed tax is shown.

What happened after the recommendation?

The source does not say. Its audit-review signature and date are blank, and no redetermination, Board decision, payment or refund record is included.

What date controls this page?

April 1, 1987, the date printed throughout and signed on the Decision and Recommendation. The hearing occurred February 24. The live annotation's April 24 date conflicts with the source.

Citations and references

• California Revenue and Taxation Code section 6359.7 — source describes the food-only ice exemption and finds it inapplicable
• California Sales and Use Tax Regulation 1630(b)(1)(B) and (b)(2) — food-ice and container-material provisions discussed or distinguished
• Tax Counsel Opinion 400.0190 — petitioner invoked its packaging rule; staff researched and distinguished it
• Tax Counsel Opinion 400.0380 — aluminum heat-treatment dry-ice opinion quoted as a consumer analogy
• Kaiser Steel Corporation v. State Board of Equalization — source prints 24 Cal.App.3d 188 and 1972; independent research identifies the named case at 24 Cal.3d 188 (1979), while the printed reporter resolves to an unrelated case
• Myers v. Stevenson, 125 Cal.App.2d 399 — printed reporter resolves to the named case
• People v. Puritan Ice Co., 24 Cal.2d 645 — printed reporter resolves to the named case
• Monterey County Ice & Development Co. — source prints 29 Cal.App.2d 241; independent research identifies the named case at 29 Cal.App.2d 421
• Good Humor Co. v. State Board of Equalization, 152 Cal.App.2d 873 — printed reporter resolves to the named case
• Audit schedules and computation; August 20, 1985 determination; August 30 petition; hearing transcript and exhibits; invoices and resale certificate; contracts and customer charges; product and shipping records; audit review; redetermination; final Board action; payment and refund outcome — referenced or implicated but not included

Verbatim support

From the official April 1, 1987 Decision and Recommendation:

Petitioner purchased the dry ice to use (quick freeze) in processing the product to be sold and the dry ice did not become a component of the resin. The ice that was packed around the tubes and syringes containing the resin was primarily for the purpose of keeping the product frozen and secondarily or incidentally beneficial as dunnage.

In summary, it is concluded that petitioner is the consumer of the dry ice purchased both for processing the resin and shipping the resin, and the ice may not be purchased ex tax for resale.

Redetermine without adjustment to the audited measure of tax.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 400.0266
• Original supporting opinion: 400.0266 PDF

Original ruling text

STATE OF CALIFORNIA

400.0266

BOARD OF EQUALIZATION

In the Matter of the Petition
for Redetermination of State
and Local Sales and Use Tax;
A--- I---, INC.,

Petitioner

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DECISION AND RECOMMENDATION

No. SR -- XX-XXXXXX-010

The above-entitled matter came on regularly for hearing on Tuesday, February 24, 1987, in --- ---, California before Robert H. Anderson. Appearing for Petitioners:

Mr. -. -. M--President

Appearing for the Board:

Mr. Philip V. Nicassio
Auditor
--- --- District

Protest
Petitioner was audited for the period from 1-1-82 through 12-31-84, and a notice of determination was sent on 8-20-85. On August 30, 1985, petitioner filed a timely petitioner for redetermination, a copy of which is in the petition file. Petitioner protests the assessment for use tax on ex-tax purchases of dry ice. The measure of tax is $XX,XXX. Contentions

1. A--- I---, Inc. uses dry ice for processing or packaging for purposes of sale. The
   provisions of Regulation 1630 are not applicable where the preservation and packaging of the goods is merely incidental to the performance of the sales activity (citing Tax Counsel Opinion 400.0190, Business Taxes Law Guide).
2. The principal activity of A--- I---, Inc. involves the sale of the goods or the processing
   or the packaging of goods in individual containers for purposes of sale; then a resale certificate may be accepted to exempt the charge, notwithstanding the failure to comply with the provisions of Regulation 1630 (again citing Tax Counsel Opinion 400.0190).

A--- I---, INC.

-2-

April 1, 1987
400.0266

3. A--- I---, Inc. has nothing to do with food products for human consumption, as such;
   Regulation 1630(b)(1)(B) has nothing to do with a tax consideration in this instance. Summary Petitioner is a corporation that commenced in the first quarter of 19XX. The audit under consideration in this matter is the first by the Board of Equalization of this business. Petitioner is engaged in the sale of premixed, degassed frozen epoxy (resin systems) which is custom packaged for specific applications (mostly for aerospace use). The product must be quick frozen in mini tubes and/or polyethlene syringe-type containers ranging from 1cc to 12 ounces. Freezing is to prevent any chemical reaction between the catalyst and the adhesive material. In order to maintain the frozen condition, the product is packaged in a styrofoam box filled with dry ice. About 25 to 30 percent of the dry ice purchased is used to quick freeze the product; the ice vaporizes and is lost into the air. Because the cold is transferred to the product, petitioner believes that the dry ice becomes a component of the product and may be purchased ex-tax for resale. The remainder of the dry ice is packed around the tubes and syringes filled with the frozen resins to keep them in a frozen state during transportation to the customers. When unpacked, the product can be used directly from the tubes or syringes. The dry ice packaging method assures the longest “potlife” (usage after thawing) possible. Petitioner believes the dry ice should be deemed as exempt “dunnage” because while keeping the product in a frozen condition it prevents the frozen tubes and syringes from coming into contact with one another and resulting in fracturing or breakage which would render them useless. Petitioner makes an analogy with a flower that is frozen in liquid nitrogen; the flower is extremely brittle and breaks into thousands of pieces if dropped. The frozen tubes and syringe containers would likewise break if jostled during shipping. Another analogy is that the dry ice is like the styrofoam “popcorn” dunnage used to prevent breakage during shipping. However, the principal purpose of the dry ice is to keep the resins in a frozen condition prior to use by the customer. Analysis and Conclusions The obvious primary purpose of the use of dry ice is to freeze the product and keep it frozen until it is used by the customer. In Kaiser Steel Corporation v. State Board of Equalization (1972) 24 Cal.App.3d 188, the court held “the primary intent of the purchaser or the primary purpose of the purchase is the test for determining whether a sale is taxable as a retail sale or exempt as a sale for resale, and such test is applicable to the manufacturing industries.”

A--- I---, INC.

-3-

April 1, 1987
400.0266

Petitioner purchased the dry ice to use (quick freeze) in processing the product to be sold and the dry ice did not become a component of the resin. The ice that was packed around the tubes and syringes containing the resin was primarily for the purpose of keeping the product frozen and secondarily or incidentally beneficial as dunnage. There is a statutory exception in the form of an exemption under Section 6359.7 relating only to ice and/or dry ice and then only when it is used or employed in packing and shipping or transporting food products for human consumption. Obviously, the exemption is not applicable to petitioner’s use of dry ice. However, we point out that were it not for the statutory exemption the use of dry ice in packing and shipping or transporting food products for human consumption would be taxable and not for resale. It would be illogical and redundant for the Legislature to enact a statute exempting from taxation transactions which were not within the coverage of the pre-existing statutes which actually imposed the taxes in question. The enactment of the ice exemption would be contrary to the principle that when the Legislature states an exemption to a general rule, it indicates that without that exemption the general rule would apply (Myers v. Stevenson (1954) 125 Cal.App. 2d 399). Petitioner’s reliance on Tax Counsel Opinion 400.0190 in the Business Taxes Law Guide is misplaced. We have researched the background giving rise to annotation 400.0190 and find that the question presented was whether a person engaged in packing individual containers of goods for marketing by their resale customers are “packers, loaders and shippers” therefore subject to the separate statement of the price and title requirements of Sales and Use Tax Regulation 1630(b)(2). The tax counsel was addressing the opinion to a case involving “property used as containers or parts of containers of goods shipped”. Where property is used as containers or parts of containers of goods shipped, when the shipper is not the seller of the contents, the sale of the containers or container materials or parts to the shipper is a taxable retail sale unless the shipper expressly contracts with his customer for the sale to his customer of the container or container material, making a separate charge therefore, with title passing from the shipper to his customer before any use of the material is made, and without any understanding or trade custom that the property will be returned to the shipper for reuse. In order for the opinion to be applicable petitioner must not be the seller of the contents of the container. The facts giving rise to the opinion are in no way similar or analogous to the facts in petitioner’s case. In petitioner’s case dry ice is not a container and petitioner is the seller of the “resin systems” which are the contents of the container. Petitioner reads the opinion out of context in relying on it as authority for purchasing dry ice ex-tax for resale. Notwithstanding the specific exemption under Secton 6359.7, we conclude that the principle to be applied here is stated in the “ice cases” (People v. Puritan Ice Co. (1944) 24 Cal.2d 645; Monterey County Ice & Development Co. (1938) 29 Cal.App. 2d 241; and Good Humor Co. v.

A--- I---, INC.

-4-

April 1, 1987
400.0266

State Board of Equalization (1957) 152 Cal.App.2d 873). The Good Humor case holds “Sales of dry ice are at retail when made to a retailer who places the dry ice with ice cream products in a cardboard container and delivers the entire package to a purchaser of the ice cream products. In Monterey County Ice & Development (supra) the Court held that the sales of ice by an ice manufacturer to lettuce packers were not sales for resale by the lettuce packers even though a separate charge was made by the packers to their customers for icing the lettuce. The Court held that the real purpose for which the ice was purchased by the packers was to preserve and protect the lettuce during shipment to customers and to furnish a refrigeration service as a necessary incident to the packer’s business of selling lettuce. In petitioner’s case the real purpose for which the dry ice was purchased was to preserve (in a frozen condition) and to protect the resin systems as a necessary incident to petitioner’s business of selling resin systems. We see the facts in petitioner’s case as being on all fours with the Monterey County Ice & Development case. Finally, we cite Tax Counsel Opinion 400.0380 which provides: “A company engaged in heat-treating aluminum is the consumer of dry ice used for the purpose of keeping aluminum parts cold while shipping them to customers subsequent to treatment, it may therefore be purchased on a tax-paid basis and the charge made to customers on account of the ice need not be included in the measure of the tax declared and paid on its returns. 4/15/60.” In summary, it is concluded that petitioner is the consumer of the dry ice purchased both for processing the resin and shipping the resin, and the ice may not be purchased ex tax for resale. Recommendation Redetermine without adjustment to the audited measure of tax.

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Robert H. Anderson, Hearing Officer

4-1-87
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Date

Reviewed for Audit:
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Principal Tax Auditor

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Date