Are a town's 'pay-as-you-throw' trash-bag fees a taxable sale of bags or a nontaxable intangible right to dispose of trash?

Plain-English summary

A Connecticut town adopted a "pay-as-you-throw" solid-waste program. Residents' trash is collected only if it's in a specially colored and marked bag the town makes available — and residents must use the special bag even if they bring trash straight to the regional disposal facility. The town sells the bags at town hall or through retail stores acting as its agents, at a price much higher than plain trash bags — set to fully cover the town's cost of disposing residents' trash at the facility under its contract with a regional resources recovery authority. The special bags also let the authority measure how much waste comes from the town and bill towns pro rata. The question: is charging residents for those bags a taxable sale of tangible personal property (the bags), or is it really payment for an intangible right?

DRS: it's an intangible right — not taxable to residents. Connecticut taxes sales of tangible personal property, not intangible property (Conn. Gen. Stat. § 12-407(2)(a)). Under the "true object" test (the intention of the parties controls, Dine Out Tonight Club v. DRS), the residents' real objective in paying the fee is the intangible right to dispose of their trash at the facility under the town's contract. The special bag is merely an indicium of that right and an incidental aid to exercising it — just as, in Dine Out Tonight, a dining club's membership card was only a token of the intangible right to receive meals. The tip-off: if residents just wanted a bag to hold garbage, they could buy plain bags for less. The marked bags function like landfill entry stickers — you're buying access, not the sticker.

What about the town's own purchase of the bags? DRS noted the town "uses" the bags as an incidental part of its access scheme, so the town's purchase of them would otherwise be taxable. But it isn't, because Conn. Gen. Stat. § 12-412(1) exempts purchases by political subdivisions of the State of Connecticut. Result: no tax on the residents' fee (intangible right) and no tax on the town's purchase (political-subdivision exemption).

What this means for you

"Pay-as-you-throw" fees aren't a taxable sale of bags

When a municipality charges for special trash bags whose real purpose is to grant access to disposal, Connecticut treats the payment as buying an intangible right, not the bag. The give-away is pricing set to cover disposal costs (far above the value of the bag itself) and a rule that the bag is required to use the service.

The "true object" test looks past the physical item

The same reasoning that made a dining-club card, a landfill sticker, or these trash bags incidental applies broadly: when the item handed over is just a token of a larger intangible right, tax follows the right, not the token. Ask what the customer is really paying for.

Municipalities buy their supplies tax-free

Even though the town's purchase of the bags would otherwise be taxable, the political-subdivision exemption (§ 12-412(1)) covers it. Local governments running these programs generally don't owe sales or use tax on the bags they buy to run them.

Common questions

Q: Does a resident owe sales tax on a town's special trash bag?
A: No, under this ruling. The fee buys the intangible right to dispose of trash at the facility; the bag is only an incidental token of that right, so it isn't a taxable sale of tangible personal property.

Q: Why does the high price of the bag matter?
A: Because it shows the true object. The fee is calculated to cover the town's disposal costs, not the value of a bag — residents could buy plain bags for far less if a bag were all they wanted.

Q: Does the town pay use tax on the bags it buys?
A: No. Although the purchase would otherwise be taxable, Conn. Gen. Stat. § 12-412(1) exempts purchases by political subdivisions of Connecticut.

Q: Would a private hauler get the same treatment?
A: The intangible-right analysis could apply to a similar access-based fee, but the political-subdivision purchase exemption is specific to government buyers. A private business should confirm its own facts and the current law.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407(2)(a) (tax on tangible personal property; intangibles not taxed); § 12-412(1) (political-subdivision purchase exemption)

Case law (as cited by the ruling):

• Dine Out Tonight Club v. Department of Revenue Services, 210 Conn. 567, 572, 556 A.2d 580 (1989); White Oak Corp. v. Department of Revenue Services, 198 Conn. 413, 503 A.2d 582 (1986)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 92-13

Original ruling text

Ruling 92-13, Sales and Use Taxes / Intangible Property / Refuse Removal

Ruling 92-13

Sales and Use Taxes Intangible Property Refuse Removal

FACTS:

A Connecticut municipality (hereinafter "the Town") has entered into a contract with a regional resources recovery authority (hereinafter "the Authority") for the disposal of solid waste that is generated by Town homeowners at a regional resources recovery facility operated by the Authority (hereinafter "the Facility"). The Town has enacted a "pay-as-you-throw" ordinance under which the trash of its resident homeowners will only be collected if it is placed in a specially colored and marked disposal bag made available by the Town. Such a bag must be used even if a resident homeowner brings trash to the Facility directly. The use of specially colored and marked disposal bags enables the Authority to determine how much of the solid waste being disposed of at the Facility is generated by Town residents and enables the Authority to charge towns on a pro rata basis for their share of the costs of operating the Facility. The fee charged upon distribution of the bags is substantially more than a resident would pay to purchase "plain" bags at a retail store, because it is calculated to fully cover the Town's costs under its contract with the Authority for the disposal of trash of Town homeowners at the Facility. Town homeowners "purchase" the bags at the Town Hall or at local retail stores which act as agents for the Town in distributing the bags and in collecting the fee charged upon the distribution of the bags.

ISSUE:

Whether the distribution of specially colored and marked trash bags for a fee to Town residents under an ordinance requiring the use of such trash bags, where the fee is intended to fully cover the Town's contractual costs of disposal of the trash of Town residents at the Facility, is a sale of tangible personal property or is, instead, an indicium of an intangible right and an incidental aid to its exercise.

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(a) imposes sales and use taxes upon the sale of tangible personal property within this state. No tax is imposed upon the sale of intangible property.

A determination of whether the charges for the trash bags are subject to sales and use taxes depends upon whether, and to what extent, the true object of the residents in "purchasing" the bags is to acquire the disposal bags themselves or to purchase the intangible right to dispose of their trash at the Facility under the Town's contract with the Authority. "The determinant is the intention of the parties." Dine Out Tonight Club v. Department of Revenue Services , 210 Conn. 567, 572, 556 A.2d 580 (1989). The analysis for determining the true object of the Town's residents in "purchasing" the special disposal bags is similar to the analysis applied by the court in Dine Out Tonight, supra, to a dining club's membership cards:

Manifestly, the sine qua non of the transaction between the club and its members is the intangible right to receive free meals and access to the knowledge of an expanding list of restaurants that provide them. The membership card and directory are merely indicia of that intangible right and incidental aids to its exercise. [Citations omitted.]

Id. , at 572.

The sine qua non, or true object, of Town homeowners in paying the distribution fees for the special disposal bags is the intangible right to dispose of their trash at the Facility pursuant to the Town's contract with the Authority. If the residents were merely concerned with purchasing trash bags to hold their garbage, they could purchase "plain" bags at a lower price. Instead, the specially marked and colored disposal bags are intended to indicate to the trash collectors that the homeowner has purchased the right of access to the Facility in advance. The bags are also a means for the Town and the Facility to keep track of the amount of waste the Town delivers to the Facility. The use of the trash bags in the "pay-as-you-throw" scheme is analogous to the use of stickers granting entry to landfills. There, as here, an individual does not purchase a mere item of tangible property, but the right to dispose of trash at a landfill, to which right the transfer of the sticker is incidental.

Furthermore, an analysis similar to that used by the court in White Oak Corporation v. Department of Revenue Services , 198 Conn. 413, 503 A.2d 582 (1986), compels the conclusion that the Town "uses" the bags as an incidental part of its scheme to provide access to the Facility, given the intent of the Town and its residents and the incidental nature of the disposal bags themselves to the "pay-as-you-throw" scheme. Therefore, sales and use taxes would be due on the Town's purchases of the bags, but for the exemption provided in Conn. Gen. Stat. §12-412(1) for purchases by political subdivisions of the State of Connecticut.

RULING:

No sales and use taxes are due on the Town's charges to its resident homeowners for the special disposal bags, because the true object of the transaction is the acquisition of an intangible right of access to the Facility, not the purchase of trash bags. Although the purchase of the bags by the Town in connection with its scheme to provide access to the Facility would otherwise be taxable, the purchase by the Town of the disposal bags is exempted under Conn. Gen. Stat. §12-412(1) from sales and use taxes.

LEGAL DIVISION

July 21, 1992