If I rent reusable shipping containers to farmers who return them after use, do I have to charge sales tax on the rental, the delivery charges, and the deposit?

Plain-English summary

A company rents reusable containers to farmers, who use them to ship produce to retail food-store customers and then return the empty containers for re-rental. The company asked whether these rentals qualified for New York's sales tax exemption for packaging materials that a seller uses to package goods for sale. The Department said no — the whole arrangement is taxable.

New York exempts a container from sales tax under Tax Law §1115(a)(19) when it's used to package property for sale and is actually transferred to the purchaser — meaning physically handed over for the purchaser to keep and do whatever it wants with. Here, the containers had to come back: farmers were contractually obligated to return them to the rental company, whether full base-fee refunds (within 30 days) or partial credits (31-60 days) applied. Because the containers never really left the rental company's ownership cycle, they were never "actually transferred," so the exemption didn't apply.

Since the containers were rented rather than sold outright, the whole arrangement is simply a taxable rental of tangible personal property. That pulled in everything billed alongside the base rental fee: pallet charges and delivery/fuel surcharges are part of the taxable receipt because expenses a vendor incurs in making a sale aren't deductible from what's taxed, and shipping/delivery charges are specifically included in "receipt." The refundable deposit is different — a genuine deposit isn't taxed when it's returned, but any deposit the company keeps (because a container isn't returned) becomes a taxable receipt at that point. On the other side, since the company is renting (not consuming) the containers itself, its own purchases of the containers qualify for the resale exclusion, so it doesn't pay tax buying them in the first place.

What this means for you

Rental and leasing companies (not just food packaging)

A packaging exemption keyed to "actual transfer" requires the item to truly leave your hands for good. If your customer has to give the item back — even eventually, even with a partial refund system — you likely don't qualify for that exemption, and the transaction is instead a taxable rental. Ancillary charges you bill alongside the rental (delivery, pallets, fuel surcharges) ride along as part of the taxable receipt.

Farmers, growers, and produce shippers

If you rent (rather than buy) shipping containers, expect sales tax on the rental fee and related delivery charges, even though the container itself is used to move your product to a customer. The exemption for packaging that becomes the buyer's property doesn't cover a "borrow it and send it back" system.

Accountants and tax professionals

Track deposits carefully: a refundable deposit itself isn't a taxable receipt under 20 NYCRR §526.5(j), but the moment it's forfeited (container not returned), it converts into a taxable receipt. Meanwhile, the rental company's own purchases of the containers stay exempt under the resale exclusion (Tax Law §1101(b)(4)) since a lease counts as a "sale" for these purposes — so tax is collected once, from the end renter, not twice.

Common questions

Q: We rent (not sell) packaging to a business that ships product to its own customers — is that rental exempt as packaging material?
A: Not unless the packaging is actually transferred to your customer to keep. If your customer must return it to you, the rental is fully taxable, regardless of what it's ultimately used for.

Q: Are delivery and pallet charges we bill alongside the rental also taxed?
A: Yes, when the underlying rental is taxable. Shipping and delivery charges are part of the taxable receipt and can't be carved out just because they're separately listed.

Q: What about the deposit we charge in case a container isn't returned?
A: A refundable deposit isn't taxed while it remains refundable. If you end up keeping it because the container was never returned, that kept amount becomes a taxable receipt at that point.

Q: Do we owe tax when we buy the containers ourselves?
A: No, as long as you buy them exclusively to rent or re-rent them — that purchase qualifies for the resale exclusion.

Q: Does this ruling apply to any business renting reusable containers?
A: Not automatically. An advisory opinion binds the Department only as to the taxpayer who requested it and only on the facts described, though the "actually transferred" test it applies is a matter of general Department policy.

Citations and references

Statutes and regulations:

• Tax Law §1115(a)(19) (packaging materials exemption)
• Tax Law §1105(a) (sales tax on retail sales)
• Tax Law §1101(b)(3) (receipt; delivery charges)
• Tax Law §1101(b)(4) (resale exclusion)
• Tax Law §1101(b)(5) (lease as a sale)
• Tax Law §1110(a), (b) (compensating use tax)
• 20 NYCRR §528.20(b)(4), (c)(1) ("actually transferred" test)
• 20 NYCRR §526.5(e) (non-deductibility of vendor expenses)
• 20 NYCRR §526.5(j) (deposits)
• 20 NYCRR §526.7(a)(2) (lease as a sale)

Cited case:

• Matter of Upstate Farms Coops., Tax Appeals Tribunal, May 2, 2002

Source

• Landing page: NY Sales Tax Advisory Opinions, 2009
• Original opinion: TSB-A-09(34)S

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(34)S
Sales Tax
August 19, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S081124A

On November 24, 2008 the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner asks whether its rental fees and related charges for
renting reusable food containers to farmers are exempt from sales tax under Tax Law, §1115(a)(19) if the
farmers use the containers to ship produce to the farmers’ customers. Petitioner’s receipts from the rental of
the containers to farmers, and related charges, are not exempt under Tax Law, §1115(a)(19) because the
containers are not actually transferred to the farmers’ customers.
Facts
Petitioner rents reusable containers to farmers. Farmers use the containers to ship produce to
customers that operate retail food stores. The containers may be left at retail stores for use as display cases
or just for storage of the produce. After the container is emptied, it is returned to Petitioner for re-rental.
The containers are shipped to farmers on pallets. The rental agreement with farmers provides that the farmer
will be billed a base lease fee, a pallet charge (a charge for each pallet used to ship containers to the farmer),
and a fuel surcharge (a delivery charge). Petitioner also bills a refundable deposit fee of $4.85 per container.
The base rental fee is refunded in full if an unused container is returned to Petitioner within 30 days of its
receipt by the farmer. A credit of 50% of the rental fee is granted if an unused container is returned to
Petitioner within 31 to 60 days of its receipt. Petitioner keeps the deposit fee if a container is not returned.
Analysis
Petitioner is in the business of leasing containers. A container is exempt from State and local sales
and use tax under Tax Law §1115(a)(19) if used by a vendor to package tangible personal property for sale
and the container is actually transferred by the vendor to the purchaser. Actually transferred means that the
packaging material is physically transferred to the purchaser for whatever disposition the purchaser wants.
20 NYCRR 528.20(b)(4). Because Petitioner’s customers (the farmers) are obligated to return the containers
in question to Petitioner, the containers are not actually transferred to the customers. 20 NYCRR 528.20
(c)(1). Thus, the rented containers do not qualify for the §1115(a)(19) sales and use tax exemption. See
Matter of Upstate Farms Coops., Tax Appeals Tribunal, May 2, 2002.
Petitioner’s rentals of the containers to farmers located in New York State constitute retail sales of
tangible personal property for purposes of State and local sales tax. Therefore, sales tax is due on the
receipts for rentals under Tax Law §1105(a) unless otherwise exempt. Expenses incurred by a vendor in
making a sale, regardless of their status and regardless of whether they are billed to a customer, are not
deductible from receipts. 20 NYCRR 526.5(e). Shipping and delivery charges by a vendor to a customer for
the cost of transporting tangible personal property to the customer are part of the vendor’s receipts subject to
sales tax when the sale of the property is subject to sales tax. Tax Law §1101(b)(3). Accordingly,
Petitioner’s pallet and delivery charges are subject to sales tax because they are components of the rental
receipts. If Petitioner delivers containers to a farmer at a point outside New York and the farmer is a resident
of this State and brings the container into this State for use here, then the farmer’s use of the containers in
New York would be subject to state and local use tax, unless otherwise exempt. The consideration subject to

-2-

TSB-A-09(34)S
Sales Tax
August 19, 2009

use tax includes any charge by Petitioner to deliver the containers to the farmer. Tax Law §1110(a)(A) and
(b). Thus, Petitioner’s pallet and delivery charges are also subject to State and local use tax.
A charge made by a vendor to a customer that constitutes a deposit on tangible personal property
rented or leased is not deemed to be a taxable receipt. 20 NYCRR 526.5(j). However, any deposit not
refunded by the vendor constitutes a taxable receipt. Therefore, Petitioner will have to collect sales tax on all
deposit fees that it keeps.
The purchase of tangible personal property that is to be resold as such qualifies for the resale
exclusion and is not subject to sales or use tax. Tax Law §1101(b)(4). A lease constitutes a sale for purposes
of sales tax. See Tax Law §1101(b)(5) and 20 NYCRR 526.7(a)(2). Since Petitioner leases containers to its
customers, its purchases of containers will qualify for the resale exclusion and will not be subject to sales and
use tax, provided the containers are purchased exclusively for resale or re-rental.

DATED: August 19, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the person
or entity fully and accurately describes all relevant facts. An Advisory
Opinion is based on the law, regulations, and Department policies in effect as
of the date the Opinion is issued or for the specific time period at issue in the
Opinion.