Are charges to rent reusable shipping pallets, plus related fees, subject to NY sales tax?
Plain-English summary
The petitioner runs a reusable pallet pool: it leases durable pallets to manufacturers, who ship goods on them to distributors, after which the pallets are recovered and returned to the pool. The petitioner asked whether the rental charges and various fees are taxable. The answer is mostly yes.
Core holding -- the rentals are taxable, and three exemptions don't apply:
- Lease = taxable sale. A lease of tangible personal property is a "sale" (Tax Law 1101(b)(5)), so the pallet rentals are taxable retail sales under 1105(a).
- No resale exclusion (1101(b)(4)(i)(A)). The manufacturers aren't buying the pallets for resale -- the lessor never gives up title, and the pallets must come back to the pool. (The lessor's own purchase of the pallets is exempt for resale, because it leases them out.)
- No packaging-materials exemption (1115(a)(19)). That exemption requires the materials be "actually transferred" to the purchaser for whatever use it wishes. These pallets are returned and title is retained, so they aren't actually transferred (Upstate Farms Cooperatives; Genesee Brewing; TSB-A-09(34)S).
- No farming exemption (1115(a)(6)(a)). Production for sale by farming ends when the product reaches the stage where it's processed or moved to a distributor (20 NYCRR 528.7(c)(1)(ii)). Pallets used to haul finished crops to a processor or wholesaler are used after production. (But a farmer who uses the pallets predominantly -- over 50% -- in production, e.g., moving produce from the fields to on-farm storage, could give the lessor a Farmer's Exemption Certificate (ST-125).)
The add-on fees:
- Fuel surcharge -- taxable; a vendor's expense of making the sale isn't deductible and is part of the taxable receipt (1101(b)(3)).
- Daily rental fee and transfer fee -- taxable parts of the rental receipt (unless to a qualifying farmer).
- Lost-equipment fee -- taxable; it's consideration for the lost pallet, not a refundable deposit (20 NYCRR 526.5(j)).
- Collection fee charged to a distributor (who isn't a party to the lease) for hauling pallets back to the pool -- exempt if it's separate and apart from the manufacturer's leasing charge.
What this means for you
Pallet-pool and equipment-rental businesses
Renting reusable equipment that you keep title to and get back is a taxable lease, full stop -- the resale and packaging exemptions don't fit because nothing is transferred to the customer for keeps. Bundle surcharges, transfer fees, and lost-item fees into the rental and they're taxable too. Your own purchase of the rental fleet is exempt for resale. A genuine third-party transport fee (to someone outside the lease) can be exempt if billed separately.
Farmers renting pallets
Pallets used to move your finished crop to a processor or wholesaler are taxable. Pallets used predominantly in production (e.g., field to on-farm storage) can be exempt -- give the lessor a completed ST-125.
Common questions
Q: Aren't pallets exempt packaging material?
A: Not these. The packaging exemption requires the material to be actually transferred to the buyer. Reusable pallets you keep title to and take back aren't transferred, so they're taxable.
Q: Is the fuel surcharge or transfer fee separately exempt?
A: No. They're parts of the taxable rental receipt. A vendor's costs of making the sale aren't deductible.
Q: Is the lost-pallet fee taxable?
A: Yes. A non-refunded deposit or a fee charged because a pallet is lost is taxable consideration, not an exempt deposit.
Citations and references
- Tax Law section 1105(a) (sales tax on tangible personal property; lease is a sale)
- Tax Law section 1101(b)(4)(i)(A) (resale exclusion)
- Tax Law section 1101(b)(5) (lease or rental is a sale)
- Tax Law section 1115(a)(19) (exemption for packaging materials actually transferred to the purchaser)
- Tax Law section 1115(a)(6)(a) (exemption for property used predominantly in production by farming)
- Tax Law section 1101(b)(3) (receipts include vendor's expenses such as fuel surcharges)
- 20 NYCRR section 526.5(j) (deposits and non-refunded amounts)
- 20 NYCRR section 528.20 (packaging materials)
- 20 NYCRR section 528.7 (production by farming)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2010.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a10_51s.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-10(51)S
Sales Tax
October 18, 2010
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. S080811A
Petitioner requests an Advisory Opinion concerning various charges related to the rental of its
reusable pallets and whether or not these charges are eligible for certain exemptions from the sales and use
tax. In particular, Petitioner asks about the resale exclusion under §1101(B)(4)(i)(A) of the Tax Law and the
exemption afforded certain packaging materials under §1115(a)(19) of the Tax Law. Petitioner also asks if
pallets rented to farmers for the purpose of transporting their finished crops to a manufacturing or processing
facility would be exempt. We conclude that Petitioner’s charges for the use of the pallets are not eligible for
either the resale exclusion or the exemption afforded certain packaging material under the Tax Law. Because
the farming process is completed by the time Petitioner’s pallets are leased, the farming exemption is also
inapplicable. However, Petitioner’s occasional charges to a third party, who is not a part of the leasing
contract with the manufacturer, for the transportation of the pallets back to one of its pooling facilities may
be exempt from the sales and use tax in certain circumstances.
Facts
Petitioner is in the business of leasing reusable pallets to manufacturers, who use the pallets to
package and ship their products to distributors or wholesalers. The pallets that Petitioner leases to the
manufacturers are similar to pallets that are used once, but Petitioner’s pallets are built to be more durable
and are intended to be used as part of Petitioner’s reusable Pallet pool. While the pallets may be combined
with manufactured goods as part of the delivery process, they are at all times the property of Petitioner.
Title to the pallets is never transferred to any other entity.
After the distributor receives the goods and the pallets used to deliver them, the manufacturer
relinquishes all responsibility for and possession of the pallet. Arrangements are made between Petitioner’s
pooling manager and the distributor to recover the pallet. Regardless of the amount of time a distributor
holds the pallet on its premises, the Petitioner’s daily rental charge to the manufacturer ceases upon transfer
of possession of the pallet from the manufacturer to the distributor. Although in limited circumstances
Petitioner may charge the distributor for the transportation costs of returning the pallets to the pooling
manager, Petitioner does not charge the distributor for any daily rental charges or other fees, except to the
extent that a pallet is lost or damaged. In all instances, the distributor is barred from returning the pallet to
anyone other than the pooling manager.
Petitioner maintains an accessible supply of pallets to meet the requirements of its various customers
(the various manufacturers). Petitioner delivers the pallets to the manufacturer, and it receives payment both
for the initial issue and the daily rental of the pallets. After receiving goods loaded on pallets from the
manufacturer, the distributor stores the loaded pallets at its facility pending unloading of the products. The
distributor is required to return the empty pallets to Petitioner. The distributor will never send back to the
manufacturer a pallet that previously was used for packaging the manufacturer's products. When the pallets
are returned to Petitioner, a portion of the pallets must be repaired before reuse due to the wear and tear that
occurred during their use.
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October 18, 2010
Petitioner has a billing system that assesses many charges in relation to the leasing and use of its
pallets. These charges include the following:
1. The manufacturer is initially charged an "issue fee" when a pallet is sent from Petitioner's pooling
manager to a manufacturer. This fee is a one-time flat fee charged to manufacturers on a per pallet basis.
2. The manufacturer may be assessed a fuel surcharge depending on the terms of the contract.
3. The manufacturer is charged a daily rental fee based upon the number of days that a particular
pallet remains in the manufacturer’s possession preceding shipment of its products to customers or
distributors. This rental fee ceases when the manufacturer sends its product (packaged on the pallet) to the
distributor.
4. The manufacturer is also charged a one-time flat fee referred to as a "transfer fee" when a
manufacturer delivers its product (on the pallet) to the distributor.
5. To the extent that a pallet received by either a manufacturer or a distributor is lost while in its
possession, the corresponding manufacturer or distributor is charged a "lost equipment fee" to recoup
Petitioner's costs related to locating and recovering the lost pallet or purchasing a replacement pallet.
6. The distributors may be charged a collection fee for a portion of Petitioner's cost for transporting
the pallets to the pooling site for inspection, potential repair, and redistribution into the pool.
Analysis
Petitioner poses a series of questions regarding the fees it charges for the lease of its pallets, and
whether or not each is subject to tax.
1. Do Petitioner’s charges related to the lease of pallets qualify as purchases [by its own customers] made for
resale under New York State Tax Law § 1101(B)(4)(i)(A)?
Answer: No. Petitioner is in the business of leasing shipping pallets. The Tax Law treats leases of tangible
personal property as “sales” of such property. Tax Law § 1101(6)(5). Accordingly, Petitioner’s rentals of
the pallets delivered to the manufacturers located in this 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 these rentals
under Tax Law §1105(a) unless otherwise exempt. The charges for leasing the pallets are not sales for resale
for the purposes of §1101(b)(4)(i)(A) of the Tax Law. That section provides in part: “(A) for resale as such
or as a physical component part of tangible personal property.”
In this instance, Petitioner’s customers are not purchasing the pallets for resale to any other party. Petitioner
never relinquishes title to the pallets, and they are ultimately required to be returned to the pooling manager
for reuse. Moreover there is no plausible argument that Petitioner’s customers ever subsequently lease or
charge any other party for the use of the pallets. Petitioner’s charges are therefore not eligible for the resale
exclusion.1 However, since Petitioner leases the pallets to its customers, Petitioner’s purchase of the pallets
1
Several bills have been considered by the Legislature to exempt receipts from the rental of this type of reusable pallet.
None of these bills were ever enacted (see A10150, sponsored by Assemblyman Colton, March 5, 2002, for an example
of such a bill).
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so used would not be subject to tax because Petitioner’s use of the pallets in its leasing business would
qualify for the resale exclusion (see §1101(b)(4) of the Tax Law and 20 NYCRR 526.7(a)(2)).
2. Do charges related to the lease of pallets used for packaging, shipment, and ultimate sale of tangible
personal property qualify for exemption as packaging material under New York State
Tax Law § 1115(a)(19)?
Answer: No. The pallets do not qualify as packaging material under Tax Law § 1115(a)(19). That section
exempts “[c]artons, containers, and wrapping and packaging materials and supplies, and components thereof
for use and consumption by a vendor in packaging or packing tangible personal property for sale, and
actually transferred by the vendor to the purchaser.” The phrase “actually transferred” means that the
packaging material is physically transferred to the purchaser for whatever disposition the purchaser wishes
(see 20 NYCRR 528.20(b)(4)). Because the pallets in question are required to be returned to Petitioner, and
because the Petitioner never relinquishes title to the pallets, they are not “actually transferred” to the
Petitioner’s customers for the purposes of the packaging material exemption (see, 20 NYCRR 528.20 (c)(1)).
Upstate Farms Cooperatives, Inc v Tax Appeals Tribunal, 290 AD2d 896, 736 NYS2d 786 (3d Dept Jan 31,
2002); Genesee Brewing Co., Inc., Tax Appeals Tribunal, DTA No. 817305, May 9, 2002; TSB-A-09(34)S).
3. Do charges related to the lease of pallets to customers qualifying as agricultural producers qualify for
exemption under New York State Tax Law § 1115(a)(6)(a)?
Answer: The answer would depend on the particular facts and circumstances. If Petitioner’s pallets are used
only to ship the finished agricultural products raised by the agricultural producers to distributors or
wholesalers for sale, that use would not be exempt. Section 1115(a)(6)(a) exempts: “[t]angible personal
property, whether or not incorporated in a building or structure, for use or consumption predominantly either
in the production for sale of tangible personal property by farming or in a commercial horse boarding
operation, or in both.” When Petitioner’s pallets are used to transport products to a distributor or wholesaler,
this is after the point at which the production process has ceased. Therefore, the lease of the pallets will not
qualify for the exemption from sales and use tax under Tax Law § 1115(a)(6) for tangible personal property
used in the production phrase of farming. Production ends when the farm product has reached a stage where
it will be processed or converted into a related product (See 20 NYCRR 528.7(c)(1)(ii)). That is the case
here when the farmers are renting the pallets for the purpose of transporting their grown produce to a
manufacturing or processing facility, or some form of distributor. However, if a farmer were to rent the
pallets for use predominantly (more than 50% of the time) in the production for sale of tangible personal
property by farming (e.g. such as transporting farm produce from the fields to a storage facility located on
the farm), (s)he could provide Petitioner with a completed form ST-125, Farmer's Exemption Certificate.
4. Do charges for the fuel surcharge fee qualify as nontaxable proceeds pursuant to an exclusion or
exemption related to Questions 1-3 above?
Answer: No. Expenses incurred by a vendor in making a sale are not deductible from receipts (see 20
NYCRR 526.5(e); TSB-A-09(34)S). Fuel surcharges by a vendor to a customer that are part of 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 (See §1101(b)(3 of the Tax Law). Accordingly,
Petitioner’s fuel surcharges associated with the rental of its pallets are subject to sales tax because they are
components of the rental receipts. However, this answer may differ if a farmer is using the pallets
predominantly in the production for sale of tangible personal property by farming (see 1(3) above).
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- Do charges for the daily rental fee qualify as nontaxable proceeds pursuant to an exclusion or exemption
related to Questions 1-3 above?
Answer: No, unless the daily rental fee is made to a farmer using the pallets predominantly in the production
for sale of tangible personal property by farming (see 1(3) above). - Do charges for the transfer fee qualify as nontaxable proceeds pursuant to an exclusion or exemption
related to Questions 1-3 above?
Answer: No, unless the transfer fee is made to a farmer that is using the pallets predominantly in the
production for sale of tangible personal property by farming (see 1(3) above). - Are lost equipment fee charges excluded from sales and use tax because there is no consideration for the
sale of tangible personal property?
Answer: No, the lost equipment fee itself constitutes consideration for the lost pallet. A charge made by a
vendor to a customer as a deposit on tangible personal property rented or leased is not deemed to be a taxable
receipt. However, any deposit not refunded or any fee charged because a pallet is lost constitutes a taxable
receipt. (see 20 NYCRR §526.5(j)). Therefore, Petitioner will have to collect sales tax on all lost equipment
fee charges it imposes. - Do charges related to the transfer fee of pallets qualify as an exempt nontaxable service under
§526.5(g)(1) of the sales and use tax regulations?
Answer: No. The transfer fee imposed by Petitioner upon manufacturers for the use of its pallets would not
be exempt pursuant to §526.5(g)(1) of the sales and use tax regulations. Because Petitioner’s leasing fee to
the manufacturer is subject to tax, its additional transfer fee charged to the manufacturer when the pallet is
used is considered to be part of the taxable receipt. See 20NYCRR §526.5(g)(1).
Based on these facts as we understand them, the collection fee Petitioner charges to the distributors for
transporting the pallets back to the pooling location would be exempt from tax, if it is separate and apart
from the leasing charge Petitioner imposes to the manufacturer for the use of its pallets.
DATED: October 18, 2010
NOTE:
/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.