Can a brewery buy kegs and pallets tax-free for resale, even when customers outside its normal delivery territory keep them instead of returning them because return shipping costs too much?

Subject

, is whether or not its purchase of kegs and pallets which are shipped outside its normal territory are subject to sales tax.

What this means for you

Matt Brewing Co. found that when it shipped kegs and pallets to distributors outside its normal delivery region, the distributors often didn't bother returning them because return shipping cost more than they were worth. In response, the brewery raised its deposit price on pallets (in 1990) to its actual cost, and on out-of-region kegs (in 1994) to full replacement cost.

New York exempts cartons, containers, and packaging/wrapping materials that a vendor uses to package goods for sale and that are "actually transferred" to the purchaser -- meaning physically handed over for the purchaser to do whatever they want with, whether that's returning it for a deposit refund or keeping/disposing of it. Kegs and pallets are both specifically listed as qualifying packaging materials in the regulations. Because Matt Brewing's kegs and pallets are genuinely transferred to the customer (who may keep them if return shipping isn't worth it) and the deposit reflects real cost or replacement value, the Department found this is still an exempt sale of packaging materials -- comparable to how an ordinary returnable soda bottle stays exempt whether or not the customer ever brings it back.

Q&A

Q: We sell kegs/pallets/containers with a deposit, and some customers never return them -- does that create a tax problem?
A: Not under this opinion, as long as the item is genuinely "actually transferred" to the customer for whatever disposition they choose -- the exemption doesn't depend on the item coming back.

Q: Does raising a deposit to reflect the item's true cost or replacement value affect its tax-exempt status?
A: No -- this opinion confirms a deposit priced at cost (or, for a different item, at replacement cost) is still consistent with the packaging-materials exemption; the exemption turns on actual transfer to the customer, not the deposit amount.

Q: What packaging materials are covered by this exemption besides kegs and pallets?
A: The regulation's non-exhaustive list (20 NYCRR § 528.20(b)(1)) also includes bags, barrels, bottles, boxes, cans, cartons, crates, drums, and similar containers/wrapping materials transferred with the product to the purchaser.

Citations

• Tax Law § 1115(a)(19) -- exempts cartons, containers, and packaging/wrapping materials used by a vendor to package goods for sale and actually transferred to the purchaser.
• 20 NYCRR § 528.20 -- implements the packaging-materials exemption, defining "actually transferred" and listing kegs and pallets among qualifying materials, with the returnable-soda-bottle example.
• Clinton's Ditch Co-op, TSB-A-90(38)S -- prior opinion applying the packaging-materials exemption, cited as precedent.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a94_52s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (52)S
Sales Tax
December 20, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S940720A

On July 20, 1994, a Petition for Advisory Opinion was received from Matt Brewing Co., Inc.,
811 Edward Street, Utica, New York.
The issue raised by Petitioner, Matt Brewing Co., Inc., is whether or not its purchase of kegs
and pallets which are shipped outside its normal territory are subject to sales tax.
Petitioner's shipments to distributors outside its normal region resulted in pallets and kegs
not being returned because the cost to return them was more than a distributer was willing to pay.
Consequently, in 1990 Petitioner raised the deposit price of pallets to its cost and in 1994 raised the
deposit on kegs going outside its region to replacement cost.
Section 1115(a)(19) of the Tax Law provides that:
(a) Receipts from the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five and the compensating use tax
imposed under section eleven hundred ten:
(19) Cartons, 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.
Section 528.20 of the Sales and Use Tax Regulations provides in part:
Cartons, containers, and wrapping and packaging materials and supplies. [Tax Law
§1115(a)(19)] (a) Exemption.
(1) The sale of cartons, 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, is exempt from sales and use tax. . . .
(b) Definitions. (1) Packaging material includes, but is not limited to: bags,
barrels, baskets, binding, bottles, boxes, cans, carboys, cartons, cellophane, coating
and preservative materials, cores, crates, cylinders, drums, excelsior, glue, gummed
labels, gummed tape, kegs, lumber used for blocking, pails, pallets, reels, sacks,
spools, staples, strapping, string, tape, twine, wax paper and wrapping paper actually
transferred with the product to the purchaser.

-2­
TSB-A-94 (52)S
Sales Tax
December 20, 1994

(2) The term vendor in this section refers to any person who sells tangible
personal property whether manufacturer, wholesaler, retailer, processor or assembler.
(3) The term purchaser in this section refers to any person purchasing tangible
personal property from a vendor, whether or not he is the ultimate consumer.
(4) Actually transferred means that the packaging material is physically
transferred to the purchaser, for whatever disposition the purchaser wishes.
Example 1:

A returnable soda bottle may be returned for a refund of deposit or
disposed of otherwise. Such a bottle is actually transferred to the
purchaser and may be purchased without payment of tax. . . .

Petitioner's transfer of the kegs and pallets, at a price which reflects their cost, to customers
outside its region constitute exempt sales of containers and packaging materials in accordance with
the meaning and intent of section 1115(a) (19) of the Tax Law and Sections 528.20(a)(1) and (b) of
the Sales and Use Tax Regulations since they were actually transferred to the customers for whatever
disposition the customer wishes. (See: Clinton's Ditch Co-op TSB-A-90(38)S)
Accordingly, Petitioner may purchase for resale those kegs and pallets which are actually
transferred to its customers for whatever disposition the customer wishes.

DATED: December 20, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.