I bottle and resell water in returnable bottles that I get back from customers and refill -- can I buy those bottles tax-free as packaging/manufacturing supplies?

Subject

Bottles — Returnable Water Bottles — Purchases Are Not Exempt As Sales For Resales

Plain-English summary

A water processor asked whether it could buy returnable water bottles tax-free, arguing the bottles should be exempt as packaging material used in manufacturing -- the same way returnable boxes and pallets are exempt. The company processes spring water and municipal water (through carbon filtration, ozonation, and reverse osmosis) for resale to end users in these bottles.

The Comptroller said no -- the purchase is taxable. The ruling gives two reasons:

1. This exact issue had already been decided against the taxpayer position. The Comptroller pointed to a string of prior Comptroller's Decisions rejecting the returnable-water-bottle exemption: Nos. 21,706 and 22,546 (1988), 26,506 (1990), and 4360 (1966).

2. The packaging-supplies rule specifically carves out returnable containers. Rule 3.314(b)(1) does exempt "boxes" and "pallets" as packaging supplies for manufacturers, but (b)(3) of the same rule says packaging supplies "do not include returnable containers." Subsection (a) defines a "returnable container" as "a container of a kind customarily returned for reuse by the buyer of the contents" (the rule gives oxygen cylinders as an example). Because returnable water bottles are customarily returned by the buyer for reuse, they fall squarely within that definition -- and are therefore taxable when purchased by the water company. The letter also cites East Texas Oxygen Co. v. State, 681 S.W.2d 741 (Tex. App.—Austin, 1984, no writ), as supporting authority.

The letter notes this opinion is based on the facts presented, and that other facts, though similar, may produce a different result.

What this means for you

Water bottlers and other beverage processors using returnable containers

You cannot buy returnable water bottles tax-free under the manufacturer's packaging-supplies exemption. Because the bottles are customarily returned by customers for reuse, they are "returnable containers" excluded from that exemption under Rule 3.314(b)(3) -- tax is due on the purchase.

Businesses comparing returnable vs. non-returnable packaging

The distinction that matters is whether the container is customarily returned for reuse by the buyer of the contents. Single-use boxes and pallets can qualify for the packaging exemption; containers designed to be returned and reused (like refillable water bottles or oxygen cylinders) cannot.

Anyone relying on this letter

This ruling is based on the specific facts the taxpayer described (spring and municipal water processed and resold in returnable bottles). The letter itself cautions that other, similar-seeming facts could lead to a different result.

Common questions

Q: Are returnable water bottles exempt as manufacturing packaging supplies?
A: No. The Comptroller ruled they are taxable when purchased by the water company.

Q: Why doesn't the packaging-supplies exemption for boxes and pallets also cover returnable bottles?
A: Rule 3.314(b)(3) expressly excludes "returnable containers" from the packaging-supplies exemption, and Rule 3.314(a) defines a returnable container as one customarily returned for reuse by the buyer of the contents -- which describes returnable water bottles.

Q: Was this a new or first-time issue for the Comptroller?
A: No. The letter notes the same issue had already been considered and rejected in Comptroller's Decisions No. 21,706 and 22,546 (1988), No. 26,506 (1990), and No. 4360 (1966).

Q: Does this ruling apply no matter what the specific facts are?
A: The letter states its opinion is based on the facts presented, and that other facts, though similar, may provide a different result.

Citations and references

Statutes and rules:

• 34 Tex. Admin. Code Rule 3.314(b)(1) (boxes and pallets exempted as packaging supplies for manufacturers)
• 34 Tex. Admin. Code Rule 3.314(b)(3) (packaging supplies exemption does not include returnable containers)
• 34 Tex. Admin. Code Rule 3.314(a) (definition of returnable container)

Case law:

• East Texas Oxygen Co. v. State, 681 S.W.2d 741 (Tex. App.—Austin, 1984, no writ)

Prior Comptroller's Decisions cited:

• Nos. 21,706 and 22,546 (1988)
• No. 26,506 (1990)
• No. 4360 (1966)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9612985L

Original ruling text

December 2, 1996

Dear **:

This is in response to your request for a ruling on the taxability of
returnable bottles used to contain water for final distribution to the
end user.

Your client processes water for resale. The company
obtains spring water from natural springs. The water is carbon-filtered and
ozonated to remove chlorine that was added in the tanker truck prior to
delivery to your client. Presently, the company uses water from individual
cities municipal water system for its drinking and purified water. Drinking
and purified water are process through carbon filtration and reverse osmosis
equipment at your client's facilities. You feel that the returnable bottles
should be exempted as packaging material used in the manufacturing process, as
are returnable boxes and pallets.

Response: The issue of returnable water bottles has
been considered and rejected previously in Comptroller's Decisions No. 21,706
and 22,546 (1988); 26,506 (1990) and 4360 (1966).

Additionally, subsection (b)(1) of Section 3.314 -
Wrapping, Packing, Packaging Supplies, Containers, Labels, Tags, Export
Packers, and Stevedoring Materials and Supplies, specifically lists "boxes" and
"pallets" as exempted containers and packaging supplies when purchased by a
manufacturer. Subsection (b)(3) of this section states that packaging supplies
"... do not include returnable containers." Returnable containers are defined
in this subsection (a) of this section as "a container of a kind customarily
returned for reuse by the buyer of the contents." It gives as an example
oxygen cylinders. Returnable water bottles are considered containers that are
customarily returned for reuse by the buyer and are therefore taxable when
purchased by your client. See also East Texas Oxygen Co. v. State, 681 S.W.2nd
741 (Tex. App. -Austin, 1984, no writ).

This opinion is based on the facts presented. Other facts though similar may
provide a different result.

You may call me toll-free at 1-800-531-5441, extension 3-4502. The direct line
is 512/463-4502. You may also write to Tax Policy Division, Comptroller of
Public Accounts. My Internet address is: [email protected].

Sincerely,

Gilbert Zamora
Tax Policy Division