Could a fulfillment business buy shipping containers and labels tax-free when it separately billed clients for those materials?

Plain-English summary

Utah Private Letter Ruling 90-009 addressed a business that pulled products from clients' Utah inventory, wrapped and labeled them, and shipped them to the clients' customers.

The business bought and owned the containers and labels, used them in performing the service, and separately billed clients for the materials.

The Commission treated the business as the consumer of those supplies.

It therefore had to pay tax when purchasing the containers and labels.

Fulfillment service

The business provided order fulfillment and shipping rather than selling tangible personal property.

It took an order, pulled the client's product from inventory, wrapped and labeled the package, and shipped it to the client's customer.

The containers were not returned to the fulfillment business or sent separately to the client.

Consumer of packaging

Rule R865-19-48S treated sales of containers, labels, bags, shipping cases, and similar items as taxable when sold to the final user or consumer.

The Commission said the fulfillment business was that consumer because it used the materials in performing its nontaxable service.

Separate billing

The business separately charged clients for the shipping materials.

The Commission said separate billing did not mean the containers were sold to the clients.

The materials were still being used by the fulfillment provider to perform the service.

Reporting number

Because the business should not make tax-free packaging purchases, the Commission said its consumer reporting number was appropriate and should not be changed.

Holding

Under the stated fulfillment arrangement:

• The business was the consumer of containers, labels, and similar materials.
• Purchases of those materials were taxable.
• The business was not reselling the materials merely because it billed for them separately.
• The fulfillment activity was treated as a nontaxable service.
• The existing consumer reporting number remained appropriate.

What this means for you

Fulfillment and shipping businesses

Separately stating packaging charges does not by itself establish a resale when your business uses the materials to perform a service.

Packaging purchasers

Identify who consumes the packaging in the transaction and whether tangible property is actually being sold to the customer.

Accountants and tax professionals

Review the service agreement, billing method, and transfer of packaging before applying resale treatment.

Common questions

Q: Could the fulfillment business buy containers tax-free?

A: No.

Q: Did separate billing make the containers a resale?

A: No.

Q: Who consumed the containers and labels?

A: The fulfillment business using them to perform the shipping and wrapping service.

Q: Did the business need a different reporting number?

A: No. The Commission said its consumer reporting number was appropriate.

Key source language

• Consumer status: the business was the “consumer” of all items used in performing the nontaxable service.
• No property sale: it was “not selling tangible personal property” when performing the fulfillment activity.
• Separate billing: “they are not selling the containers to their client. They are using them in performing the service.”
• Registration result: the consumer reporting number “is appropriate and should not be changed.”

Citations and references

• Utah Sales Tax Rule R865-19-48S

Source

• Landing page: Utah Private Letter Rulings
• Official ruling: Utah PLR 90-009
• Source-content note: after the complete 90-009 ruling, the official page appends the separate formal text of PLR 90-010DJ concerning egg-processing equipment.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response
August 13, 1990

August
13, 1990

XXXXX

Re: Declaratory Judgment - Shipping Containers

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on whether shipping containers and labels are taxable when you purchase them for use in shipping your clients' products.

Although
your inquiry was framed as a request for a declaratory judgement, Tax Commission policy is to initially treat all such inquiries as requests for advisory opinions. As such, it was referred to the Tax commission's Auditing Division for their analysis and recommendation. The division's recommendation is as follows:

1. In the performance of the shipping and
   wrapping service performed by XXXXX, they are the "consumer" of all items they use in performing the nontaxable service. Sales Tax Rule R865-19-48S states "Sales of containers, labels, bags shipping cases, and the like are taxable when:

1.
sold to the final user or consumer;"

2. XXXXX is not selling tangible personal
   property when they perform a service of taking an order and pulling the product from a client's inventory in Utah, wrapping the product, labeling the package and shipping the product to the client's customer. In billing the client for the service and separately billings for the shipping materials, they are not selling the containers to their client. The are using them in performing the service.

3. Since you should not be making tax-free
   purchases, your consumer reporting number, XXXXX, is appropriate and should not be changed.

For
the Commission

Joe
B. Pacheco

Commissioner

160
East 300 South

Salt
Lake City, UT 84134

XXXXX
is seeking a declaratory judgement before the Utah State Tax Commission in regards to shipping containers and whether we can purchase them tax free. Please give a judgement in regards to the situation written in the following paragraph.

XXXXX
Purchases shipping containers, labels, and like for use in shipments. The containers and the like are owned by us but are used in shipping the tangible personal property of our clients. The shipments are sent to our clients customers. The shipping containers and the like are not returned to us and are not sent to our clients. We do bill our clients separately for the shipping containers. If we are able to purchase the items tax free, does this mean that we have to change our XXXXX sales tax number?

If
there are any questions, please feel free to give me a call at XXXXX.

Thank
you,

XXXXX

90-010DJ

Response
January 7, 1991

January
7, 1991

XXXXX

XXXXX

Certified
Public Accountants

Re: Declaratory Judgment - XXXXX

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on whether XXXXX qualifies for exemption on machinery and equipment purchases under the provisions of �59-12-104(16). You stated they moved to a new plant location and purchased a pasteurizer and related system, freezers, packaging machinery, pumping machinery, boilers, egg breaking equipment and shipping equipment. You further stated they had to hire seven new employees to operate the equipment and maintain the expanded facility. It is your opinion that the manufacturing part of XXXXX should be assigned SIC code 2017.

1. XXXXX's primary SIC code should be 5144.
   However, Sales Tax Rule R865-19-85S, in defining an "establishment" says, "where distinct and separate economic activities are performed at a single physical location, each activity should be treated as a separate establishment." The rule further states, new or expanding operations means activities which:

"(b)
are begun in a new physical plant location in Utah; or" .. . It is our understanding XXXXX meets this requirement. Egg drying, freezing and breaking does clearly fall under SIC code 2017, which is a qualifying code. XXXXX is entitled to the manufacturers exemption and a refund of tax already paid on qualifying equipment.

2. Qualifying machinery and equipment is
   machinery actually used in the production process. Machinery used for storage or distribution (shipping equipment) does not qualify for the exemption. Once the expansion is complete, additional purchases and replacements do not qualify for exemption.

3. The method for obtaining a refund is to
   issue a sales tax exemption certificate to vendors who collected tax on the sale and request a refund, or where sales or use tax was paid directly to the Tax Commission by XXXXX, apply to the Tax Commission for a refund.

For
the Commission,

Joe
B. Pacheco

Commissioner

September
24, 1990

Utah
State Tax Commission

Heber
M. Wells Building

160
East Third South

Salt
Lake City, Utah 84134

We
hereby seek a declaratory judgement for our client, XXXXX (the company), to qualify under Utah Tax Code R865-19-85S for an exemption from sales and use taxes. The company wishes to obtain this judgement from the Utah State Tax Commission so that charges for sales and use taxes from various vendors can be stopped and refunds can be received for past collections of sales and use taxes in error.

The
account number for our client is XXXXX. The standard industrial code for this account has been XXXXX, but is more correctly XXXXX.

In
February of 1988, the company started new and expanding operations. These operations were substantially different in nature, were begun in a new physical plant location, and increased production and capacity.

The
company meets the definition of a manufacturer in that it produces a new commodity from a raw material. The new product is a liquid or frozen egg product from a raw egg.

In
February of 1988, the company leased a new warehouse and plant facility and moved its operations to this facility. At that time one new production line was installed which was substantially different and more efficient than prior systems. This expansion required the purchase or lease of tangible personal property on which the company was and is being charged sales and use taxes. The property includes: pasteurizer and related system, freezers, packaging machinery, pumping machinery, boilers, and shipping equipment. In addition, the actual egg breaking equipment was installed at that time. The expansion required hiring five new employees to facilitate operation of the new equipment. Two new sanitation employees were hired to assist in the clean up and maintenance of the plant. The expansion has been an asset to the egg production business of Utah. The plant is now producing products for large national companies such as XXXXX, XXXXX and XXXXX. All of these products are produced from raw materials substantially purchased from Utah producers.

We
request your immediate attention to this matter and appreciate your cooperation. If you have any questions, please call or write to us at the above address.

XXXXX

Certified
Public Accountants

Attachment
is located in Tax Commission file 90-010DJ.