Were bags, pallets, and containers used by a Virginia export-packaging service exempt under the foreign-commerce exemption?

Subject

Foreign and interstate commerce exemption: Packing Materials

Plain-English summary

Virginia upheld use tax on bags, pallets, and other materials consumed by a business packaging grain and feed for export. Export destination alone did not make the service provider's purchases exempt.

The foreign-commerce rule addressed sales of tangible personal property when title or possession passed outside Virginia and no Virginia use occurred. Here, the taxpayer sold a packaging service, not the materials themselves.

The packing materials were used to bag and containerize the customer's products and were not resold to the customer. Virginia's packaging regulation required a service provider to pay tax on materials used in performing its service unless the materials were resold and no transportation service accompanied them.

What this means for you

• An exported finished shipment does not automatically exempt a service provider's Virginia inputs.
• Contract and invoice treatment should show whether packing materials are actually resold to the customer.
• A business that consumes materials while performing a service is generally the taxable user under the rule applied here.

Common questions

Did it matter that the grain and feed were destined for foreign export? Not for these purchases. The taxpayer was providing a service and using the materials in Virginia.

Could packaging materials ever be treated as resold? The cited regulation contemplated resale only when the materials were resold to the customer and no transportation services were provided with them.

Citations and references

• Va. Code § 58.1-609.10(4).
• 23 VAC 10-210-780(A) and 10-210-400(C).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-26

Original ruling text

March 20, 2008

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") by the Department for the period January 2001 through October 2006.

FACTS

The Taxpayer is engaged in packaging services and provides bagging and bulk containerization of grain and feed products for the export market. As a part of its service, the Taxpayer arranges for trucks to bring empty cargo ship containers, owned by steamship lines, to the Taxpayer's facilities. The grain and feed products are placed in bags or other containers and loaded into the cargo ship containers by the Taxpayer.

As a result of the Department's audit, the auditor assessed use tax on the purchase of the bags, pallets and other container materials purchased by the Taxpayer for use in providing its service. The Taxpayer contends that the bags and other container materials are exempt from retail sales and use tax pursuant to the foreign and interstate commerce exemption.

DETERMINATION

Interstate and Foreign Commerce

Virginia Code § 58.1-609.10 4 provides an exemption from the sales and use tax for goods delivered to a factor or export agent and destined for foreign export. Such goods are deemed for use and consumption outside Virginia when delivered by the seller to the factor or export agent in the seller's vehicle, by common carrier, by licensed contract or independent trucker hired by the seller or by U.S. mail.

In interpreting the exemption in Va. Code § 58.1-609.10 4, Title 23 of the Virginia Administrative Code (VAC) 10-210-780 A states, "The tax does not apply to sales of tangible personal property in interstate or foreign commerce. A sale in interstate or foreign commerce occurs only when title or possession to the property being sold passes to the purchaser outside of Virginia and no use of the property is made within Virginia." [Emphasis added.]

In this instance, the Taxpayer does not sell tangible personal property, but rather provides a packaging service. Therefore, because the Taxpayer does not sell tangible personal property, it is not eligible for the interstate and foreign commerce exemption outlined under Title 23 VAC 10-210-780.

Packaging Materials

Title 23 VAC 10-210-400 C provides that "[p]ackaging materials and transportation devices, the ownership of which remains with the seller and does not pass to the customer are taxable. Persons who provide packaging and transportation services must pay the tax on all material used in providing such services unless the materials are resold to a customer and no transportation services are provided therewith."

The purchases assessed in the audit are not resold by the Taxpayer to its customer. The Taxpayer uses the items to package the grain and feed products as part of the service it renders. As such, the Taxpayer was properly assessed the use tax on the purchases at issue.

CONCLUSION

Based on the above determination, the assessment is upheld. An updated bill with interest accrued to date will be sent to the Taxpayer under separate cover. No further interest will accrue provided the bill is paid within 30 days of the date on the bill.P. D. 08-26

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions concerning this determination, you may contact the Department's Office of Tax Policy, Appeals and Rulings, at *.

Sincerely,

Janie E. Bowen

Tax Commissioner

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