Did plastic strapping used to secure lumber bundles for shipment qualify as exempt packaging or property bought for resale?

Subject

Lumber strapping was a taxable transportation device, not packaging

Plain-English summary

Virginia held that plastic strapping used to secure bundles of precut lumber for delivery was a taxable transportation device, not exempt packaging. The manufacturer argued that the strapping and related equipment were integral to production because the lumber could not be shipped without them.

Virginia applied the state supreme court's narrow definition of packaging: placing goods in a package or container. The strapping wrapped and restrained the lumber bundles for shipment but did not place the lumber into a package or container.

The transportation-device regulation specifically covered strapping used to brace or secure cargo. Such devices were not packaging materials and were exempt only if bought for resale. Because the manufacturer itself used the strapping for transportation, the resale exemption also failed, and Virginia upheld the assessment.

What this means for you

• Material used to restrain cargo can be taxable even when shipment is impossible without it.
• Virginia distinguishes a package or container from a transportation device used to brace or secure products.
• The industrial packaging exemption is construed narrowly.
• A resale exemption does not apply when the manufacturer consumes the device in shipping its own goods.

Common questions

Why was the strapping not packaging?

It secured the lumber for transport but did not place the goods into a package or container.

Did the associated strapping equipment qualify?

No. Virginia treated the strapping and associated supplies and equipment as outside the claimed packaging exemption.

Did necessity for shipment change the result?

No. The ruling acknowledged the shipping function but applied the narrower statutory and regulatory definitions.

Citations and references

• Va. Code § 58.1-609.3(2)(iv).
• 23 VAC 10-210-400 and 10-210-920(C)(2).
• Webster Brick Company, Inc. v. Department of Taxation, 219 Va. 81, 245 S.E.2d 252 (1978).
• Virginia Public Document 96-301.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-145

Original ruling text

July 26, 2010

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") as a result of an audit for the period January 2006 through September 2008. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer manufacturers wood products for sale to commercial customers. As a result of the Department's audit, the Taxpayer was assessed use tax on plastic strapping and associated supplies and equipment used to strap bundles of precut lumber for sale and delivery to customers. The Taxpayer contends that the strapping and strapping equipment are integral parts of the manufacturing process and thus qualify for the packaging exemption set out in Va. Code § 58.1-609.3 2 (iv) and Title 23 Virginia Administrative Code (VAC) 10-210-920 C 2. The Taxpayer also asserts that it could not ship its products to market if not for the strapping.

DETERMINATION

Virginia Code § 58.1-609.3 2 (iv) provides an exemption from the retail sales and use tax for "materials, containers, labels, sacks, cans, boxes, drums or bags for future use for packaging tangible personal property for shipment or sale." Title 23 VAC 10-210-920 C 2 lists items qualifying for the industrial manufacturing exemption, including "[w]rapping or packaging equipment and supplies used at the plant site in packaging products for sale or resale."

In P.D. 96-301, strapping was used to protect manufactured products from damage during shipment to market. The Tax Commissioner determined that the manufacturing exemption for packaging materials was not applicable to the strapping materials based on the court's narrow construction of the packaging exemption in Webster Brick Company, Inc. v. Department of Taxation , 219 Va. 81, 86, 245 S.E. 2d 252 (1978).

In Webster Brick , the Virginia Supreme Court defined the term "packaging" for purposes of the above exemption as "placing in a package or container." In this case, strapping is used to wrap a bundle of wood products so that the bundle can easily be shipped to market. This strapping does not constitute materials used to place goods into a package or container for shipment or sale. The courts have long ruled that exemptions from the sales and use tax are strictly construed against the one seeking them. Based on the narrow construction given the! exemption by the court, the strapping and associated equipment does not qualify for the packaging exemption noted above.

The application of the tax to packaging materials and transportation devices is also addressed in Title 23 VAC 10-210-400. Subsection A of this regulation defines transportation devices as "items which are used to transport and protect products for sale and to restrain product movement in a single plane of direction." Such transportation devices include strapping used to brace or secure cargo for transport. Subsection B of the regulation provides that "[t]ransportation devices are not packaging materials and may not be purchased tax exempt unless purchased for resale." Because the Taxpayer used the strapping for transportation purposes, the resale exemption is not applicable.

CONCLUSION

Based on this determination, the assessment is correct. An updated bill, with interest accrued to date, will be sent to the Taxpayer. The outstanding balance should be paid within 30 days of the bill date to avoid additional interest charges.

The Code of Virginia sections, regulations and public document cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this determination, you may contract * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda Foster

Deputy Tax Commissioner

AR/1-3248074673.R