Washington State: Pallets Not Leased for Resale to Customers

A Washington State appeals court recently addressed whether two manufacturers owed sales tax on leases of wooden pallets that were used to hold the taxpayers’ products during shipment. Both taxpayers leased the pallets from the same pallet pooling service that generally required the taxpayers to transfer pallets only to authorized locations where the recipient was likewise a customer of the pallet pooling service. Neither taxpayer provided its customers with an itemized bill charge for the pallets, but they generally factored the cost of the pallets into charges for products or in the cost of delivery. After being assessed retail sales tax on the fees they paid to the pallet pooling company, the taxpayers protested on the basis that they were leasing the pallets for resale or sublease to customers and that the pallets qualified as exempt packing materials. Eventually, a trial court reversed taxpayer-favorable rulings from the Board of Tax Appeals and both taxpayers sought review of the reversals.  

To qualify for the lease-for-sublease exemption, the taxpayers were required to establish that they leased the pallets for sublease, subleased the pallets in the regular course of their business, and did not make intervening use of the pallets before they were subleased. The court, agreeing with the Department of Revenue, concluded that the taxpayers had not established that they leased the pallets for sublease. To reach this conclusion, the court looked at the elements of a lease or sublease and determined they were not present in the instant case. For example, the taxpayers did not receive consideration in exchange for their customer’s right to possess or control the pallets. Although the taxpayers argued that they factored the costs of the pallets into the amount they charged for products, customers did not pay to possess or control a pallet; they paid consideration for the taxpayers’ products. Further, the court found that the taxpayers leased the pallets for the purpose of using the pallets for their intended use—to facilitate the delivery of their products to their customers. Using the pallets to transport and distribute products to their customers plainly constituted making use of the pallets for a purpose other than merely renting or leasing the pallets to customers. Having determined that the taxpayers were not entitled to the lease for sublease exemption, the court also concluded they were not eligible for claim the packing material exemption. Specifically, under Washington Rule 115, the sale or lease of packing materials is not subject to the retail sales tax if the buyer of the materials “sell[s] tangible personal property contained in or protected by packing materials.” The retail sales tax is not imposed if the purpose of the initial sale or lease of the packing materials is for the resale or sublease of the packing materials with the product. Because the taxpayers were not subleasing the pallets, they did not qualify for the exemption. Please contact Michele Baisler at 206-913-4117 with questions on Washington Dep’t of Rev. v. Advanced H2O, LLC. and Tyson Fresh Meats, Inc.