Utah Addresses Sales and Use Tax Treatment of Shipping Pallets
Shipping pallets rented through a pallet pooling program are not “nonreturnable” and do not qualify for an exemption under Utah law.
By Jess Johannesen, SALT manager
For sales and use tax purposes, pallets used to ship tangible goods present a challenging issue due to the array of taxability treatment among the states. States’ statutory provisions for the sales tax treatment of pallets typically fall under the provisions for “containers” or “packaging materials,” but the taxation of pallets may also depend on whether they are being shipped to a customer or another manufacturer, whether they are required to be returned by the customers to its seller, and whether they are leased. A recent Utah Commission Decision illustrates the sales tax implications with respect to pallets that are rented through a pallet pooling program. 
The taxpayer in Utah was a manufacturer of pet food products that the taxpayer shipped to customers on pallets. Rather than purchasing pallets, the taxpayer rented pallets through a pallet pooling program operated by Company XYZ, which charged the taxpayer sales tax on the rental charges for the pallets. All of the taxpayer’s customers were part of Company XYZ’s pallet pooling program. The taxpayer would rent the pallets and ship the products to its customers on the pallets, and the customers would eventually return the pallets to Company XYZ so that the pallets could be placed back into the pool. The taxpayer argued that it should get a refund of sales tax paid to the Company XYZ for the pallet rentals.
Since the rental of the pallets would be considered the lease of tangible personal property, the rental of the pallets is taxable in Utah unless a specific exemption applies.  Utah specifically exempts the sale of “nonreturnable containers” to manufacturers, processors, wholesalers or retailers for use in packaging the tangible goods to be sold by such customer.  Utah regulations expand and clarify the statutory exemption to illustrate when the sales of containers may be taxable; specifically, the sale is taxable when the container is returnable and reused.  The taxpayer argued that there is no definition of “nonreturnable” provided in the statute or regulations, and that the pallets in this case that the taxpayer provides to its customers should be viewed as “nonreturnable” because the customer returns the pallets to Company XYZ and not to the taxpayer.
The state ruled that a container is not considered “nonreturnable” merely because the pallet is returned by the customer to the pooling provider instead of the taxpayer (i.e., the company from which the customer received the pallet). Instead, Utah notes that it is the intent that the pallets be returned to Company XYZ and eventually reused by the taxpayer or another business that participates in the pooling program. Therefore, the exemption does not apply and the rental of the pallets is indeed subject to sales and use tax.
As this decision illustrates, the taxability of property that is provided with the actual product, such as packaging and shipping pallets, can differ among states and may be based on how such property is provided and/or used. Aprio’s SALT team has experience assisting businesses regarding the applicable sales taxability issues to make sure that those business are in compliance with sales tax rules and are not creating a potential sales tax exposure. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the March 2017 SALT Newsletter. To view the entire newsletter, click here.
 Utah Commission Decision No. 15-1172, 10/03/2016.
 Utah Code Ann. §59-12-103(1)(k).
 Utah Code Ann. §59-12-104(22).
 Utah Admin. Rule R865-19S-48.
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