Virginia – Pallets Used in Distribution are Taxable

SALT Report 1509 – The Virginia Department of Taxation ruled that a taxpayer’s purchases of pallets are subject to Virginia retail sales and use tax. The taxpayer markets, and distributes accent rugs and floor mats, and imports finished rugs that he resells to wholesale distributers.  The taxpayer claims that he is an industrial manufacturer and the application of labels and hangers to the imported rugs is the last step in production before the items are sent on pallets to be shipped to his customers.
The Department rejected the taxpayer’s argument and ruled that no additional manufacturing or processing takes place on the finished rugs.  The application of a label or hanger does not result in the creation of a new product. Rather, the Taxpayer is merely applying a hanger or label to a finished product prior to shipment.
Therefore, the Taxpayer’s activities fall within the definition of distribution under Title 23 VAC 10-210-920 C 3 and the pallets used to package the finished products imported by the Taxpayer for distribution to wholesale customers are subject to the tax pursuant to Title 23 VAC 10-210-920 C 3.
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