Department of Revenue (DOR) appeals the Board of Tax
Appeals' (Board) orders granting summary judgment to
Tyson Fresh Meats Inc. (Tyson) and Advanced H2O LLC (H2O);
Tyson and H2O appeal the superior court's reversal of the
Board's orders. DOR contends that the Board erred when
ruling that Tyson's and H2O's rental payments for the
use of pallets are exempt from the retail sales or use tax
under RCW 82.04.050(4)(b) because Tyson and H2O did not
sublease the pallets to their customers or lease the pallets
for the purpose of sublease to their customers and because
the leases of pallets were not a lease of "packing
materials" under WAC 458-20-115(3)(a) (Rule 115). Tyson
and H2O contend that the Board did not err when ruling that
their lease transactions are exempt from the retail sales tax
under RCW 82.04.050(4)(b) because they leased the pallets for
the purpose of subleasing the pallets to their customers and
their leases of the pallets were leases of "packing
materials" within the meaning of Rule 115(3)(a).
agree with DOR and hold that Tyson's and H2O's lease
transactions are not exempt from the retail sales and the use
tax under RCW 82.04.050(4)(b) and are therefore subject to
the retail sales and use tax. Accordingly, we reverse the
Board and affirm the superior court.
following facts are undisputed. Tyson is a beef manufacturing
corporation that processes and sells meat in Washington. H2O
is a corporation that manufactures and sells bottled water
and other beverages in Washington. During the years at issue,
Tyson and H2O packed their products onto wooden
pallets-portable platforms for transporting freight-to
facilitate the delivery of their products to their customers.
and H2O leased wooden pallets from CHEP USA (CHEP), a company
that operates a pallet pooling service. CHEP issues,
collects, conditions, and reissues pallets, which help
companies like Tyson and H2O streamline distribution and
transportation of their products to others. Each CHEP pallet
is identifiable by a CHEP logo and the words "Property
of CHEP" or "Owned by CHEP." H2O Clerk's
Papers (CP) at 28.
and H2O signed a "Hire Agreement" with CHEP to
enter into CHEP's pallet pooling service. The agreement
states that CHEP retains ownership and legal title of the
pallets at all times:
6. OWNERSHIP OF EQUIPMENT
(a) CHEP never sells or transfers ownership of its Equipment.
Customer acknowledges and agrees that each item of Equipment
has a special value to CHEP and that CHEP repairs, maintains,
handles, and otherwise administers the circulation of all
Equipment as part of a pool.
(b) Customer acknowledges and agrees that despite any other
clause in the Agreement, CHEP remains the owner of the
Equipment at all times. Neither customer nor any other person
is entitled to purchase or sell the Equipment, or use,
dispose, or otherwise deal with Equipment in any way that is
inconsistent with CHEP's ownership of the Equipment or
the terms of this Agreement. Payment of the Lost Equipment
Fee or any other circumstance or event does not constitute or
result in any transfer of any property right or other
interest in the Equipment by or from CHEP.
H2O Administrative Record (AR) at 121. The agreement also
states that customers may not "assign" their rights
under the agreement without CHEP's written consent. Tyson
AR at 113. Invoices to CHEP customers repeat the Hire
Agreement, stating that CHEP is the exclusive owner and that
the payment of any fee does not result in "any transfer
of any property right or other interest in any CHEP Equipment
by or from CHEP." Id. at 134.
of the Hire Agreement, CHEP customers agree to accept
transfers from other CHEP customers. When customers ship
their products on pallets to distributors or retailers who
were also customers of CHEP, the receiving party is required
to notify CHEP as to the quantity received and the location
of the pallets. Once a customer accepts a transfer of
pallets, the pallets become subject to the receiving
customer's contract with CHEP. CHEP then deducts the
transferred pallets from the delivering customer's
quantity of pallets "on Hire" or quantity of
pallets in its possession.H2O AR at 120.
Hire Agreement strictly prohibits transfers of pallets to
"unauthorized locations," which include transfers
to nonparticipating parties or parties that did not have a
separate agreement with CHEP. Tyson AR at 99. Customers may
transfer pallets to only "authorized locations,"
which include CHEP's distribution centers or other CHEP
customers. Id. If a customer transfers pallets to a
nonparticipating party, CHEP charges the customer with a
"Lost" fee and a "Surcharge." H2O AR at
121, 127. However, if the customer obtains written consent
from CHEP to make a transfer to an unauthorized party, CHEP
only charges a surcharge and not the lost fee.Conversely, if a
customer ships their products using CHEP pallets to another
CHEP customer, the customer does not incur a surcharge upon
weekly basis, CHEP charges each customer for use of the
pallets by multiplying the number of pallets used by the
number of rental days the pallets were in the customer's
possession during the billing cycle. CHEP also charges an
"Issue Fee" for each pallet the customer receives
from CHEP. Tyson CP at 49. Once the customer pays the issue
fee, it has the right to keep the pallet in its possession as
long as the Hire Agreement is in place.
and H2O did not provide its customers with an itemized bill
charge related to the CHEP pallets when the customers
received deliveries of their products. Instead, Tyson
"pass[ed] the cost of the pallet rental to the customer
in either the freight charge or in the product cost."
Tyson AR at 155. H2O's pallet costs are "factored
into the amounts it charges customers" for its products.
H2O AR at 24.
Procedural History: Tyson
audited Tyson for the period of January 1, 2007 through
December 31, 2010. DOR assessed Tyson with a $142, 691.01 use
tax on the pallets Tyson leased from CHEP. Tyson
unsuccessfully appealed the tax to DOR's Appeals
appealed to the Board. Tyson and DOR filed cross motions for
summary judgment. Tyson argued that its lease of pallets from
CHEP are excluded from the definition of "retail
sale" in RCW 82.04.050(1)(a)(i) because Tyson leased the
pallets from CHEP for the purpose of subleasing the pallets
to its customers and that Tyson's lease of the pallets
was a lease of "packing materials" within Rule 115.
Board granted Tyson's motion for summary judgment. The
Board concluded that the rental fees Tyson paid to CHEP were
exempt from the retail sales or use taxes as a lease for
sublease under RCW 82.04.050(4)(b). The Board further
concluded that Tyson's lease of the pallets qualified as
a "lease of 'packing materials' for sublease to
its customers" under Rule 115(2), (3)(a), and (6)(c).
Tyson AR at 28.
petitioned for judicial review of the Board's decision.
The superior court reversed the Board, ruling that
Tyson's pallet lease did not qualify as a
"'rental for the purpose of sublease or
subrent'" within RCW 82.04.050(4)(b) and the lease
transactions were not exempt from the sales or use taxes as
"'packing materials'" under Rule 115. Tyson
CP at 91.
appeals the superior court's reversal of the Board's
Procedural History: H2O
assessed H2O with $327, 720 in retail sales tax on pallet
rental fees from January 1, 2008 through December 31, 2011.
H2O requested a refund, arguing that its lease transactions
are exempt from the retail sales or use tax because the
pallets qualified as nonreturnable "packing
materials" under Rule 115.
denied H2O's request. H2O moved for reconsideration,
arguing that its lease qualifies as a lease for sublease and
is exempt from the retail sales and use tax under RCW
82.04.050(4)(b). DOR denied H2O's motion for
unsuccessfully appealing to DOR's Appeals Division, H2O
appealed the assessment to the Board. At the Board, both
parties filed cross motions for summary judgment. H2O argued
that the lease payments are exempt from the retail sales and
use tax as a lease transaction under RCW 82.04.040(3), and as
a lease-for-sublease of packing materials under Rule 115. The
Board agreed and ruled that H2O's transaction was a lease
under RCW 82.04.040(3) for the use of pallets and qualified
for the lease-for-sublease exception under RCW
82.04.050(4)(b) and as a lease of packing materials under
Rule 115(2), (3)(a), and (6)(c).
petitioned for judicial review of the Board's decision.
The superior court reversed the Board, concluding that the
Board erred when it determined that the pallet rentals were
exempt from the retail sales and use tax under RCW
82.04.050(4)(b) and Rule 115 as sales of nonreturnable
"'packing materials.'" H2O CP at 97.
appeals the superior court's reversal of the ...