BRATTLEBORO — C&S Wholesale Grocers, which is located in Keene, N.H., but has a warehouse in Brattleboro, was ordered by the Vermont Supreme Court to pay $30,562 in sales tax to the state.

C&S had disputed an assessment, as was imposed by the Vermont Department of Taxes, for the purchase of reusable fiberglass freezer tubs used in the transport of perishable items. C&S appealed the decision to the Vermont Supreme Court, as well as the Department of Taxes' refusal to refund sales tax paid on diesel fuel used to power refrigeration systems mounted on its tractor trailers.

"Serving as a middleman between manufacturers and grocery stores, taxpayer's inventory includes products requiring refrigeration for freshness and safety reasons," noted the court in its ruling. "To maintain the temperature of the product requiring refrigeration, taxpayer transports perishable products in large rectangular fiberglass tubs, referred to as 'freezer tubs,' which are packed with dry ice and loaded into refrigerated tractor-trailers. The tractor-trailers, or 'reefers,' are insulated and mounted with a refrigeration system that runs on diesel fuel, or 'reefer fuel.'"

The Supreme Court noted that empty freezer tubs, which last between three and five years, are not given or transferred to the grocer customer, and are not used by the customer in any way; they are taken back by taxpayer for re-use.


The dispute between the state and C&S hinged on whether the freezer tubs were or were not packaging. State tax law exempts materials, containers, labels, sacks, cans, boxes, drums, or bags and other packing, packaging, or shipping materials for use in packing, packaging, or shipping tangible personal property by a manufacturer or distributor.

"Also during the audit, when asked by the Department whether they had paid sales tax on the reefer fuel, taxpayer answered in the affirmative," noted the court.

During an audit, the Department of Taxes found that no sales or use tax was paid on the thousands of freezer tubs owned by C&S. The commissioner of the Vermont Department of Taxes concluded the freezer tubs did not meet the state's definition of packaging and that reefer fuel was not tax exempt.

"The Commissioner found that the freezer tubs are not exempt as they 'are returned to the taxpayer and reused, and have an expected life greater than three years, and so, under the regulations, are not exempt.'" Because reefer fuel is not "a container or packing material, is not a component of the parcel which conveys to the customer ..." it is not exempt either.

C&S then filed a written request for a return of the sales tax paid on the reefer fuel, which the Department of Taxes refused. C&S appealed the ruling, arguing that "the statute does not limit the type of materials or containers used to pack or ship ..."

"Because we are 'traditionally reluctant to substitute our judgment for the experience and expertise of an agency,'" noted the court, "we apply a deferential standard of review to agency decisions ... We therefore uphold the Commissioner's interpretation of tax statutes absent 'compelling indication of error.'"

"(R)eturnable or reusable returnable or reusable packaging which is not permanently transferred to a retail customer does not become part of the taxable base," wrote the Department of Taxes. "Therefore, the exemption has extended only to materials that were transferred to the buyer with the product; and returnable or reusable materials used by the manufacturers or distributors in getting their product to the market have not been exempt."

Because a sales tax is designed to be imposed on the ultimate user and the freezer tubs do not move through the stream of commerce, they will not be taxed at any point in the distribution process, noted the court. "The tubs are not a component of the parcel to be shipped any more than the tractor-trailer itself; rather, it is a component used in shipping that has come to rest with taxpayer in the stream of commerce. If taxed to taxpayer, there is no risk of double taxation — if taxpayer does not pay tax on the freezer tubs, however, they will go completely untaxed."

C&S also contended that the "three-year rule" had no statutory basis and that the Department of Taxes lacked the authority to adopt the exception in the first place. "The Court declines to address taxpayer's challenge to the three-year rule because it has no effect on this case: the freezer tubs have a life expectancy of more than three years and are thus excluded regardless of the rule," noted the court. "The Department's application of the rule, whether it has been consistent or inconsistent, is therefore irrelevant to the facts of this case, and we decline to address its validity. ... That the Commissioner may not have had the authority to exempt returnables having a useful life of three years or less from taxation does not mean the regulation is invalid as to those items having a useful life of greater than three years."

The court than took up C&S' contention that reefer fuel should not be taxed because it is exempt as "shipping material."

"Rather than being a component of the parcel to be shipped, it is a component used in shipping — one that does not transfer to the grocery stores and has come to rest with taxpayer in the stream of commerce."

Bob Audette can be contacted at 802-254-2311, ext. 160.