C&S Wholesale Grocers, Inc. v. Vermont Department of Taxes, No. 547-9-14 Wncv (Teachout, J., June 24, 2015)

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                                                      STATE OF VERMONT

SUPERIOR COURT                                                                                         CIVIL DIVISION
Washington Unit                                                                                        Docket No. 547-9-14 Wncv


C&S WHOLESALE GROCERS, INC.
     Taxpayer–Appellant

           v.

VERMONT DEPARTMENT OF TAXES
    Appellee



                                                     DECISION ON APPEAL

        Taxpayer C&S Wholesale Grocers, Inc., the nation’s largest wholesale grocer, appeals
from an assessment of sales and use tax by the Vermont Department of Taxes. At issue in this
case is whether the insulated fiberglass shipping tubs that C&S uses to transport perishable
groceries to retailers and the diesel fuel it uses to power the refrigeration systems in its trucks are
exempt from the sales and use tax pursuant to 32 V.S.A. § 9741(16).1 That subsection exempts
from the tax “packing, packaging, or shipping materials for use in packing, packaging, or
shipping tangible personal property by a manufacturer or distributor.” The Commissioner
concluded that the shipping tubs and diesel fuel are not within the scope of the exemption. C&S
argues that they are and that any interpretation to the contrary is unconstitutional.

        The court reviews this case “on the basis of the record established before the
Commissioner.” Piche v. Dep’t of Taxes, 152 Vt. 229, 233 (1989) (citing State Dep’t of Taxes v.
Tri-State Indus. Laundries, Inc., 138 Vt. 292, 294 (1980)). The Commissioner’s decision is
presumed “correct, valid and reasonable, absent a clear and convincing showing to the contrary.”
Tri-State Indus. Laundries, 138 Vt. at 294. “[I]n construing tax exemptions, the burden is on the
person claiming the benefit of the exemption and the exemption statute must be strictly construed
against that person.” Our Lady of Ephesus House v. Town of Jamaica, 2005 VT 16, ¶ 14, 178
Vt. 35.


           The exemption as applied to this case

       The following are exempt from the sales and use tax under 32 V.S.A. § 9741(16):
“[m]aterials, 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

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  The Commissioner determined that the dry ice that C&S packs with certain perishable foods is exempt from the
sales and use tax pursuant to 32 V.S.A. § 9741(16). While that matter was raised and decided below, it is not part of
this appeal and the court will not address it.
manufacturer or distributor.” An expression such as “[m]aterials . . . used in shipping” is
potentially meaninglessly broad. By regulation adopted in 1974, the Department expressly
interpreted the exemption to not apply to “returnable or reusable pallets, skids, reels and similar
equipment” in an effort to distinguish packing, packaging, and shipping materials from the
taxpayer’s durable equipment. The rationale was described subsequently in Technical Bulletin
11, issued in 1998:

       It has long been the Department’s position that returnable and reusable packaging
       is not exempt from the sales and use tax. The rationale for the exemption is that
       packaging is ordinarily transferred to the retail customer as part of the sale and it
       is part of the taxable base. There the same packaging should be exempt at the
       manufacturing or distributor level to avoid taxing it twice. In contrast, returnable
       or reusable packaging which is not permanently transferred to a retail customer
       does not become part of the taxable base. 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.

TB-11 at 1 (footnote omitted). As the Department puts it, the taxpayer’s durable equipment has
come to rest in the stream of commerce and thus should be taxed to the manufacturer or
distributor. Packing, packaging, and shipping materials that will continue down the stream of
commerce are not taxed.

        There is nothing arbitrary or inherently unreasonable with this much of the Department’s
interpretation of 32 V.S.A. § 9741(16). It is consistent with the thrust of similar statutes. See
67B Am. Jur. 2d Sales and Use Taxes § 104 (WL updated May 2015) (“The purpose of
exempting from the sales tax such intermediate sales of containers and packaging materials is to
avoid double taxation and to prevent the increase of the ultimate sales price to the consumer, for
the consumer pays the whole tax reflected in the price which he or she pays for the finished
product.”)

        Applying this interpretation to this case, neither the diesel fuel used to power C&S’s
refrigeration systems nor the durable fiberglass tubs in which it transports some products is
within the scope of the exemption. C&S claims that the diesel qualifies as a shipping material
because it is a material and it is used in the shipping process. While true in a highly literalistic
way, this argument would extend the tax exemption to anything that both can be considered a
“material” and is in any way is related to C&S’s grocery transportation. It is overly broad. As
the court stated in McClure Newspapers, Inc. v. Vermont Dep’t of Taxes, 132 Vt. 169, 173
(1974), “we [do not] allow words . . . to prevail over common sense.” Diesel fuel is not a
shipping material within the meaning of 32 V.S.A. § 9741(16).

        The shipping tubs also are not within the scope of § 9741(16). The Commissioner found
that the fiberglass tubs are durable equipment typically having a life expectancy of greater than
three years and that they have come to rest in the stream of commerce with C&S. On those facts,
the tubs are not exempt.



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       C&S argues that the diesel fuel and tubs are exempt based on its understanding of
McClure Newspapers, Inc. v. Vermont Dep’t of Taxes, 132 Vt. 169 (1974), and Standard
Register Co. v. Commissioner of Taxes, 135 Vt. 271 (1977). C&S also asks the court to
invalidate the Department’s so-called three-year rule.

         McClure does not advance C&S’s claim in this case. In McClure, the Court analyzed a
newspaper’s claim of exemption under § 9741(14). That subsection, at the time of McClure,
exempted “[t]angible personal property which becomes an ingredient or component part of, or is
consumed or destroyed or loses its identity in the manufacture of tangible personal property for
later sale.” The question in McClure was whether the process of “manufacturing” a newspaper
included the process by which a reporter takes photographs such that the consumables used to
produce those photographs (film, flash, etc.) were exempt. The Court concluded that it did.

       McClure can be read to have given the concept of manufacturing a broad interpretation,
implying that the exemption in that case will have broad applicability. This case is not
analogous, however. The exemption in this case is limited to packing, packaging, and shipping
materials and the issue is whether the disputed items have the characteristics that the exemption
requires.

        Standard Register also does not advance C&S’s claim. Originally, the following were
exempt from the sales and use tax: “[m]aterials, 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 for resale.” 32 V.S.A. § 9741(16) (1973) (emphasis added),
as quoted in Standard Register, 135 Vt. at 273. The question in Standard Register was whether
the taxpayer’s business forms were being sold “for resale.” They were not. Thus, the Court
concluded, shipping materials used to transport the forms fell outside of the exemption.

        While Standard Register was pending, the legislature amended the exemption to delete
“for resale” and replace it with “by a manufacturer or distributor.” The Court recognized that the
amended language, had it applied in Standard Register, would have changed the outcome: “As to
sales after [the amendment], it is now clear that materials sold to a manufacturer and used for
shipping his product are exempt from tax, as fully as materials sold him for incorporation into
the product itself.”

        Standard Register has no material application to this case. There, the Court was
addressing the effect of the resale requirement that appeared in the original statute. In this case,
the issue is whether the diesel and tubs have the character of packing, packaging, or shipping
materials within the meaning of the exemption. The resale or consumption of the personal
property sold with those packing, packaging, or shipping materials is immaterial to this case.

         C&S also argues that the Department’s “three-year rule” is invalid. This rule is discussed
in Technical Bulletin 11. In short, in 1998, the Department modified its policy on the distinction
between nondurable shipping materials (exempt) and durable equipment used in shipping (not
exempt). In the Bulletin, the Department explains the rationale for the distinction but notes that
it created an incentive to use disposable shipping materials rather than reusable materials. To
incentivize the use of reusable shipping materials, the Department’s new (and current) policy is

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that reusable shipping materials with a life expectancy not exceeding three years would be
considered within the scope of 32 V.S.A. § 9741(16). In other words, the Department now
extends the exemption to durable equipment with a limited life that otherwise is not within the
scope of the exemption.

         C&S argues that there is no statutory basis for the three-year rule, the Department had no
authority to adopt it, and it is thus invalid. The court declines to address this issue because it has
no effect on this case. The three-year rule operates to expand the exemption to include certain
durable equipment that otherwise, by longstanding interpretation of the Department, would fall
outside its scope. C&S’s fiberglass tubs fall outside of the three-year rule because they generally
have a life expectancy exceeding three years. Thus, the tubs are taxable even with the benefit of
the expanded exemption. A determination that the three-year rule is valid or invalid is irrelevant
to this case.


       Constitutionality of the exemption

       C&S argues that excluding its diesel fuel and fiberglass tubs from the benefit of the
exemption has the ultimate effect of raising the prices of the groceries for retail customers.
There are numerous federal food assistance programs in which those customers may participate.
Taxing C&S on diesel and tubs thwarts the effectiveness of those assistance programs, C&S
reasons, and thus violates the Supremacy Clause. C&S cites no meaningful authority for this
extremely broad argument, which presumably would prevent any taxation of C&S (or any
component of the food industry in general) of any kind.

        “The Supremacy Clause of the United States Constitution proclaims federal law to be
‘the supreme Law of the Land.’ Consequently, federal law can preempt state law whenever
Congress explicitly states that it is preempting state law or implicitly preempts state law by
occupying an entire field of regulation or passing laws that conflict with state law.” Youngbluth
v. Youngbluth, 2010 VT 40, ¶ 12, 188 Vt. 53 (citations omitted).

        C&S has not seriously attempted to show express, field, or conflict pre-emption. The
matter is inadequately briefed. The court declines to address it further.


       Penalty

        C&S argues that the Commissioner abused her discretion by including a penalty with the
assessment of sales and use tax. C&S raised this issue for the first time in its reply brief. It was
not preserved for review. Agency of Natural Resources v. Glens Falls Ins. Co., 169 Vt. 426, 435
(1999) (holding that issues raised for the first time in a reply brief are not preserved for review).
In any event, C&S argues that the Commissioner abused her discretion because its underpayment
of taxes was de minimus presuming it prevails on the issues above. It has not prevailed on those
issues; there is no compelling basis for the conclusion that the penalty is an abuse of discretion.




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                                   ORDER

For the foregoing reasons, the Commissioner’s Determination is affirmed.

Dated at Montpelier, Vermont this ____ day of June 2015.


                                           _____________________________
                                           Mary Miles Teachout
                                           Superior Judge




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