                                                                                             Filed
                                                                                       Washington State
                                                                                       Court of Appeals
                                                                                        Division Two

                                                                                      December 10, 2019




      IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

                                        DIVISION II
    STATE OF WASHINGTON, DEPARTMENT                                No. 51468-1-II
    OF REVENUE

                               Respondent,

         v.

    ADVANCED H2O, LLC,                                        PUBLISHED OPINION

                               Appellant.
                                                        (Consolidated with No. 51513-0-II)
    STATE OF WASHINGTON, DEPARTMENT
    OF REVENUE

                               Respondent,

         v.

    TYSON FRESH MEATS INC.,

                               Appellant.

        CRUSER, J. — The 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.1 DOR


1
  General Order 2010–1 of Division II, In Re: Modified Procedures For Appeals Under The
Administrative Procedures Act, Chapter 34.05, and Appeals Under the Land Use Petition Act,
Chapter 36.70C RCW (Wash. Ct. App.), available at http://www.courts.wa.gov/ appellate—trial—
courts/, requires that the party filing an appeal in superior court, here DOR, shall have the
responsibility for the opening and reply briefs before our court and shall be entitled to open and
conclude oral argument, whether designated as the appellant or respondent on appeal to this court.
Consol. Nos. 51468-1-II / 51513-0-II


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).

       We 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.

                                                 FACTS

                                      I. BACKGROUND FACTS

       The 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.

       Tyson 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




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Consol. Nos. 51468-1-II / 51513-0-II


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.

       Tyson 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.

       As part 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




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Consol. Nos. 51468-1-II / 51513-0-II


from the delivering customer’s quantity of pallets “on Hire” or quantity of pallets in its possession.2

H2O AR at 120.

       The 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.3

Conversely, if a customer ships their products using CHEP pallets to another CHEP customer, the

customer does not incur a surcharge upon delivery.




2
 The relevant contract language is as follows:
       Definition of “QUANTITY OF EQUIPMENT ON RENTAL.” For any given day,
       the Quantity of Equipment on Rental will be calculated by subtracting the quantity
       of pallets returned to CHEP, or transferred to an authorized location, from the
       quantity of Equipment shipped to the Customer before that day.
       ....
       5.6     As of the date of transfer of Equipment, the Quantity of Equipment on
               Rental will increase at the authorized location and will decrease the
               Quantity of Equipment on Rental at the Customer by the quantity
               transferred.
Tyson AR at 99.
3
  Both H2O and Tyson’s Hire Agreements contain these terms. However, Tyson’s agreement
states that CHEP will waive the surcharge and provide discounts on Tyson’s pallet rental fees if
the nonparticipating party signs an agreement with CHEP to enter the pooling service. The lost
fee still applied to Tyson in the event that more than .5 percent of the total quantity of CHEP pallets
issued to Tyson are unaccounted for upon completion of a periodic inventory check.

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Consol. Nos. 51468-1-II / 51513-0-II


       On a 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.

       Tyson 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.

                                II. PROCEDURAL HISTORY: TYSON

       DOR 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 Division.

       Tyson 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.

       The 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


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Consol. Nos. 51468-1-II / 51513-0-II


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.

       DOR 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.

       Tyson appeals the superior court’s reversal of the Board’s decision.

                                 III. PROCEDURAL HISTORY: H2O

       DOR 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.

       DOR 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 reconsideration.

       After 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).


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Consol. Nos. 51468-1-II / 51513-0-II


       DOR 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.

       H2O appeals the superior court’s reversal of the Board’s decision.

                                           ANALYSIS

       DOR contends that the Board erred in ruling that Tyson’s and H2O’s (the Manufacturers)

lease of CHEP pallets qualifies as a sale-for-resale exemption or lease-for-sublease exemption

from the retail sales and use tax under RCW 82.04.050(4)(b) because the Manufacturers did not

lease the pallets from CHEP for the purpose of a sublease nor did they sublease the pallets to their

customers.   DOR also argues that the Board erred in ruling that the Manufacturers’ lease

transactions are exempt from the retail sales tax under RCW 82.04.050(4)(b) as a lease of “packing

materials” pursuant to Rule 115. The Manufacturers counter 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 a sublease and subleased the pallets to their customers.           Furthermore, the

Manufacturers argue that their lease transactions are tax exempt as leases or sales of “packing

materials” within the meaning of Rule 115. We agree with DOR.

                                     I. STANDARD OF REVIEW

       This case presents a review of an order for summary judgment involving statutory

interpretation. Washington’s Administrative Procedure Act, ch. 34.05 RCW, governs our review

of the Board’s order for summary judgment. Steven Klein, Inc. v. Dep’t of Revenue, 183 Wn.2d

889, 895, 357 P.3d 59 (2015). “On appeal, we review the Board’s decision, not the superior court,


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Consol. Nos. 51468-1-II / 51513-0-II


and our review of the Board’s decision is limited to the record before the Board.” Sprint Spectrum,

LP v. Dep’t of Revenue, 174 Wn. App. 645, 657, 302 P.3d 1280 (2013). As the party asserting

that the Board erred, DOR bears the burden of demonstrating the invalidity of the Board’s actions.

Id. We review the Board’s order de novo. Id. at 657-58.

       On review of an order for summary judgment, we perform the same inquiry as the trial

court. Activate, Inc. v. Dep’t of Revenue, 150 Wn. App. 807, 812, 209 P.3d 524 (2009). A court

must grant summary judgment if there is “no genuine issue as to any material fact and . . . the

moving party is entitled to a judgment as a matter of law.” CR 56(c). “We grant summary

judgment only if reasonable persons could reach but one conclusion from all the evidence.”

Activate, 150 Wn. App. at 812.

       We review questions of law, including statutory construction, de novo. Id. “‘The court’s

fundamental objective in construing a statute is to ascertain and carry out the legislature’s intent.’”

Lake v. Woodcreek Homeowners Ass’n, 169 Wn.2d 516, 526, 243 P.3d 1283 (2010) (quoting

Arborwood Idaho, L.L.C. v. City of Kennewick, 151 Wn.2d 359, 367, 89 P.3d 217 (2004)).

       Statutory interpretation begins with the statute’s plain meaning. Sprint, 174 Wn. App. at

658. We discern the plain meaning from the ordinary meaning of the language at issue, the

statute’s context, related provisions, and the statutory scheme as a whole. Lake, 169 Wn.2d at 526.

If the statute is unambiguous, we derive the legislature’s intent from the plain language and

ordinary meaning alone. Activate, 150 Wn. App. at 812.

       A statute or regulation is ambiguous if it is susceptible to more than one reasonable

interpretation. Seattle FilmWorks, Inc. v. Dep’t of Revenue, 106 Wn. App. 448, 453, 24 P.3d 460

(2001). Generally, a reviewing court construes an ambiguous taxing statute or regulation in the


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Consol. Nos. 51468-1-II / 51513-0-II


taxpayer’s favor. Id. But when the court is interpreting a regulation or statute granting a tax

exemption or deduction, the court must construe it “‘strictly, though fairly and in keeping with the

ordinary meaning of their language, against the taxpayer.’” Id. (quoting Group Health Coop. of

Puget Sound, Inc. v. Dep’t of Revenue, 106 Wn.2d 391, 401-02, 722 P.2d 787 (1986)). As taxation

is the “‘rule’” and “‘exemption is the exception,’” the taxpayer who “‘claims an exemption carries

the burden of proving [it] qualifies for it.’” TracFone Wireless, Inc. v. Dep’t of Revenue, 170

Wn.2d 273, 296-97, 242 P.3d 810 (2010); Activate, 150 Wn. App. at 813 (alteration in original)

(quoting Glen Park Assocs., LLC v. Dep’t of Revenue, 119 Wn. App. 481, 486, 82 P.3d 664

(2003)).

       DOR may prescribe regulations to enforce the tax code. Former RCW 82.32.300 (1997).

“The rules of statutory construction apply to agency regulations as well as statutes.” Tesoro Ref.

& Mktg. Co. v. Dep’t of Revenue, 164 Wn.2d 310, 322, 189 P.3d 28 (2008). We give great

deference to the DOR’s interpretation of its own regulations; however, DOR’s interpretation is not

binding on this court. Dep’t of Revenue v. GameStop, Inc., 8 Wn. App. 2d 74, 82, 436 P.3d 435,

review denied, 193 Wn.2d 1026 (2019). We presume that the regulation is valid if it is reasonably

consistent with the statute it implements. Id.

                                       II. LEGAL PRINCIPLES

       Washington imposes an excise tax known as the “retail sales” tax on the selling price of

each retail transaction of tangible goods in the state. RCW 82.08.020(1)(a). The retail sales tax is

calculated based on the sales price of the item sold. RCW 82.08.010(1)(a)(i). Under Washington

excise tax laws, the term “sale” is any “transfer of the ownership of, title to, or possession of

property for a valuable consideration.” Former RCW 82.04.040(1) (2004).


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Consol. Nos. 51468-1-II / 51513-0-II


         The retail sales tax is not imposed on a transaction if the transaction is specifically excluded

from the definition of a “retail sale” under RCW 82.04.050(1)(a). The statutory definition of a

retail sale excludes purchases “for the purpose of resale as tangible personal property in the regular

course of business without intervening use by such person.” Id. This exclusion is commonly

referred to as the sale-for-resale exception or the wholesale exception. WAC 458-20- 115(3)(a).

         The definition of “retail sale” includes a lease or rental of personal tangible property. RCW

82.04.050(4)(a). The term “lease or rental” is defined as “any transfer of possession or control of

tangible personal property for a fixed or indeterminate term for consideration.” Former RCW

82.04.040(3)(a) (2004). Because a retail sale includes a retail lease, the sale-for-resale exception

from the statutory definition of “retail sale” is extended to a lease for sublease. Therefore, the

retail sales tax is not imposed on leases “for the purpose of [sublease] as tangible personal property

in the regular course of business without intervening use by such person.”                        RCW

82.04.050(1)(a)(i); RCW 82.08.010(11). Additionally, our legislature expressly extended the

definition of a retail sale to exclude “renting or leasing tangible personal property where the lease

or rental is for the purpose of sublease or subrent.” RCW 82.04.050(4)(b).

         WAC 458-20-211(1) (Rule 211), DOR’s administrative interpretation of RCW 82.04.050,

“explains how persons are taxable who rent or lease tangible personal property” under the retail

sales tax. Rule 2114 states,

                 (6) Retail sales tax. Persons who rent or lease tangible personal property
         to users or consumers are required to collect from their lessees the retail sales tax
         measured by gross income from rentals as of the time the rental payments fall due.
                 (a) RCW 82.04.050 excludes from the definition of the term “retail sale,”
         purchases for resale “as tangible personal property.” Thus the retail sales tax does
         not apply upon sales of tangible personal property to persons who purchase the


4
    Rule 211 uses the terms “leasing” and “renting” interchangeably. WAC 458-20-211(2)(a).
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Consol. Nos. 51468-1-II / 51513-0-II


       same solely for the purpose of renting or leasing such property. . . . However, the
       retail sales tax applies upon sales to persons who . . . intend to make some use of
       the property other than or in addition to renting or leasing.

WAC 458-20-211(6) (emphasis added).5

       Within the sale-for-resale exception is the sale of “packing materials.” Rule 115(3)(a).

DOR’s administrative Rule 115 explains that a sale of packing materials is not subject to the retail

sales tax if the buyer of the materials “sell[s] tangible personal property contained in or protected

by packing materials.” Thus, the retail sales tax is not imposed on the initial sale of packing

materials because the purpose of that sale is for the resale of the packing materials, which are sold

with the product. Because a retail sale includes a lease or rental of personal tangible property, the

exception under Rule 115 also applies to a lease for sublease. RCW 82.08.010(11); RCW

82.04.050(4)(a).

       Washington also imposes a use tax, which is a “companion tax” that applies when a seller

has not collected the retail sales tax. RCW 82.12.020(1)(a), (2); Glen Park, 119 Wn. App. at 484

n.1. “The use tax’s purpose is ‘to tax the privilege of using all tangible property within the state

on which [the retail] sales tax has not been paid.’” Activate, 150 Wn. App. at 814 (quoting Sacred

Heart Med. Ctr. v. Dep’t of Revenue, 88 Wn. App. 632, 638, 946 P.2d 409 (1997)). The use tax

statute incorporates by reference chapters 82.04 and 82.08 RCW. RCW 82.12.010(1); Activate,




5
  The Manufacturers argue that Rule 211 does not apply in this case because the rule interprets
only the sale-for-resale exception under RCW 82.04.050(1)(a) and not the lease-for-sublease
exception. What the Manufacturers ignore is that a retail lease is included within the definition of
a “retail sale.” RCW 82.08.010(11); RCW 82.04.050(4)(a). Because a lease qualifies as a “sale”
under RCW 82.08.010(11), a lease is extended to the sale-for-resale exception from the term “retail
sale.” RCW 82.04.050(1)(a)(i). Therefore, Rule 211 applies to both the sale-for-resale exception
and the lease-for-sublease exception.

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Consol. Nos. 51468-1-II / 51513-0-II


150 Wn. App. at 814. Thus, the same exceptions that apply to the retail sales tax also apply to the

use tax “because those exemptions are embedded within the definition of ‘retail sale’ under RCW

82.04.050(1).” Activate, 150 Wn. App. at 814.

       There is no dispute that the Manufacturers leased pallets from CHEP and their leases

constitute a retail transaction subject to the retail sales or use tax. However, the Manufacturers

claim that they are exempt from paying either the retail sales tax or the use tax on their lease

transactions with CHEP (1) under RCW 82.04.050(4)(b) as a lease for sublease or (2) as a

wholesale sale of nonreturnable “packing material” under Rule 115.

                                          III. ANALYSIS

A. LEASE FOR THE PURPOSE OF SUBLEASE EXCEPTION TO THE RETAIL SALES OR USE TAX

       DOR assigns error to the Board’s conclusion that the Manufacturers’ lease of pallets from

CHEP was within the “retail sale” exception of RCW 82.04.050(1)(a)(i) and (4)(b) as a lease for

sublease. DOR argues that the Manufacturers’ lease of the pallets from CHEP does not qualify

for the exemption because the Manufacturers did not (1) sublease the pallets as they did not receive

consideration from their customers for the customers’ own use of the pallets or (2) acquire the

pallets from CHEP for the purpose of subleasing the pallets to their customers. The Manufacturers

argue that the Board correctly determined that their lease of pallets from CHEP is within the plain

meaning of a lease-for-sublease exemption because it (1) “sub-transferred possession” of CHEP

pallets to their customers, (2) received consideration for the pallets from their customers, and (3)

used the pallets “for the purpose of shipping product to their customers.” Appellant’s Resp. Br. at

12-13. We agree with DOR.




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Consol. Nos. 51468-1-II / 51513-0-II


       To qualify for the lease-for-sublease exception, the Manufacturers must show that they (1)

leased the pallets for sublease, (2) subleased the pallets in its regular course of business, and (3)

did not make an intervening use of the pallets before sublease.6 See Sprint, 174 Wn. App. at 663;

RCW 82.08.010(11); RCW 82.04.050(1)(a)(i). A lease or rental is defined as “any transfer of

possession or control of tangible personal property for a fixed or indeterminate term for

consideration.” Former RCW 82.04.040(3)(a). As the legislature does not specifically define

“sublease” as used in chapter 82.04 RCW, we apply its common meaning, which may be

determined by referring to a dictionary. Quadrant Corp. v. Cent. Puget Sound Growth Mgmt.

Hr’gs Bd., 154 Wn.2d 224, 239, 110 P.3d 1132 (2005). Black’s Law Dictionary defines “sublease”

as a “lease by a lessee to a third party, transferring the right to possession to some or all of the

leased property for a term shorter than that of the lessee.” BLACK’S LAW DICTIONARY 1724 (11th

ed. 2019).

       1.      NO CONSIDERATION

       To establish that they subleased the pallets, the Manufacturers have to show that they

transferred possession or control of the pallets for consideration. The Manufacturers contend that

they leased the pallets to their customers for consideration because the pallet costs are factored

into the amounts they charge customers for their products. DOR responds that regardless of

whether the Manufacturers “factored” the pallet costs into the selling price of the products sold,

the amount the Manufacturers charged for the products “was not consideration for their customers’




6
  We do not interpret the meaning of “regular course of business” within the sale-for-resale
exception as DOR does not argue that the Manufacturers did not sublease the pallets in its “regular
course of business.”

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Consol. Nos. 51468-1-II / 51513-0-II


own possession or use of the pallets for any period of time.”7 Reply Br. of Resp’t at 12. Therefore,

the Manufacturers did not receive consideration in exchange for the possession or control of the

pallets by their customers as required by the definition of a lease or rental under former RCW

82.04.040(3)(a). We agree with DOR.

       A lease is the exchange of consideration (1) for the right to possess or control the property

(2) for a fixed or indeterminate term. Former RCW 82.04.040(3)(a). The Manufacturers stipulated

below that they “recoup[ ]” the pallet rental costs by factoring the costs into the amount customers

pay for each product. H2O AR at 86. H2O stated that “one of the costs of the bottled water and

beverage products are the rental payments [H2O] made to CHEP, which the parties stipulated,

[H2O] recouped as part of the selling price of its products.” Id. Tyson submitted to the Board that

its own pallet costs were “factored into the amounts it charges customers” for its products. Tyson

AR at 88. “Factual stipulations generally bind the parties and the court.” Glen Park, 119 Wn.

App. at 487.

       The Manufacturers were free to recover costs, including pallet rental expenses, through the

amount they charged customers for their products. However, the Manufacturers’ ability to recover

past costs did not convert its product sale into a “sublease” of the CHEP pallets. Each customer’s

consideration was not given in exchange for the customer’s own right to possess or control the

CHEP pallets in the future; rather, the consideration was given in exchange for the customer’s

own right to possess or control the products sold by Tyson or H2O.




7
 In DOR’s opening brief, DOR argues that Tyson did not charge their customers for the transferred
pallets. However, in DOR’s reply brief, DOR somewhat acknowledges its stipulation.
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Consol. Nos. 51468-1-II / 51513-0-II


       On appeal, the Manufacturers take a somewhat different stance. The Manufacturers now

argue that they factored consideration into the selling price of their products for each customer’s

own use of the pallets and not just in exchange for the customer’s right to possess or control the

products sold by Tyson and H2O. Therefore, the Manufacturers contend that their customers paid

the Manufacturers for the customers’ own future use of the pallets, making the transaction a

sublease.

       Assuming, arguendo, that the Manufacturers’ stipulations to the Board are not binding, the

outcome does not change. A “sublease” is a “lease by a lessee to a third party, transferring the

right to possession to some or all of the leased property for a term shorter than that of the lessee.”

BLACK’S 1724.      However, once the Manufacturers transferred a pallet to a customer, the

Manufacturers’ own right to possess or control the pallet under the Hire Agreement with CHEP

ended. Upon transfer, CHEP deducted the pallet from the quantity of pallets in the Manufacturers’

possession, and the pallet became subject to the customer’s Hire Agreement with CHEP.

Therefore, the Manufacturers’ own lease of a pallet ended upon transfer to the customer. The

Manufacturers cannot sublease a pallet when they no longer lease the pallet themselves. Thus, the

Manufacturers’ claim that it subleased the pallets to their customers is simply not possible within

the plain meaning of a sublease and the framework of their own pallet leases with CHEP.

       We hold that the Manufacturers did not receive consideration in exchange for their

customers’ own right to possess or control the pallets within the definition of a lease or rental under

former RCW 82.04.040(3)(a) because the customers gave consideration only for the right to

possess the Manufacturer’s products, and the Manufacturers’ right to possess or control the pallets

ended upon transfer to their customers under their Hire Agreement with CHEP.


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Consol. Nos. 51468-1-II / 51513-0-II


       2.      FOR A FIXED OR INDETERMINATE TERM

       The Manufacturers do not argue that their alleged sublease of pallets to their customers is

for a fixed or indeterminate term, a required element of a lease under former RCW 82.04.040(3)(a).

Instead, the Manufacturers contend that their transaction with their customers is within the plain

language of a lease because they “sub-transferred possession of [CHEP] pallets to purchasers of

their products” upon delivery of their product “for consideration.” Appellant’s Resp. Br. at 12.

       A lease or rental is defined as “any transfer of possession or control of tangible personal

property for a fixed or indeterminate term for consideration.” Former RCW 82.04.040(3)(a).

Therefore, a taxable lease differs from a sale because consideration is paid in exchange for the

right to possess and control the tangible personal property for a period of time. Former RCW

82.04.040(3)(a). Even if the Manufacturers’ customers exchanged consideration for their own

right to possess or control the pallets, and the Manufacturers’ lease of the pallets did not terminate

upon transfer of the pallets, the Manufacturers did not receive consideration for their customers’

possession of the pallets for a fixed or indeterminate term. Former RCW 82.04.040(3)(a).

       DOR cites to Gandy v. State to support its assertion that a transaction may be characterized

as a lease under the tax code only if the transfer of possession or control is for a fixed or

indeterminate term. 57 Wn.2d 690, 692, 359 P.2d 302 (1961); former RCW 82.04.040(3)(a). In

Gandy, the taxpayer owned a business leasing vehicles. 57 Wn.2d at 692. The issue before the

court was whether the retail sales tax attached only to the amount paid by the lessee at the execution

of the lease or if the tax also attached to each lease payment when it became due. Id. at 695.

       To determine when the retail sales tax attached to a lease, the Gandy court engaged in a

discussion of a lease under the “Retail Sales Tax Act,” ch. 82.08 RCW. Id. at 694. The court


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reasoned that the lessee’s obligation depends upon his right to possession and “[e]ach rental

payment relates to a period of possession.” Id. at 695 (emphasis added). The court held that the

lessee must pay taxes on the selling price when the lease is executed and all rental payments

because each rental payment is for his continued enjoyment and right to possess the vehicle. Id.

        The Manufacturers pay consideration to CHEP in exchange for their own continued

enjoyment and right to possess the pallets for the past fixed or indeterminate term. Gandy, 57

Wn.2d at 695; former RCW 82.04.040(3)(a). However, the Manufacturers’ customers do not

contract with or give consideration to the Manufacturers in exchange for their own “period of

possession” of the pallets for a fixed or indeterminate term. Gandy, 57 Wn.2d at 695. As noted

above, the Manufacturers do not argue, nor does the record state, that the Manufacturers’ transfer

of pallets to its customers was for only a fixed or indeterminate term or that the selling price related

to a corresponding “period of possession.” Id.

        The Manufacturers contend that by referencing Gandy, DOR “attempts to distract [this]

Court by reading non-existant and irrelevant requirements into the statutory language.”

Appellant’s Resp. Br. at 12. But Gandy does not expand the definition of a lease under former

RCW 82.04.040(3)(a). The fact that the leases at issue in Gandy involved a series of rental

payments does not change the definition of a lease under the Retail Sales Tax Act; it changes the

number of taxable events only if the transaction involves multiple payments. 57 Wn.2d at 694.

        The Manufacturers do not argue that their transactions with their customers involving

CHEP pallets included an exchange of pallets for a fixed or indeterminate term, an essential

element of a lease. Former RCW 82.04.040(3)(a). Thus, we again agree with DOR.




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       3.      MANUFACTURERS DID NOT LEASE THE PALLETS FOR THE PURPOSE OF SUBLEASE

       DOR argues that the Manufacturers do not qualify for the lease-for-sublease exception

because the Manufacturers purchased the pallets for their own use in shipping operations and not

for the purpose of “resale, sublease, or subrent” within the definition of RCW 82.08.010(11). The

Manufacturers argue that DOR “is wrong: [DOR] stipulated that [the Manufacturers] acquired the

pallets for the purpose of shipping product to their customers.” Appellant’s Resp. Br. at 13. We

agree with DOR.

       To qualify for the lease-for-sublease exception, the Manufacturers must show that they

purchased the property for resale or sublease and the Manufacturers have not made intervening

use of the purchased items. Sprint, 174 Wn. App. at 663 (emphasis added). The terms “use,”

“used,” “using,” or “put to use,” with respect to tangible personal property,

       have their ordinary meaning, and mean:
               (a) . . . the first act within this state by which the taxpayer takes or assumes
       dominion or control over the article of tangible personal property (as a consumer),
       and include installation, storage, withdrawal from storage, distribution, or any other
       act preparatory to subsequent actual use or consumption within this state.

RCW 82.12.010(6).

       Rule 211 explains that the retail sales tax does not apply to sales of tangible goods when

       persons who purchase the [tangible goods] solely for the purpose of renting or
       leasing such property. . . . However, the retail sales tax applies upon sales to persons
       who . . . intend to make some use of the property other than or in addition to renting
       or leasing.

WAC 458-20-211(6)(a) (emphasis added).

       Here, in the Hire Agreement, CHEP made clear that the ordinary use of its pallets is for

use in shipping products: “‘[c]ustomer will use Equipment only for shipments to [customers],’”

Tyson AR at 98; and the Manufacturers’ acknowledge that they used the pallets “for the sole

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purpose of placing their products onto the pallets and transferring possession of those product-

loaded pallets via shipment.” Appellant’s Resp. Br. at 1. The Manufacturers stipulated that they

leased the pallets from CHEP and “only use[d] the pallets in shipping products to their customers.”

Appellant’s Resp. Br. at 20 (emphasis added). The Manufacturers leased the pallets for the purpose

of using the pallets for their intended use—to facilitate the delivery of their products to their

customers.

        The crux of the Manufacturers’ argument is that their use of the pallets to distribute their

products to their customers is not an intervening use. However, using the pallets to transport and

distribute their products to their customers plainly constitutes making use of the pallets for a

purpose other than merely renting or leasing the pallets. The undisputed material facts show that

the Manufacturers not only intended but made “some use of the [pallets] other than or in addition

to renting or leasing.” WAC 458-20-211(6)(a). They assumed dominion or control over the pallets

for the sole purpose of using the pallets to facilitate transportation and distribution of their products

to their customers, well within the ordinary and expected use of a pallet. RCW 82.12.010(6)(a).

        The burden of showing that the terms of a tax exemption are met lies with the taxpayer.

Activate, 150 Wn. App. at 813 (quoting Glen Park, 119 Wn. App. at 486). Under the facts

presented, the requirements of the lease-for-sublease exemption have not been satisfied. The

Manufacturers have not shown that they subleased the pallet to their customers or that they leased

the pallets from CHEP for the purpose of subleasing the pallets to their customers. Accordingly,

we hold that the lease transactions at issue do not qualify for the sale-for-resale exemption as a

lease for sublease under RCW 82.04.050(4)(b).




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B. PACKAGING MATERIALS EXCEPTION TO THE RETAIL SALES TAX

       DOR contends that the Board erred in ruling that the Manufacturers’ leases of pallets

qualified as a lease for sublease of packing materials under Rule 115. The Manufacturers contend

that their lease transactions are exempt from the retail sales tax as wholesale sales of packing

material. We agree with DOR.

       Under Rule 115, the sale or lease of packing materials is not subject to the retail sales tax

if the buyer of the materials “sell[s] tangible personal property contained in or protected by packing

materials.” The retail sales tax is not imposed if the purpose of the initial sale or lease of the

packing materials is for the resale or sublease of the packing materials with the product.

       In ruling that the Manufacturers were entitled to the sale-for-resale exemption (or lease-

for-sublease exception) under Rule 115, the Board concluded that the Manufacturers’ leases of

pallets were a lease of “‘packing materials’” and the Manufacturers subleased the pallets as part

of the sale of their products. H2O AR at 28. However, as discussed above, the Manufacturers’

did not sublease the pallets to their customers. The Manufacturers sold the products contained

only on the pallets for shipment purposes and transferred possession of only the pallets. And any

interest that the Manufacturers had in the pallets terminated upon transfer of the pallets to the

customer. Therefore, we hold that the Manufacturers’ lease transactions are not exempt from the

retail sales tax as a resale or sublease of “packing materials” under Rule 115.

                                          CONCLUSION

       We hold that the Manufacturers’ lease transactions are not entitled to the “lease-for-

sublease” exception to the retail sales or use tax under RCW 82.04.050(4)(b) or as a lease or sale

of “packing materials” within the meaning of Rule 115. The Manufacturers did not lease pallets


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from CHEP for the purpose of subleasing the pallets to their customers nor did the Manufacturers

sublease the pallets to their customers. We reverse the Board and affirm the superior court’s

decision to deny the Manufacturers’ refund requests.



                                                   CRUSER, J.
 We concur:



MAXA, C.J.




LEE, J.




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