Supreme Court Affirms Sales Tax Assessment

In C&S Wholesale Grocers, Inc. v. Department of Taxes, 2016 VT 77 (July 15, 2016), the Vermont Supreme Court affirmed the sales tax assessment on the purchase of reusable fiberglass freezer tubs, the Department of Taxes’ refusal to refund sales tax paid on diesel fuel, and the penalty assessed by the Commissioner of the Department of Taxes.

Issue: Taxpayer, a Vermont corporation, uses reusable fiberglass freezer tubs to ship frozen food to grocery stores throughout New England and New York State. The tubs are subsequently returned to Taxpayer, which uses each tub for three to five years on average. Title 32 V.S.A. §9741(16) exempts certain packaging and shipping materials from Vermont sales tax. Sales and Use Tax Regulation §1.9741(16)-2 further limits the exemption, and the Department of Taxes assessed sales tax on the tubs and on diesel fuel based on the exemption. Taxpayer appealed, arguing that under the plain language of the statute, the freezer tubs should be exempted as containers, that the Department’s interpretation of the exemption should not be given deference by the Court, and that the Department’s regulation limiting the exemption to shipping and packaging materials with a life span of less than three years is “arbitrary and capricious.”

Holding: The Supreme Court affirmed the Department’s decision, finding that the regulation is clear as to what the sales tax exemption applies to. Since the freezer tubs have “come to rest in the stream of commerce,” they are not at risk of being doubly taxed. While the freezer tubs are containers, they are not encompassed within the language of the regulation, which is meant to further refine the language of the statute. In making her decision, the Commissioner looked at the language of the exemption and the context provided by the regulations, and as such, her conclusion was not “incorrect, invalid, or unreasonable.” The Court did not address Taxpayer’s argument that the regulation’s less than three-year lifespan limitation was arbitrary and capricious; instead, the Court noted that the freezer tubs are excluded regardless of the rule because of their life expectancy, and left it at that. The Court also found that the diesel fuel was not shipping material and as such was not exempt from sales tax. While Taxpayer also challenged the penalty as being unreasonable, since Taxpayer acted in good faith, the Court found that the argument was not properly preserved for review because Taxpayer did not raise the argument in its memorandum to the Commissioner.