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When Do Pallets Qualify for Sales Tax Exemptions for Manufacturers?

Pallets-Manufacturing-Industrial_GI-518662204_BW_MDIs your company’s purchase of pallets subject to sales & use tax? As with most issues related to sales & use taxes, the answer depends on several factors. Here are three things to know about the taxability of pallets: 

Pallets used to ship a product for sale may qualify for sales tax exemptions.  If your company uses pallets to ship products that are sold to customers, the pallets may qualify as exempt materials used for packaging a product for sale. Check the laws of your state to determine if packaging exemptions applies to wholesalers or only to manufacturers. 

Returnable pallets may not be treated the same as non-returnable pallets.  Some states only allow an exemption for “non-returnable” packaging supplies. These states do not consider returnable pallets as exempt packaging supplies since the pallets are returned to the seller and thus are not considered to be sold along with the product.  Leases of pallets, such as chep pallets, are even more complicated because they do not fall into the returnable or non-returnable categories.  Many states have complex tax treatment for leased pallets. 

Exactly how the pallets are packaged can affect their taxability.  Some states only consider pallets as packaging supplies depending on exactly how they go out the door with your product. For example, Ohio only considers pallets to be exempt if they are shrink-wrapped along with the product being shipped. When shrink-wrapped, Ohio considers the pallets to be part of an exempt packaging container. When not shrink-wrapped the pallets are considered dunnage and are fully subject to sales & use tax.

While the taxability rules for pallets are complicated, it’s worth understanding your state’s regulations.  Next, investigate the details about pallets at your facility.  Are they leased? How to they go out the door? Do customers return the pallets? Put this information together to determine if you are missing any sales tax savings opportunities.  Because state regulations change regularly, you may want to consider periodically conducting a Compass Complete Assessment.

For more sales tax tips and updates, subscribe to the Cherry Bekaert Sales and Use Tax newsletter. 

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Lauren Stinson, CMI
Written by Lauren Stinson, CMI
As a Principal with Cherry Bekaert, Lauren serves as the National Leader for the Sales & Use Tax practice within the Firm’s State & Local Tax group. Based in Cherry Bekaert’s Atlanta practice, Lauren is an expert on sales and use tax issues that directly impact manufacturers, technology businesses and eCommerce sellers on the state and national levels.

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