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

[The text of this Vermont trial court opinion is un official. It has been reformatted from the origina l. The accuracy of the text and the accompanying data included in the Vermont trial cou rt opinion database is not guaranteed.] 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 Verm ont Department of Taxes. At issue in this case is whether the insulated fiberglass shipping t ubs that C&S uses to transport perishable groceries to retailers and the diesel fuel it uses to power the refrigeration systems in its trucks ar e 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 mater ials for use in packing, packaging, or shipping tangible personal property by a manufactur er or distributor.” The Commissioner concluded that the shipping tubs and diesel fuel ar e 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 r ecord 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 dec ision is presumed “correct, valid and reasonable, absent a c lear 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 th e 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 ta x under 32 V.S.A. § 9741(16): “[m]aterials, containers, labels, sacks, cans, boxe s, drums, or bags and other packing, packaging, or shipping materials for use in packing, packaging , or shipping tangible personal property by a

1 The Commissioner determined that the dry ice that C&S packs with certain perishable foods is exempt f rom the sales and use tax pursuant to 32 V.S.A. § 9741(16). While that matter was raised and decided below, i t is not part of this appeal and the court will not address it.2

manufacturer or distributor.” An expression such a s “[m]aterials . . . used in shipping” is potentially meaninglessly broad. By regulation ado pted in 1974, the Department expressly interpreted the exemption to not apply to “returnable or reusable pallets, skids, r eels and similar equipment” in an effort to distinguish packing, pac kaging, and shipping materials from the taxpayer’s durable equipment. The rationale was de scribed subsequently in Technical Bulletin 11, issued in 1998:

It has long been the Department’s position that ret urnable and reusable packaging is not exempt from the sales and use tax. The rati onale for the exemption is that packaging is ordinarily transferred to the retail c ustomer as part of the sale and it is part of the taxable base. There the same packag ing should be exempt at the manufacturing or distributor level to avoid taxing it twice. In contrast, returnable or reusable packaging which is not permanently tran sferred to a retail customer does not become part of the taxable base. Therefor e, the exemption has extended only to materials that were transferred to the buye r with the product; and returnable or reusable materials used by the manufa cturers or distributors in getting their product to the market have not been e xempt.

TB-11 at 1 (footnote omitted). As the Department p uts it, the taxpayer’s durable equipment has

come to rest in the stream of commerce and thus sho uld be taxed to the manufacturer or distributor. Packing, packaging, and shipping mate rials that will continue down the stream of

commerce are not taxed.

There is nothing arbitrary or inherently unreasona ble with this much of the Department’s interpretation of 32 V.S.A. § 9741(16). It is cons istent with the thrust of similar statutes. See 67B Am. Jur. 2d Sales and Use Taxes § 104 (WL updat ed May 2015) (“The purpose of exempting from the sales tax such intermediate sale s of containers and packaging materials is to avoid double taxation and to prevent the increase o f the ultimate sales price to the consumer, for the consumer pays the whole tax reflected in the pr ice 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 tu bs 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 ship ping process. While true in a highly literalistic way, this argument would extend the tax exemption t o anything that both can be considered a “material” and is in any way is related to C&S’s gr ocery 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 o ver 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 typi cally 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.3

C&S argues that the diesel fuel and tubs are exemp t 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 ru le.

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). T hat subsection, at the time of McClure

, exempted “[t]angible personal property which become s 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 newsp aper included the process by which a reporter takes phot ographs 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 manufactu ring 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 ite ms have the characteristics that the exemption requires.

Standard Register

also does not advance C&S’s claim. Originally, th e following were exempt from the sales and use tax: “[m]aterials, co ntainers, labels, sacks, cans, boxes, drums or bags and other packing, packaging, or shipping mate rials 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 m aterials 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 tha t appeared in the original statute. In this case,

the issue is whether the diesel and tubs have the c haracter 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 shi pping 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 D epartment 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 is4

that reusable shipping materials with a life expect ancy 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 l imited life that otherwise is not within the scope of the exemption.

C&S argues that there is no statutory basis for th e 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 ha s no effect on this case. The three-year rule operat es to expand the exemption to include certain durable equipment that otherwise, by longstanding i nterpretation of the Department, would fall outside its scope. C&S’s fiberglass tubs fall outs ide 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 t hree-year rule is valid or invalid is irrelevant

to this case.

Constitutionality of the exemption

C&S argues that excluding its diesel fuel and fibe rglass tubs from the benefit of the exemption has the ultimate effect of raising the pr ices 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 effective ness 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 pr event any taxation of C&S (or any component of the food industry in general) of any k ind.

“The Supremacy Clause of the United States Constit ution proclaims federal law to be ‘the supreme Law of the Land.’ Consequently, feder al law can preempt state law whenever Congress explicitly states that it is preempting st ate 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, f ield, 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 discre tion by including a penalty with the

assessment of sales and use tax. C&S raised this i ssue 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 ti me in a reply brief are not preserved for review). In any event, C&S argues that the Commissioner abus ed her discretion because its underpayment

of taxes was de minimus presuming it prevails on the issues above. It has not preva iled on those issues; there is no compelling basis for the conclu sion that the penalty is an abuse of discretion.5 ORDER

For the foregoing reasons, the Commissioner’s Dete rmination is affirmed

.

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

_____________________________ Mary Miles Teachout Superior Judge