2016 VT 77
By Elizabeth Kruska
Some of you may have seen this movie.
You know what a reefer is? No, silly, it’s a refrigerated truck! I mean, yeah, it’s also weed, but in the context of this particular opinion, it’s a truck and the fuel that runs the refrigerated part of the truck. Actually, this opinion is more about refrigerated tubs, but I can’t think of anything funny about refrigerated tubs.
C&S is a big wholesale grocer company in Vermont, and with its business headquarters in Keene, New Hampshire. They buy grocery products from producers and re-distribute them throughout New England and New York. I should mention that at one point in the last decade my husband, who is also an attorney, provided some legal services to C&S. I am not sure what he did, and it’s been at least five years since he had any cases with them. I vaguely remember him having to prepare for a trial involving questions about the correct way to weigh cheese. He kept calling it “The Cheese Trial.” I believe The Cheese Trial settled amicably.
Cheese, like many other grocery products, has to be kept cool in order to be safe for distribution, re-sale, and ultimately for consumption by human beings. The trick is that the producers and distributors have to be able to maintain the right conditions from point A to B to C to your fork. That’s more cumbersome and less romantic than “Farm to Table” but I think you know what I mean.
So, C&S has to have the appropriate equipment to shuttle comestibles around the region. First, they’ve gotta have refrigerated trucks. Even though sometimes it feels like the only season we have here is Winter, we actually do sometimes experience summer-like conditions. It’s characterized by bad ice fishing, road construction, and flip flops. I think I’m going to call LL Bean and see if they can make Bean Boot Flip Flops. This is either my best or my worst invention yet; I can’t decide. Anyway, since weather is relatively unpredictable, and food is known to spoil if subject to vagaries of climate, food distributors need to make sure they can keep food at a stable temperature.
C&S buys some reefers, which need to be powered with regular truck fuel to make them go, and the refrigerated part has to be fueled with special red-dyed, non-engine grade diesel, colloquially known as “Reefer Fuel.” I believe I have heard people refer to Doritos the same way. Ba dum bum.
C&S also bought some big fiberglass freezer tubs. The products would go from the warehouse onto a pallet, covered with a wrapping called a shroud, packed with dry ice, and put into the tubs. The tubs go into the reefer, and the reefer heads out the door to deliver tasty ice cream, frozen peas, and whatever else is in there to your friendly local market.
C&S did its taxes, and tried to get a refund for taxes paid on the reefer fuel and the freezer tubs, arguing that since they were part of the packing and shipping of their wares, they should be exempt from sales tax. The Tax Department denied the request and also assessed a penalty. C&S appeals, which SCOV affirms.
My favorite part of this opinion is in the middle, so I’m going to start there. This is a fight about sales tax and who pays sales tax and who doesn’t. Justice Eaton says very plainly that sales tax is designed to be levied on the ultimate user.
This gets a little complicated, though, when considering packaging. The tax statute does exempt disposable packaging and also some reusable packaging. Consider a cardboard box with some bubble wrap inside. The distributor uses these materials to get the goodies inside to the seller. But, if the distributor is taxed on them, and then the buyer is taxed on them, they get double-taxed. Believe it or not, nobody wants that. So there’s an exemption. But even though we’re living in a material world (you’re welcome), there is a lot of good and a lot of encouragement to recycle and reuse packaging materials. But, since reusable packaging materials are generally not subject to tax refunds, there’s no incentive other than conscience to a business to use them. This turned out to be an unintended consequence in the tax rules, so the Tax Department created an exception. If packaging material that is meant to be reused has a 3 year life span, it can be exempt from taxes. Consider a pallet. It’s made of wood, and it can be used a bunch of times—as well it should be. But, eventually pallets fall apart from use. In order to make it fair and to encourage companies to use certain reusable packing and shipping materials like pallets, they can get a tax break on using them.
C&S tried to argue that the freezer tubs should be exempt from tax because they are containers for shipping. The Tax Commissioner looked at the language of the rules, and disagreed. The freezer tubs are made of fiberglass and have a life expectancy of more than three years. I’m guessing (and this is based on nothing more than common sense) that these tubs are expensive and probably fairly durable; otherwise nobody would buy them.
Since the freezer tubs aren’t meant for the grocery stores to keep, the grocery store isn’t the end-user on the product. C&S apparently tried to make an argument about containers, saying that since it’s a container, it should be exempt from sales tax under the exemption rule. Sure, these are containers, in that they contain something, but they contain it briefly and then go back to where they started. This is like arguing that if I meet a friend for a picnic and give her a sandwich out of my cooler that she’s somehow entitled to my cooler. Hands off my cooler, sister, that’s going home with me.
SCOV agrees with the Tax Department’s logic for a few reasons. First of all, SCOV is not about to second-guess an agency that has actual expertise in a subject unless it’s blatantly wrong. Second, SCOV’s job in interpreting statutes is to give effect to the legislative intent. They first assume that the legislature wrote down what it meant. The statute at issue has an exemption for packing materials. Although the exemption is broad, the legislature would not have meant to exempt every single kind of packaging and shipping material. Otherwise, they’d have gone Oprah-style and said, “You’re exempt! You’re exempt!” But they didn’t do that here. If the court read it that way, it would lead to an absurd result.
If there’s an exemption sought, the burden is on the taxpayer to prove that he or she qualifies. And they must prove it beyond a reasonable doubt. But, if there’s ambiguity regarding an exemption, it is supposed to be resolved in favor of the taxpayer. SCOV finds that C&S couldn’t prove that here, and that there wasn’t such an ambiguity. If C&S never paid tax on the tubs, and their consumers never pay tax on the tubs, then nobody pays tax on the tubs. That’s also contrary to the point of the sales tax statute that calls for a tax on the end-consumer.
C&S also tried to make an argument that the three-year rule is arbitrary and capricious. And I can kind of see this argument. These freezer tubs they bought, although durable, aren’t indestructible. Dragons live forever, not so freezer tubs, I hum with every possible apology to Peter Paul and Mary. The tubs are used for three to five years and then have to be replaced. What’s so magical about the three year cut-off? Why isn’t it five? These are legitimate questions. SCOV points to the regulation and says, “Hey, that’s the rule they made, we aren’t going to second-guess the contents of the rule. Freezer tubs have a life expectancy longer than three years so they’re not exempt.” I can’t help but observe, though, that the rule was made in 1974, and might be worth revisiting, given advances in technology in packaging and durability of materials. Just look at the differences in things like cars and football helmets between 1974 and now. Just making a suggestion.
Now, let’s get to this reefer-truck-fuel business. C&S argued that reefer fuel is a shipping material, so it should be exempt. SCOV agrees that it’s a “material” in that it is a tangible thing that exists in the universe, but that’s where it stops. The fuel gets used up between points A and B; it’s not something that stays with B such that the tax could be passed through. The reefer fuel is not in any danger of being double taxed. So, no.
Last, C&S made an argument that it should not have to pay a penalty. SCOV dismisses this because it wasn’t raised below, and you don’t get to make new arguments for the first time in the Supreme Court, generally speaking. You have to preserve your arguments, or SCOV is not going to hear them.
So, SCOV affirms.