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C&S Wholesale Grocers, Inc. v. Department of Taxes

Supreme Court of Vermont

September 16, 2016

C&S Wholesale Grocers, Inc.
Department of Taxes

         On Appeal from Superior Court, Washington Unit, Civil Division Mary Miles Teachout, J.

          Jon R. Eggleston and Malory S. Lea of Primmer Piper Eggleston & Cramer PC, Burlington, for Plaintiff-Appellant.

          William H. Sorrell, Attorney General, and Will S. Baker, Assistant Attorney General, and Bridget C. Asay, Solicitor General, Montpelier, for Defendant-Appellee.

          PRESENT: Dooley, Skoglund, Robinson and Eaton, JJ., and Kupersmith, Supr. J. (Ret.), Specially Assigned

          EATON, J.

         ¶ 1. Taxpayer C&S Wholesale Grocers, Inc., a wholesale grocery distributor, disputes sales tax assessed by the Vermont Department of Taxes on the purchase of reusable fiberglass freezer tubs used in the transport of perishable items, as well as the Department's refusal to refund sales tax paid on diesel fuel used to power refrigeration systems mounted on taxpayer's tractor trailers. Taxpayer also contests the penalty assessed by the Commissioner of the Department of Taxes, arguing that it is unreasonable. We affirm.

         ¶ 2. Taxpayer is a Vermont corporation, headquartered in Keene, New Hampshire. As the nation's largest wholesale grocer, taxpayer purchases inventory from manufacturers and other suppliers before reselling it to national supermarket chains and local independent grocers. Since 1981, taxpayer has maintained a warehouse in Vermont that supplies its New England and New York State customers. Serving as a middleman between manufacturers and grocery stores, taxpayer's inventory includes products requiring refrigeration for freshness and safety reasons. To maintain the temperature of the product requiring refrigeration, taxpayer transports perishable products in large rectangular fiberglass tubs, referred to as "freezer tubs, " which are packed with dry ice and loaded into refrigerated tractor-trailers. The tractor-trailers, or "reefers, " are insulated and mounted with a refrigeration system that runs on diesel fuel, or "reefer fuel."

         ¶ 3. The freezer tubs, which vary in size, are insulated with fiberglass or foam and have a hard plastic outer shell. Boxes of frozen food are stacked on a wooden pallet and covered with dry ice, which is then wrapped in a large plastic bag, or shroud. The shrouded package is then placed in the freezer tubs, which are then loaded onto taxpayer's tractor-trailer delivery trucks, which typically make between two and seven stops to various grocer customers. During delivery, the freezer tubs are unloaded and the plastic shrouds are cut off the pallets before the boxes of frozen food are removed and taken into the store. Empty freezer tubs are not given or transferred to the grocer customer, and are not used by the customer in any way; they are taken back by taxpayer for re-use.

         ¶ 4. Taxpayer typically uses each freezer tub for a period of three to five years. Despite this lifespan, some of the freezer tubs may be damaged by heavy warehouse equipment or lost and last less than three years, and still others may last longer.

         ¶ 5. Each of taxpayer's reefers has a fuel tank, separate from the tractor-trailer's fuel tank. The fuel tank is used only to power the tractor-trailer's refrigeration unit, which in turn keeps the tractor-trailer cool. Unlike the diesel fuel for the tractor-trailers themselves, the reefer fuel is dyed red and held in tanks marked "for off-road use only." It is illegal to use reefer fuel to propel the tractor-trailers on public roads and highways.

         ¶ 6. During an audit, the Department identified that no sales or use tax was paid on the thousands of freezer tubs owned by taxpayer, which it found were not exempted as packaging under 32 V.S.A. § 9741(16), which exempts "[m]aterials, containers, labels, sacks, cans, boxes, drums, or bags and other packing, packaging, or shipping materials for use in packing, packaging, or shipping tangible personal property by a manufacturer or distributor." The Department assessed sales and use tax of $30, 562 for these freezer tubs for the period from October 1, 2009, through September 30, 2012, as well as a penalty under 32 V.S.A. § 3202(b)(3). Also during the audit, when asked by the Department whether they had paid sales tax on the reefer fuel, taxpayer answered in the affirmative.

         ¶ 7. On March 26, 2014, the Department held an administrative hearing regarding taxpayer's protest of that tax assessment for the freezer tubs and its denial of taxpayer's request for a sales tax refund for the reefer fuel. The Commissioner of the Department of Taxes considered whether freezer tubs and reefer fuel were exempt from the Vermont sales and use tax under the packing and shipping materials exemption in 32 V.S.A. § 9741(16). The Department found that taxpayer's freezer tubs did not qualify as shipping materials exempt from sales and use tax under 32 V.S.A. § 9741(16). Considering the freezer tubs in the context of its regulations, which define "packing, packaging or shipping materials" as "the articles and devices used in packing, packaging or shipping tangible personal property such as containers, bags, labels, gummed tapes, bottles, drums, cartons, bubble wrap and sacks, " and exempt "[i]tems of returnable and reusable packaging as long as the packaging has a limited life expectancy (not more than three years), " Sales and Use Tax Regulations § 1.9741(16)-2, Code of Vt. Rules 10 060 033 [Hereinafter Tax. Dept. Reg.], the Commissioner found that the freezer tubs are not exempt as they "are returned to the taxpayer and reused, and have an expected life greater than three years, and so, under the regulations, are not exempt." As to the reefer fuel, the Commissioner found that it "is not a container or packing material, is not a component of the parcel which conveys to the customer, and is not exempt."

         ¶ 8. After the hearing, taxpayer filed a written request for a refund of the sales tax paid on the reefer fuel. The Department formally denied the request. Taxpayer appealed both determinations, and the parties stipulated to a consolidation of the appeals. Thereafter, taxpayer appealed the Department's adverse determination regarding the freezer tubs and reefer fuel to the trial court. Following the trial court's decision affirming the Commissioner's determination, taxpayer appealed to this Court.

         ¶ 9. On appeal, taxpayer challenges both the Commissioner's interpretation of the exemption in 32 V.S.A. § 9741(16), arguing that the statute does not limit the type of materials or containers used to pack or ship, and her decision upholding the penalty assessed against taxpayer. The State disagrees with these arguments, asserting that the Commissioner correctly construed the packaging exemption to the sales and use tax when it found that the statute does not exempt all materials used to transport goods, but only that packaging which stays with the customer. Although the State acknowledges that the exemption includes some returnable and reusable packaging, such packaging must have a life expectancy of less than three years.

         ¶ 10. We review the Commissioner's decision directly, independent of the superior court's conclusions. In re Williston Inn Grp., 2008 VT 47, ¶ 11, 183 Vt. 621, 949 A.2d 1073 (mem.). Moreover, because we are "traditionally reluctant to substitute our judgment for the experience and expertise of an agency, " Lemieux v. Tri-State Lotto Comm'n, 164 Vt. 110, 112, 666 A.2d 1170, 1172 (1995), we apply a deferential standard of review to agency decisions, see, e.g., Gasoline Marketers of Vt., Inc. v. Agency of Natural Res., 169 Vt. 504, 508, 739 A.2d 1230, 1233 (1999) ("[A]bsent a clear and convincing showing to the contrary, decisions made within the expertise of administrative agencies are presumed to be correct, valid, and reasonable." (citation omitted)). We therefore uphold the Commissioner's interpretation of tax statutes absent "compelling indication of error." Williston Inn Grp., 2008 VT 47, ΒΆ 12. This ...

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