Companies that use pallets to transport goods do not need to pay the Tax on Circulation of Goods and Services (ICMS) on them, according to the understanding of the 1st District Court of Monte Mor of the Court of Justice of São Paulo (TJSP), in a case involving a company that produces paper, cardboard and packaging. The decision can still be appealed. (Read the sentence)
Judge Gustavo Nardi ruled that ICMS cannot be levied on goods intended for consumption or for the taxpayer's fixed assets. According to the judge, pallets and other materials used exclusively in the production process “are immediately and completely used up during the process, and do not incorporate the goods finally produced under any aspect”. The decision was handed down in case 1002288-54.2020.8.26.0372.
According to the lawyer in charge of the case, Regiane Esturílio, from Esturílio Advogados, when notifying the departure of the pallets from the establishment, the state inspection treated the items as merchandise to be sold, which does not apply to the case of the taxpayer, who uses them as support structures for cardboard bales that will be transported to the buyer's establishment.
“The company was fined for selling the pallets when its corporate purpose is the manufacture and sale of paper and cardboard packaging. They fined it as if [the taxpayer] was selling the pallet,” he says.
Ana Mazzaferro, a partner in Tax Litigation at Rayes e Fagundes Advogados Associados, states that the decision takes into account the taxable event for ICMS. “What the judge understood is that the pallet was not a commodity. It was only there for transportation purposes; there was no actual circulation of merchandise. Since there was no legal way out, there is no ICMS incidence. What I think is important is this approach that the judge takes, to make this comparison that can be used in other cases. You have to find the actual taxable event for ICMS,” she states.
“Backwards” tax substitution
The state tax authorities based the assessment on article 398 of the São Paulo ICMS Regulation, which provides that payment of the tax on pallets and other transportation and storage items will be deferred until the moment they enter the taxpayer's establishment, even if the items are intended for use, consumption or permanent assets.
In defense of the taxpayer, however, the inspection wrongly applied the deferral method, seeking to make a “backward” tax substitution, which is not provided for in the Federal Constitution. According to Regiane Esturílio, paragraph 7 of article 150 of the Constitution provides for the possibility of the company paying in advance for a taxable event that occurs later, but not the possibility of payment in the future for a previous taxable event.
For Kelly Martarello, partner at Martarello Advogados, the assessment was wrong. “According to article 398 of the São Paulo ICMS Regulation, for ICMS to be levied, it is necessary to be linked to an onerous legal transaction that leads to a change in ownership, which is not the case here, since it is merely a matter of transporting the goods that the company manufactures on pallets. The decision is an important precedent for discussing the issue in the state, since other taxpayers will be able to challenge the State Treasury’s mistaken understanding,” she stated.
Lawyer Ana Mazzaferro believes the fine is invalid. She believes that article 398 of the São Paulo ICMS Regulation applies only to pallet manufacturers. “This article of the regulation on which [the fine] was based is specific to those who manufacture pallets,” she says.
Attorney Carlos Daniel Neto, from Daniel & Diniz Tax Law Firm, has a different assessment. In his view, the company in question, even though it did not manufacture the pallets, was required to collect ICMS on them under state regulations. He believes the court decision was mistaken in not addressing the deferral provided for in the regulations.
“The discussion, in fact, is that the company that produces and sells pallets has a specific treatment in article 398. Whenever the establishment that manufactured [the pallet] sells it to another establishment that buys it, the legislation establishes the deferral. The ICMS that is being discussed is what the company has to pay as a substitute tax payer. At the moment that [the pallet] entered the establishment, [the company] should recognize the debit [of ICMS] and the corresponding credit”, he states.
Non-reusable pallets
The decision by the 1st District Court of Monte Mor also drew attention for having removed ICMS from non-reusable pallets, i.e., pallets that are not returned to the company after being used to transport goods. Tax experts point out that reusable pallets generate fewer disputes between taxpayers and the National Treasury.
This is because it would be more explicit that reusable pallets are part of the companies' fixed assets and are not subject to ICMS. In the specific case of São Paulo, art. 82 of Annex I of the ICMS Regulation provides for ICMS exemption only for reusable pallets.
Non-reusable pallets, such as the one in this case, are made of a less resistant material and are usually left at the customer's establishment after the product has been sold. “To generate ICMS, two requirements must be met. First, [the product] must be considered merchandise. Second, it must have commercial or legal circulation. The pallet that is delivered together with the merchandise itself, there is this debate as to whether it can be taxed by ICMS or not”, says Augusto Fiel Jorge d'Oliveira, partner at Fiel d'Oliveira Advocacia.