In a recent decision, the Arkansas Supreme Court denied Tyson Foods subsidiaries’ $3.45 million refund claim for sales tax paid in connection with their rental of wooden pallets used to deliver chicken, finding that the sale for resale exemption was inapplicable. Tyson Chicken, Inc. v. Hudson, No. CV-25-16 (Ark. June 4, 2026). In so finding, the Court expressed that “chicken is chicken, not chicken plus a pallet,” harkening back to Judge Henry Friendly’s famous question from over 60 years ago: “The issue is, what is chicken?”[1]
The Facts: Three Tyson Foods subsidiaries (together, “Tyson”) rent reusable wooden shipping pallets from Commonwealth Handling Equipment Pool (“CHEP”), the world’s largest supplier of reusable pallets and containers. Tyson uses the pallets to ship chicken and other food products to distributors and others through its supply chain. After delivery, the pallets are unloaded and returned to CHEP, which retains ownership of the pallets throughout the process, inspects and repairs them, and rents them out again.
Tyson paid sales tax on the pallet rentals but later concluded it should not have paid the tax and sought refunds. CHEP, which had remitted the tax to the Arkansas Department of Finance and Administration (“DFA”), assigned its refund rights to Tyson, allowing Tyson to request a refund directly from the DFA without the need to involve CHEP. DFA denied the refund, and the circuit court granted summary judgment in DFA’s favor. Tyson appealed to the Arkansas Supreme Court.
The Law: Arkansas imposes a three-percent sales tax on “proceeds or gross receipts derived from all sales,” and the definition of “sale” includes rentals or leases of personal property. Ark. Code Ann. §§ 26-52-301,-103(31)(A)-(B).
The exemption at issue is the “sales for resale” provision under Ark. Code Ann. § 26-52-401(12)(A), which exempts from sales tax “proceeds derived from sales for resale to persons regularly engaged in the business of reselling the articles purchased.” In essence, this provision seeks to ensure that items that are merely resold are not taxed twice.
However, Section 401(12)(B) imposes an additional requirement for items “sold for use in manufacturing, printing, compounding, processing, assembling, or preparing for sale.” To qualify, the purchased item must “become[] a recognizable integral part of the manufactured, printed, compounded, processed, assembled, or prepared products.” Items that do not become part of the product are treated as purchased “for consumption or use”—not for resale—and remain taxable. The parties conceded that “the pallets are used to ‘assemble[]’ and ‘prepar[e] [products] for sale’” and thus, Section 401(12)(B) applies.
The Decision: Tyson argued that it sells “pallets of chicken” and that the pallets are therefore integral to the final packaged product received by its customers (distributors, wholesalers, and retailers). While the Court credited Tyson’s argument as “creative,” it concluded that the pallets never actually become part of the chicken—they are merely “a convenient way to market and deliver it.”
The Court drew on its own precedent. It previously held that chemicals incorporated into paper, paper cups for fountain drinks, and soda bottles were “integral parts” of finished products because, without them, it would be impossible to sell the product. By contrast, the Court has long held that wooden boxes used to transport bottled soda, grocery bags, and other packaging materials used to deliver merchandise were not integral parts of the products sold.
The Court found that the pallets fell into the latter category. Unlike the cups and bottles, without which it would be impossible to sell beverages, “it is possible to sell chicken without wooden pallets.” As the Court put it: “the end consumer buys chicken, not chicken and a pallet.”
It bears noting, however, that in arriving at its conclusion, the Court may have been focused on the wrong transactions. The sales at issue are Tyson’s rental of the pallets (which qualifies as a sale, i.e., the original sale) and its subsequent sale of product on pallets to its distributors (i.e., the claimed resale). Those transactions do not involve the end consumer, and if the Court had focused on those transactions, the outcome may have been different, as distributors cannot receive the product without the pallet. Indeed, during oral arguments, the Court pressed the state’s attorney on exactly this point: “But for the pallet, how does the chicken get delivered? . . . How is the pallet not part of the delivery and the product?”[2] Yet this reasoning was conspicuously absent from the Court’s written opinion.
The Takeaway: This case highlights a fundamental design flaw in many state sales tax systems. As a matter of sound tax policy, sales taxes should apply only to final consumption—the end consumer buying the product. Business inputs like purchases of pallets, packaging materials, and processing supplies should be excluded from the tax base entirely. When they are not, you get a cascading tax—tax on top of tax—baked into the price the consumer ultimately pays. Most state sales tax statutes trace their origins to the Great Depression when states could not afford to leave any revenue on the table. The legacy is a patchwork of exemptions and fine-line distinctions—cups are exempt, bags are not; bottles are in, pallets are out—that generate litigation over questions a well-designed consumption tax would never produce. Getting business inputs out of the sales tax base would eliminate entire categories of disputes like this one and produce a cleaner, fairer system. But that is a job for the legislature.
This update is one in a series of updates written for the June 2026 edition of The BR State + Local Tax Spotlight.
[1] Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F. Supp. 116, 117 (S.D.N.Y. 1960) (Friendly, J.).
[2] Oral Argument at 31:50–32:10, Tyson Chicken, Inc. v. Hudson, No. CV-25-16 (Ark. May 21, 2026), arkansas-sc.granicus.com/MediaPlayer.php?view_id=2&clip_id=1808.