May a retail copy-and-duplicating service buy or lease copiers and binding machines tax-free under Kansas's integrated production exemption?

Plain-English summary

A tax professional asked whether a client operating a copy-and-duplicating service owed tax when buying copiers used to make retail copies on which it collected sales tax.

The Department answered yes. Purchases and leases of copy machines, binding machines, and other equipment used by a copying service were subject to Kansas sales and use tax. The business could not claim the integrated production exemption in K.S.A. 79-3606(kk).

Notice 00-08 explained that the exemption benefited businesses conducting industrial manufacturing, processing, fabrication, finishing, or assembly for wholesale or retail distribution. It expressly distinguished retail and nonindustrial operations, including copying and photo-finishing services that served retail customers.

K.S.A. 79-3606(kk)(2)(D) excluded nonindustrial businesses whose operations were primarily retail and that produced or processed tangible property only as an incidental part of the retail business. Copy shops filled special orders for final consumers, often walk-in customers, rather than conducting what the statute described as a commonly recognized industrial production operation.

What this means for you

Copy and print shops

Pay Kansas sales or use tax when buying or leasing copiers, binding machines, and similar equipment. Collecting tax on the finished copies does not make the machines exempt manufacturing equipment.

Equipment lessors and sellers

Do not accept an integrated-production exemption merely because a copy shop uses the equipment to create taxable copies for customers.

Tax professionals

Focus on the nature of the business operation. Producing customer-ordered tangible items does not by itself turn a primarily retail service business into an industrial manufacturer or processor.

Common questions

Q: Are copy-shop purchases of copiers taxable?
A: Yes. The Department said purchases and leases of copying equipment were taxable.

Q: Does collecting sales tax on finished copies exempt the machines?
A: No. The copy shop was still a nonindustrial retail operation.

Q: Why did the integrated production exemption not apply?
A: Copying services produced special-order items for retail customers and were not commonly regarded as industrial manufacturing or processing operations.

Q: Did the rule also cover binding machines?
A: Yes. The letter expressly included copy machines, binding machines, and other machines used by the service.

Citations and references

• K.S.A. 2004 Supp. 79-3606(kk) — integrated production machinery and equipment exemption
• K.S.A. 79-3606(kk)(2)(D) — exclusion for primarily retail, nonindustrial businesses
• Kansas Department of Revenue Notice 00-08 — implementation guidance quoted in the opinion

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2005-001

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

August 1, 2005

XXXX
XXXX
XXXX

RE: Your e-mail received on July 26, 2005

Dear XXXX:

I have been asked to respond to your recent e-mail. In it you state that you have a client that operates copy and duplicating service. You ask if sales tax is owed when your client buys copiers to uses to reproduce the copies that its sells at retail and collects sales tax on. The answer is yes. Purchases and leases of copy machines, binding machines, and other machines by a copying service are subject to Kansas sales and use tax. These businesses may not claim exemption under the integrated production exemption set forth at K.S.A. 2004 Supp. 79-3606(kk).

When K.S.A. 2004 Supp. 79-3606(kk) was enacted, the department issued Notice 00-08 to help implement the new sales tax exemption. The notice explains:

The new law benefits manufacturing or processing businesses. The law defines “manufacturing or processing business” as a business that utilizes an integrated production operation to manufacture, process, fabricate, finish, or assemble items for wholesale and retail distribution as part of what is commonly regarded as a industrial manufacturing or processing operation or a agricultural commodity processing operation. The exemption does not apply to retail operations or other non-industrial businesses. Retail operations and non-industrial businesses include, but are not limited to: contractors; construction companies; retail businesses that prepare food products for consumption by the buyer on or off premises; businesses that service or refurbish property that is returned to its owner, such as repair shops and machine shops; copying services, photo finishing services, and similar businesses that perform services for retail customers; telephone companies; and utility transmission and distribution operations.

K.S.A. 79-3606(kk) (2)(D)(iii) specifies that:

Manufacturing or processing businesses do not include, by way of illustration but not of limitation, nonindustrial businesses whose operations are primarily retail and that produce or process tangible personal property as an incidental part of conducting the retail business. . . .

Photocopying, copying, and duplicating services do not qualify for this exemption. As a general rule, service businesses like you describe that produce articles to the special order of customers are treated as retailers under the sales tax law. These businesses include restaurants, bakers, meat lockers, metal shops, ones that imprint t-shirts, and so forth. These business are not industrial processors or manufacturers. They do not conduct what is "commonly regarded by the general public as an industrial production operation to manufacture, process, fabricate, finish, or assemble items for wholesale or retail distribution as part of what is commonly regarded by the general public as an industrial manufacturing or operation." K.S.A. 79-3606(kk)(2)(D). Typically, these business accept an order from a final consumer and produce items to fill that order. They often provide their services to walk in customers. These kinds of businesses do not qualify for exemption under a statute that dictates: "manufacturing or processing businesses do not include, by way of illustration by not of limitation, nonindustrial businesses that whose operation is primarily retail and that produce or process tangible personal property as an incidental part of conducting the retail business." K.S.A. 79-3606(kk)(2)(D)(i)(emphasis supplied).

I hope that this letter adequately explains why your client is not entitled to claim exemption when it leases copying equipment.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 08/02/2005 Date Modified: 08/02/2005

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