Are soap, stain remover, and disinfectant used to launder towels for cleaning dairy cows before milking exempt as consumed in production?

Plain-English summary

A dairy farmer used towels to clean and disinfect cows' teats before milking, then laundered the towels with soap, stain remover, and disinfectant. The requester argued that these supplies were essential, immediately consumed, nonreusable, and connected to milk and dairy products sold at retail.

The Department nevertheless said the purchases were taxable. K.A.R. 92-19-53 requires property claimed as consumed in production to satisfy at least five criteria, including being “used in the actual process.” The Department found that the laundry and disinfecting materials were used one step before the actual milk-production process, so they failed that criterion.

The rule also distinguishes an item that is important to production from one actually used in production. It expressly excludes supplies used for cleaning equipment or the physical plant from the consumed-in-production exemption. Here, necessity and immediate consumption were not enough without direct use in the actual production activity.

What this means for you

Dairy farmers

Pay Kansas sales or compensating tax on soap, stain remover, and disinfectant used to launder towels for pre-milking teat cleaning under the facts of this letter.

Agricultural suppliers

Do not accept a consumed-in-production claim merely because a cleaning supply is necessary, quickly used up, or connected to a taxable agricultural product. Confirm that it is used in the actual production process.

Tax professionals

Apply every K.A.R. 92-19-53 criterion. Failing the actual-process requirement defeats the exemption even if the property is essential, consumed, and nonreusable.

Common questions

Q: Why were the cleaning supplies taxable?
A: The Department placed their use one step before actual milk production, so they were not used in the actual process.

Q: Did it matter that the supplies were immediately consumed?
A: Not enough. Immediate consumption is only one requirement; all required criteria must be met.

Q: Did it matter that clean towels were necessary before milking?
A: Necessity alone did not establish actual-process use under the rule.

Q: What tax applied?
A: The Department advised that the purchases were subject to Kansas sales or compensating tax.

Citations and references

• K.A.R. 92-19-53 — five-part consumed-in-production test and actual-process requirement
• K.S.A. 79-3606(n) — consumed-in-production exemption implemented by the regulation cited in the letter

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2009-008

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

May 12, 2009

XXXXXXXX
XXXXXXX
XXXXXXXXXXX

The purpose of this letter is to respond to your letter dated April 13, 2009. In it, you ask if the purchase of soap, stain remover and disinfectant purchases and used by a dairy farmer and used to launder and disinfect towels used to clean the teats of dairy cows prior to milking would be exempt as consumed in production of dairy products.

In your letter you stated:

Before milking a cow, dairy farmers must clean and disinfect the teats. Dairy farmers use towels for this purpose. After the towels are used they must be cleaned. To clean and sanitize the towels dairy farmers must purchase laundry soap, stain remover and disinfectant.

These items (soap, stain remover & disinfectant) are essential to the process, immediately consumed/dissipated and not reusable. The ultimate product being produced is dairy products (e.g. milk, ice cream, cheese, etc.) which are taxed at retail.

We believe when used in this production process these items should be exempt from sales tax. We look forward to your response and would gladly respond to any questions you might have.

Kansas Administrative Regulation 92-19-53 states:

“Consumed in production. (a) In order for purchases of tangible personal property to qualify for exemption under K.S.A. 1986 Supp. 79-3606(n) as amended by L. 1987, Ch. 292, Sec. 32, as further amended by L. 1987, Ch. 64, Sec. 1 and amendments, the following requirements must be met:
(1) The tangible personal property must be essential or necessary to the process;
(2) the tangible personal property must be used in the actual process;
(3) the tangible personal property must be immediately consumed or dissipated in the process;
(4) the tangible personal property must be used in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, the providing of services or the irrigation of crops for ultimate sale at retail in the regular course of business; and
(5) the tangible personal property cannot be reusable for such purposes. The identity of the buyer, seller or item purchased is immaterial. Whether the purchase qualifies for exemption is determined by how the item is used in the production or processing activity. An item may be taxable for one use and exempt for another use, even though purchased by the same consumer. Each transaction shall be separately measured against the statutes and regulations to determine the taxability of the transaction.
(b) For the purposes of determining whether tangible personal property is consumed in the providing of services, the term service'' refers only to taxable services enumerated under the sales tax act. Each person providing a nontaxable service shall pay sales tax on all articles of tangible personal property and all services purchased by the person to provide the nontaxable service, and may not claim an exemption from sales tax. (c)Used in the actual process'' means the use of the tangible personal property used shall:
(1) Be integral and essential to the production or processing activity;
(2) occur at the location where the production or processing activity is carried on; and
(3) occur during the production activity.
The fact that a particular item of tangible personal property may be considered important to a production process does not, of itself, mean that the tangible personal property is used in the actual process. The following uses of tangible personal property do not qualify for exemption from sales tax as consumed in production: shipping, testing, repairing, servicing, maintaining, cleaning the equipment and the physical plant, and storing. Tangible personal property used in the administration of the business and wholesale, commercial or retail facilities or buildings do not qualify for exemption from sales tax as consumed in production.
(d) ``Immediately consumed or dissipated'' means that tangible personal property shall be consumed or destroyed both economically and physically in a time reasonably requisite in the production or processing activity. The fact that tangible personal property may be used for only one production or processing activity and then discarded, or that tangible personal property is rendered obsolete or worthless in a short time is not the determining factor. Purchases of tangible personal property used in a repetitive function to produce articles of tangible personal property designed to be sold to consumers and not immediately consumed or dissipated are subject to sales tax. Tangible personal property that is specifically produced to perform a specific job for a specific consumer and has no other value other than as scrap, may qualify for exemption from sales tax as consumed in production, if the purchased property meets the other requirements under the exemption. Tangible personal property which breaks, depreciates, wears out or becomes obsolete, albeit in a short time span, does not qualify for exemption from sales tax as consumed in production.
(e) Natural gas, electricity, heat and water consumed by machinery and equipment actually used to produce, manufacture, process, mine, drill, refine or compound tangible personal property, provide taxable services or irrigate crops for resale in the regular course of business, qualify for exemption as consumed in production.
(f) All purchases of tangible personal property by contractors, subcontractors, or repairmen for incorporation into any structure or for use in altering, servicing, repairing or maintaining personal property or personal property that has been affixed to real property are subject to sales tax unless specifically exempted by K.S.A. 1986 Supp. 79-3606(d), (e) as amended by L. 1987, Ch. 292, Sec. 32, as further amended by L. 1987, Ch. 64, Sec. 1.
Contractors, subcontractors, repairmen, and consumers shall not purchase materials exempt from sales tax as consumed in the production of services whether or not the project is original construction. (Authorized by K.S.A. 79-3618; implementing K.S.A. 1986 Supp. 79-3602, K.S.A. 1986 Supp. 79-3603 as amended by L. 1987, Ch. 182, Sec 108, K.S.A. 1986 Supp. 79-3606 as amended by L. 1987, Ch. 292, Sec. 32, as further amended by L. 1987, Ch. 64, Sec. 1; effective May 1, 1988.)

Per the regulation a minimum of five criteria must be met to exempt an item, it is the Department’s opinion that criteria number two (2) is not met. Criteria number 2 states that: “[T]he tangible personal property must be used in the actual process”. It is the Department’s opinion that the cleaning materials are used one step before the actual production process and do not meet the all criteria of items consumed in production. Therefore the Department does not agree with your position and advises that purchase of soap, stain remover & disinfectant are subject to sales or compensating taxes that are used by a dairy to launder towels used to clean the teats of dairy cows prior to milking.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 05/13/2009 Date Modified: 05/13/2009

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