Are charges to assemble a manufactured product, such as an office chair, subject to Kansas sales tax?

Plain-English summary

The Department said charges to assemble a manufactured product are taxable, using an office chair shipped in components as its example. The result is the same whether the retailer assembles the item or the buyer hires an independent third party.

When the retailer does the work, its labor and service costs, delivery, and installation charges are part of the taxable “sales or selling price” under K.S.A. 79-3602(ll). The retailer cannot deduct its assembly costs from the price. A separately stated charge remains taxable when assembly is needed to complete the agreed sale, including assembly at the buyer's location after delivery.

When an independent service provider assembles an item the consumer bought elsewhere, the provider's standalone charge is also taxable. The Department treated connecting or affixing the component parts as the taxable service of “installing or applying tangible personal property” under K.S.A. 79-3603(p).

What this means for you

Retailers selling unassembled products

If you agree to deliver an assembled product, charge Kansas sales tax on the full selling price, including assembly labor. Separately stating the assembly charge does not remove it from the tax base.

Independent assemblers

If a consumer hires you to assemble a manufactured product purchased from someone else, the letter treats your charge as taxable installation labor. The fact that you did not sell the component parts does not make the service exempt.

Buyers

Expect sales tax whether assembly is included in the retailer's price or billed separately by a third party. The opinion focuses on assembling manufactured tangible personal property from component parts for its intended use.

Common questions

Q: Is assembly taxable when the retailer performs it before delivery?
A: Yes. The retailer recovers its assembly cost through the selling price, and that cost is not deductible from the taxable amount.

Q: What if the retailer assembles the product at the customer's location?
A: The separately stated charge is still taxable when assembly is a service necessary to complete the sale.

Q: What if assembly is described as optional?
A: If the sale is conditioned on the retailer assembling the product, the charge is taxable even if labeled optional.

Q: Is a third-party assembly service taxable when the assembler did not sell the product?
A: Yes. The Department classified the work as installing tangible personal property under K.S.A. 79-3603(p).

Citations and references

• K.S.A. 79-3602(ll) — “sales or selling price,” including labor, service, delivery, and installation charges described in the letter
• K.S.A. 79-3603(p) — tax on installing or applying tangible personal property not held for resale
• K.S.A. 79-3603(q) — tax on repairing, servicing, altering, or maintaining tangible personal property
• Kansas EDU-28 — cited for its definition of “set-up charges”

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2011-014

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

December 6, 2011

XXXX
XXXX
XXXX

RE: Your e-mail received December 5, 2011

Dear XXXX:

Thank you for your recent e-mail. You ask if charges to assembly a manufactured product, such as an office chair, are subject to Kansas sales tax. The answer is yes. A charge to assemble a manufactured product from its components is subject to Kansas sales tax whether the charge is billed by the retailer as part of the selling price of the product or by a third-party service provider as a standalone charge for services.

Manufacturers often package and ship their products as component parts that must be assembled for use. Shipping component parts rather than a fully-assemble product reduces shipping costs and helps prevent damage to the product during transit. These component parts must be assembled by the retailer, buyer, or a third-party service provider for the buyer, before the product can be used for its intended purpose.

If a retailer assembles a product at its store or shop that it later resells, the retailer recoups the cost it incurs assembling the product in the "selling price" it charges for the product. The definition of "sales or selling price" includes the retailer's "labor and service cost[s]" as well as "delivery" and "installation charges" that are billed to the buyer. K.S.A. 79-3602(ll). This means if a retailer assembles and sells a product, it cannot deduct its costs of assembling the product from the amount it charges to the buyer. See e.g. definition of "set-up charges" in EDU-28.

This analysis applies whether the component parts are assembled by the retailer at its business location or at the location where the buyer takes delivery. When a buyer contracts to buy an assembled product and the product is assembled at the buyer's location, any separately stated assembly charges are taxable. This is because the service charges are part of the "selling price" which is defined to include: (1) the retailer's "labor and service cost[s]"; and (2) "charges by the retailer for any service necessary to complete the sale . . . ." K.S.A. 79-3602(1)(C). A retailer's charges for services performed to assemble and set up exercise equipment for use by the buyer are an example of taxable "charges by the retailer for any service necessary to complete the sale . . . ."

Unlike most retail sales, a sale of component parts of a product isn't complete upon delivery to the buyer if the retailer has agreed to assemble the product after delivery. The sale is complete only after the buyer accepts the assembled product. Even "optional" charges for assembling a product are taxable if the sale is conditioned on the product being assembled by the retailer. See K.S.A. 79-3602(1)(C)("charges by the retailer for any service necessary to complete the sale . . . .").

Kansas sales tax is imposed on labor service charges billed by a third-party serviceman to a consumer to assemble goods for the consumer. For example, a consumer may buy a product that is unassembled and hire someone other than the retailer to assemble it. In such cases, the sale by the retailer is complete when the component parts are delivered to the consumer.

Charges billed by the third-party serviceman to the consumer to assemble the product from its component parts are taxable under Kansas law even when the consumer did not buy the parts from the serviceman. For purposes here, K.S.A. 21010 Supp. 79-3603(p) imposes sales tax on:

(p) the gross receipts received for the service of installing or applying tangible personal property which when installed or applied is not being held for sale in the regular course of business . . . .a

K.S.A. 2009 Supp. 79-3603(q) taxes:

(q) the gross receipts received for the service of repairing, servicing, altering or maintaining tangible personal property . . . .

When a product like an office chair is "assembled" by a third-party service provider, one component part is installed or affixed to another component part. Usually, a smaller part is "installed" on a larger component or assembly of component parts. In addition, the service provider may "apply" stickers or similar products to the assembly. The department has always considered charges for assembling a manufactured product from its component parts to be taxable charges for the service of installing tangible personal property. See K.S.A. 79-3603(p). This is because assembling components into a product for use necessarily requires installing or affixing one component part to another until the final product re is fully assembled.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 12/15/2011 Date Modified: 12/15/2011

Table 1

Table 2