Does the expanded Kansas manufacturing machinery and equipment exemption cover an automated capacitor bank and the labor to install it?

Plain-English summary

A manufacturer asked whether the newly expanded Kansas exemption for manufacturing and processing machinery and equipment covers an automated capacitor bank and the labor to install it. The Department ruled that both are exempt.

A new, broader exemption took effect July 1, 2000. "Effective July 1, 2000, businesses engaged in certain manufacturing or processing activities will not be required to pay sales or use tax on an expanded range of machinery and equipment used in manufacturing and processing operations." It applies to purchases delivered on or after July 1, 2000, to lease payments for rental periods on or after that date, and to "service or labor charges for installing and repairing qualifying machinery and equipment . . . performed on or after July 1, 2000." These changes were made by House Bill 2011, enacted by the 2000 Kansas Legislature, and codified at K.S.A. 79-3606(kk).

The exemption is only for manufacturing or processing businesses. The law defines a "manufacturing or processing business" as one that "utilizes an integrated production operation to manufacture, process, fabricate, finish, or assemble items for wholesale and retail distribution" as part of an industrial manufacturing/processing operation or an agricultural commodity processing operation. It "does not apply to retail operations or other non-industrial businesses," and the Department listed excluded examples: contractors; construction companies; retail food preparation; repair and machine shops that service or refurbish property returned to its owner; copying and photo-finishing services; telephone companies; and utility transmission and distribution operations.

"Integrated production operations" reach the plant's utility distribution to production. They "encompass machinery and equipment used at a plant or facility to transport electricity, gas, water, steam, or other items used in production" - either from the in-plant point of generation to the production operation, or from the point the utility is first metered at the plant site to the production operation.

Result for the capacitor bank. "In closing, the purchase of the automated capacitor bank, as well as the labor to install the equipment[,] would come within the scope of the sales tax exemption in K.S.A. 79-3606(kk)." A capacitor bank conditions the electrical power delivered to production, so it fits within the integrated production operation.

Bottom line: if you are a qualifying manufacturing or processing business, equipment like an automated capacitor bank that supports your integrated production operation - and the labor to install it - is exempt from Kansas sales and use tax under K.S.A. 79-3606(kk).

What this means for you

Qualifying manufacturers and processors

Machinery and equipment that is part of your integrated production operation - including equipment that transports or conditions electricity, gas, water, or steam used in production, such as a capacitor bank - is exempt from Kansas sales and use tax, along with the labor to install and repair it, for purchases and work on or after July 1, 2000.

Check that you are an "industrial" operation

The exemption is limited to manufacturing or processing businesses using an integrated production operation. It does not reach retail or non-industrial businesses: contractors, construction companies, retail food prep, repair/machine shops, copy and photo services, telephone companies, or utility transmission and distribution operations.

Use the exemption certificate at purchase

As with other Kansas exemptions, claim it by giving the supplier the appropriate exemption certificate at the time of purchase (and for the installation/repair labor).

Common questions

Q: Is an automated capacitor bank exempt from Kansas sales tax?
A: Yes, for a qualifying manufacturing or processing business. The Department ruled that the capacitor bank and the labor to install it fall within the expanded exemption in K.S.A. 79-3606(kk).

Q: When did the expanded exemption take effect?
A: July 1, 2000, under House Bill 2011. It covers qualifying equipment delivered, lease periods, and installation/repair labor on or after that date.

Q: Who does NOT qualify?
A: Retail and non-industrial businesses - for example contractors, construction companies, retail food preparation, repair and machine shops, copying and photo-finishing services, telephone companies, and utility transmission and distribution operations.

Citations and references

• K.S.A. 79-3606(kk) - the expanded exemption for manufacturing and processing machinery and equipment enacted by House Bill 2011 (2000 Kansas Legislature), effective July 1, 2000. It exempts qualifying machinery and equipment used in a manufacturing or processing business's integrated production operation, plus the labor to install and repair it, and reaches equipment that transports or conditions electricity, gas, water, or steam used in production. The Department held that an automated capacitor bank and its installation labor come within the exemption.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-005

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

January 29, 2001

TTTTTTTTTTTT
TTTTTTTTTTTT
TTTTTTTTTTTT
TTTTTTTTTTTT

Dear Ms. TTTTTT:

We wish to acknowledge receipt of your e-mail dated January 26, 2001, regarding the application of Kansas Retailers’ Sales tax.

Effective July 1, 2000, businesses engaged in certain manufacturing or processing activities will not be required to pay sales or use tax on an expanded range of machinery and equipment used in manufacturing and processing operations. This expanded exemption applies to purchases of machinery and equipment delivered on or after July 1, 2000. In the case of leased machinery and equipment, the exemption applies to payments for rental periods that occur on and after July 1, 2000. Service or labor charges for installing and repairing qualifying machinery and equipment are exempt when performed on or after July 1, 2000. These changes are contained in House Bill 2011 that was enacted by the 2000 Kansas Legislature.

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.

Integrated production operations encompass machinery and equipment used at a plant or facility to transport electricity, gas, water, steam, or other items used in production (1) from the point of generation, if in the plant, to the production operation, or (2) from the point it is first metered at the plant site, if generated or produced outside the plant, to the production operation.

In closing, the purchase of the automated capacitor bank, as well as the labor to install the equipment would come within the scope of the sales tax exemption in K.S.A. 79-3606(kk).

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, case law, or published revenue ruling, that materially effects this private letter ruling.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 01/31/2001 Date Modified: 10/11/2001

Table 1

Table 2