Does the Kansas manufacturing machinery and equipment exemption apply to a rail spur built from the main track to a plant?

Plain-English summary

A manufacturer asked whether a rail spur running from the main track to its plant qualifies for the expanded Kansas exemption for manufacturing machinery and equipment. The Department ruled that it does not - the spur is a taxable improvement to real property.

The exemption is for machinery and equipment, not real estate. The exemption is found at K.S.A. 2000 Supp. 79-3606(kk) and is explained in Notice 00-08. The Department assumed the plant qualifies as a "manufacturing or processing business," then explained the limit: the exemption "is for manufacturing machinery and equipment," which "is, and generally remains, tangible personal property or becomes an industrial fixture." By contrast, "a rail spur . . . is generally regarded as an improvement to real property that is not . . . machinery and equipment."

A rail spur is expressly one of the excluded "parts of real estate." As Notice 00-08 points out, production machinery and equipment does not include "buildings and other parts of real estate that are not otherwise exempt." The Department said that phrase "describes a railroad spur, pavement needed for truck movement in and out of a plant, a airplane runway that services the plant, and docks or other facilities needed to tie-up river barges." A rail spur also "would not qualify as an 'industrial fixture'" in the statutory sense.

Result: materials and installation are taxable. "Accordingly, the materials being purchased for the rail spur are subject to Kansas sales tax." And "the services to install the spur are also taxable if the spur has no connection with other construction" - meaning a standalone rail-spur project does not pick up the original-construction labor exemption.

A separate economic-development note. The Department forwarded the taxpayer's inquiry about an economic-development-law exemption to another staff member to determine whether the company might qualify for any economic-development benefits - a separate program from the sales-tax analysis in this ruling.

Bottom line: the manufacturing machinery and equipment exemption does not reach a rail spur, which is real property; the materials are taxable and the installation labor is taxable unless it is tied to other exempt construction.

What this means for you

Manufacturers building rail spurs or plant site work

Even if your plant qualifies as a manufacturing or processing business, the machinery-and-equipment exemption does not cover a rail spur. Treat the spur - and comparable site improvements like truck pavement, runways, and barge docks - as taxable real-property improvements: pay Kansas sales tax on the materials.

Installation labor on a standalone spur is taxable

If the rail spur "has no connection with other construction," the labor to install it is taxable. The result can differ only where the spur work is part of a larger exempt construction project.

Machinery/equipment vs. real estate is the dividing line

The exemption turns on whether an item stays tangible personal property or becomes an industrial fixture, versus becoming an improvement to real property. Rail spurs fall on the real-property side and are excluded.

Ask about economic-development programs separately

A project that does not qualify for the machinery-and-equipment exemption may still be eligible for economic-development benefits under other Kansas law - a separate inquiry the Department here routed to its economic-development staff.

Common questions

Q: Is a rail spur to a plant exempt as manufacturing machinery and equipment?
A: No. The Department ruled that a rail spur is an improvement to real property, not machinery, equipment, or an industrial fixture, so it does not qualify under K.S.A. 79-3606(kk).

Q: Do I pay tax on the materials for the spur?
A: Yes. The materials purchased for the rail spur are subject to Kansas sales tax.

Q: Is the installation labor taxable?
A: Yes, when the spur has no connection with other construction. A standalone rail-spur installation does not qualify for the original-construction labor exemption.

Q: What other site items are treated the same way?
A: Notice 00-08 lists pavement needed for truck movement in and out of a plant, an airplane runway servicing the plant, and docks or facilities to tie up river barges - all "other parts of real estate that are not otherwise exempt."

Citations and references

• K.S.A. 79-3606(kk) (2000 Supp.) - the expanded exemption for manufacturing machinery and equipment, explained in Department Notice 00-08. It covers items that are or remain tangible personal property or become an industrial fixture, but not "buildings and other parts of real estate that are not otherwise exempt." The Department held that a rail spur is an excluded improvement to real property, so the materials are taxable and installation labor is taxable when the spur is unconnected to other construction.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-018

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 7, 2001

XXXX
XXXX
XXXX

RE: Your e-mail request

Dear XXXX:

Thank you for your e-mail. You ask if a rail spur from the main track to your plant is exempt under the expanded exemption for manufacturing machinery and equipment. The new exemption is found at K.S.A. 2000 Supp. 79-3606(kk) and is explained in Notice 00-08. I will assume that your plant qualifies as a “manufacturing or processing business,” as that term is used in the statute.

Generally speaking, the new exemption is for manufacturing machinery and equipment. Such machinery and equipment is, and generally remains, tangible personal property or becomes an industrial fixture. A rail spur, by contrast, is generally regarded as an improvement to real property that is not as machinery and equipment.

As Notice 00-08 points out, production machinery and equipment does not include “buildings and other parts of real estate that are not otherwise exempt.” The term “other parts of real estate that are not otherwise exempt” describes a railroad spur, pavement needed for truck movement in and out of a plant, a airplane runway that services the plant, and docks or other facilities needed to tie-up river barges. A rail spur also would not qualify as an “industrial fixture” in the sense that the term is used in the statute. Accordingly, the materials being purchased for the rail spur are subject to Kansas sales tax. Similarly, the services to install the spur are also taxable if the spur has no connection with other construction.

I am forwarding your e-mail about economic development law exemption to Kathleen Smith with a request that she contact you. She will advise you if your company may qualify for any potential economic development benefits.

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

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 03/21/2001 Date Modified: 10/11/2001

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