Are stretch-wrapping and shrink-wrapping machines used in a manufacturing plant's production and distribution for resale exempt from Kansas sales tax?

Plain-English summary

A manufacturer of stretch-wrapping machines — expanding its product line to include shrink wrappers — asked how Kansas would classify the taxability of the shrink machine, and whether it should be treated the same as the stretch machine. (A stretch wrapper stabilizes a product on a pallet for shipping; a shrink wrapper uses heat to over-wrap and protect a product before it is containerized or palletized.) The Department ruled both types of machine are exempt when used in production for resale.

Both machines qualify for the manufacturing exemption. The Department's opinion is that the purchase, rental, or lease of stretch-wrapping machines and shrink-wrapping machines used in the direct production and distribution of items intended for resale by a manufacturing plant or facility are exempt from Kansas retailers' sales and compensating tax under K.S.A. 79-3606(kk).

Why — integrated production includes packaging and distribution. Under 79-3606(kk), the exemption reaches machinery and equipment used as an integral or essential part of an integrated production operation, plus installation, repair, and maintenance services on it and repair and replacement parts for it. The statutory definition of "integrated production operation" expressly includes packaging operations (as part of production-line operations) and post-production handling, storage, warehousing, and distribution operations. Because wrapping machines perform exactly those packaging/distribution functions in a production operation, they fall within the exemption. The Department enclosed an exemption certificate for the buyer to use.

Bottom line: stretch- and shrink-wrapping machines used in a manufacturing plant's integrated production and distribution of goods for resale are exempt from Kansas sales and compensating tax under 79-3606(kk), and the buyer should claim the exemption with an exemption certificate.

What this means for you

Manufacturers buying packaging equipment

Packaging machinery — including stretch and shrink wrappers — used in your integrated production operation for goods you make for resale is exempt under 79-3606(kk). The statute's definition of integrated production reaches packaging and post-production distribution, so end-of-line wrapping equipment qualifies, not just the core process machinery.

Sellers of manufacturing equipment

When you sell stretch- or shrink-wrapping machines to a Kansas manufacturer for use in production for resale, the sale (or rental/lease) can be made exempt on the buyer's exemption certificate. Obtain and keep the certificate to support the exempt treatment.

Exemption also covers service and parts

79-3606(kk) exempts not just the machine but also its installation, repair, and maintenance services and its repair and replacement parts and accessories. Apply the exemption across the equipment's life cycle, not only at initial purchase.

Common questions

Q: Are shrink-wrapping machines taxable in Kansas?
A: Not when used in a manufacturing plant's direct production and distribution of items for resale. Like stretch wrappers, they are exempt under K.S.A. 79-3606(kk).

Q: Why does packaging equipment qualify for the production exemption?
A: Because 79-3606(kk)'s definition of "integrated production operation" expressly includes packaging operations and post-production handling, storage, warehousing, and distribution.

Q: Does the exemption cover rentals and repair parts too?
A: Yes. It covers purchase, rental, or lease of the machinery, plus installation/repair/maintenance services and repair and replacement parts and accessories.

Citations and references

• K.S.A. 79-3606(kk) — exempts machinery and equipment used as an integral or essential part of an integrated production operation (expressly including packaging and post-production distribution), plus installation/repair/maintenance services and repair/replacement parts; the basis for exempting the stretch- and shrink-wrapping machines.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-066

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

July 2, 2001

XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX

Dear XXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated June 21, 2001. In it, you request a private letter regarding the sales tax exemption for manufacturing machinery and equipment.

In your letter, you stated:

Our organization manufactures stretch wrapping machines for resale and we are currently registered to collect sales tax in your state. We are expanding our product line to include shrink wrappers. Let me explain the difference. A stretch wrapper stabilizes a product to a pallet to keep it from being damaged during shipping. A shrink wrapper can be used two ways. By using heat, it can be used as an over wrap to protect a product before it goes into a container for shipping. It can also protect a product before it goes directly to the pallet for shipping.

How would your state classify the taxability of the shrink machine? Should it be the same as what we do for our stretch machine? Please provide applicable state tax statues and/or regulations.

It is the opinion of the Kansas Department of Revenue that the purchase, rental or lease of stretch wrapping machines and shrink wrapper machines utilized in the direct production and distribution of items intended for resale by a manufacturing plant or facility are exempt from Kansas retailers’ sales and compensating tax pursuant to K.S.A. 79-3606(kk).

Per K.S.A. 79-3606(kk) The following shall be exempt from the tax imposed by the act: . . . (1) (A) all sales of machinery and equipment which are used in this state as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility;
(B) all sales of installation, repair and maintenance services performed on such machinery and equipment; and
(C) all sales of repair and replacement parts and accessories purchased for such machinery and equipment.

(2) For purposes of this subsection:
(A) "Integrated production operation" means an integrated series of operations engaged in at a manufacturing or processing plant or facility to process, transform or convert tangible personal property by physical, chemical or other means into a different form, composition or character from that in which it originally existed. Integrated production operations shall include: (i) Production line operations, including packaging operations; (ii) preproduction operations to handle, store and treat raw materials; (iii) post production handling, storage, warehousing and distribution operations; and (iv) waste, pollution and environmental control
operations, if any;

I have enclosed an exemption certificate for this purpose.

This is a private letter ruling pursuant to Kansas Administrative Regulation 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 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 ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC:mdc

Date Composed: 07/06/2001 Date Modified: 10/11/2001

Table 1

Table 2