Can a company buy ATVs and watercraft tax-free if it modifies them and resells them?

Plain-English summary

A company buys all-terrain vehicles (ATVs) and watercraft from a dealer, modifies them, and then resells them — either to another dealer or to an end user. It asked the Department to confirm in writing that it does not owe Kansas sales tax on those purchases. The Department agreed.

The purchases are tax-free. The Department stated that the company "should acquire the all terrain vehicles and watercraft to modify without the payment of sales tax." In other words, buying the base vehicles to modify and resell is an exempt purchase, not a taxable retail sale to the company.

Use an exemption certificate — and the right one. The Department told the company to "issue an exemption certificate to your vendors" and identified the specific exemption to claim: "The proper exemption is 'component part.'" The reason is that the ATVs and watercraft the company buys are incorporated into the finished, modified products it sells — they become a component part of what it resells, rather than being consumed by the company. The Department enclosed a copy of the certificate and said the company "may duplicate and issue as needed."

Why "component part" and not a plain resale certificate. Because the company modifies the vehicles before resale, the base units function as ingredients or component parts of a new product it produces and sells. Claiming the correct exemption — the component-part exemption — is what keeps the input purchases tax-free while the tax is ultimately collected on the finished product's retail sale.

Bottom line: a business that buys goods to modify and resell can purchase those inputs tax-free by giving vendors a component-part exemption certificate. The tax is deferred to the eventual retail sale of the finished, modified product — the ordinary result when purchases are inputs to something you sell rather than items you consume.

What this means for you

Businesses that modify goods for resale

If you buy items, change or build on them, and then sell the finished product, your input purchases can be exempt — but you must give your vendor the correct exemption certificate. Here the Department specified the "component part" exemption because the purchased vehicles become part of the product sold.

Match the certificate to the transaction

Don't reach for a generic certificate. The Department was specific that the component-part exemption fit these facts. Using the exemption that actually describes your transaction (component part / ingredient-or-component vs. plain resale) is what makes the exempt purchase defensible.

The tax is collected downstream

Buying inputs tax-free does not make the whole chain tax-free — it shifts the tax to the retail sale of the finished product. When you sell the modified ATV or watercraft to an end user, collect and remit Kansas sales tax on that sale unless another exemption applies.

Common questions

Q: Does the company owe Kansas sales tax when it buys ATVs and watercraft to modify and resell?
A: No. The Department agreed the company may acquire them without paying sales tax, provided it gives its vendors the proper exemption certificate.

Q: Which exemption should it claim?
A: The Department said the proper exemption is "component part," because the purchased vehicles become a component part of the finished, modified products the company resells.

Q: What does the company have to do?
A: Issue a component-part exemption certificate to its vendors. The Department enclosed a copy of the certificate, which the company may duplicate and issue as needed.

Q: Is anything taxed, then?
A: Yes, downstream. The exemption applies to the input purchases; Kansas sales tax is generally collected when the finished, modified vehicle is sold at retail to an end user.

Citations and references

• The "component part" exemption — the Department directed the company to issue a component-part exemption certificate to its vendors, on the basis that the ATVs and watercraft it buys become a component part of the finished, modified products it resells. (The ruling names this exemption and encloses the certificate, but cites no specific statute section.)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-115

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 26, 2001

XXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX

Dear XXXXXXXXXX:

The purpose of this letter is to respond to your letter dated September 19, 2001.

In your letter you stated:

We are looking for a written clarification on buying ATVs and watercrafts from a dealer to be resold after modifications. Our Tax Account Number XXXXXXXXXXXXXXXXXXXX

Please fax a Private Letter Ruling stating that we are not required to pay Kansas Sales Tax on these purchases.

Per our telephone conversation it was determined that your company acquires all terrain vehicles and watercraft to modify and sell to either a dealer or end user.

The Department agrees that your company should acquire the all terrain vehicles and watercraft to modify without the payment of sales tax. Your company should issue an exemption certificate to your vendors. The proper exemption is “component part”. I have closed a copy of this certificate, which you may duplicate and issue as needed.

This private letter ruling 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,

Mark D. Ciardullo
Tax Specialist

Date Composed: 10/30/2001 Date Modified: 10/30/2001

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