Is a city's purchase of a diesel generator to produce electricity for sale exempt from Kansas sales tax?

Plain-English summary

A city asked whether its purchase of a diesel generator and associated equipment for its electric department is exempt from Kansas sales tax. The generator will produce electricity for sale to local businesses and residents. The Department's answer is yes — the purchase is exempt.

Why the usual government exemption doesn't do the work. The Department noted that under K.S.A. 79-3606(d), sales of property to Kansas political subdivisions are exempt "unless the property is intended to be used to provide gas, electricity or heat to others." Because the city will use the generator to sell electricity to others, that governmental exemption would not apply on its own.

The manufacturing exemption does apply. Instead, the Department relied on K.S.A. 79-3606(kk) — the Integrated Production Manufacturing Machinery and Equipment Exemption — which exempts machinery and equipment used in manufacturing and production. The Department has "determined that this exemption extends to equipment purchased by a public utility to generate electricity." So the city "is entitled to claim exemption on its purchase and installation of the generator and the associated equipment at the city's generation plant." The Department enclosed Notice 00-08, which discusses how the exemption applies to a public utility's generating plant.

Where the exemption stops. The Department cautioned that the exemption does not extend to purchases to repair or replace the city's electric transmission and distribution lines. Property that makes up the distribution lines remains taxable — although labor services for the first or initial construction of a new line are exempt.

Bottom line: generating electricity for sale is production, so the generation equipment qualifies for the integrated-production exemption even for a municipal utility. The exemption covers the generation plant, not the wires that carry the power to customers.

What this means for you

Municipal and public electric utilities

Equipment you buy to generate electricity for sale can qualify for the integrated production exemption (K.S.A. 79-3606(kk)), even though selling power to others would defeat the ordinary political-subdivision exemption. Treat the generation plant as a manufacturing/production operation for sales-tax purposes.

Draw the line at the plant fence

The exemption follows production, so it covers generation machinery and its installation but not the transmission and distribution system. Materials to repair or replace existing lines are taxable; only the installation labor for the first construction of a new line is exempt.

Use the right authority

The Department pointed to Notice 00-08 for how the exemption applies to a utility's generating plant. Cite the exemption that matches the facts — the production exemption here, not the general government exemption, which 79-3606(d) withholds when the property is used to provide electricity to others.

Common questions

Q: Is a city's generator to produce electricity for sale exempt from Kansas sales tax?
A: Yes. The Department ruled it is exempt under K.S.A. 79-3606(kk), the integrated production machinery and equipment exemption, which extends to equipment used by a public utility to generate electricity.

Q: Why not the ordinary exemption for sales to a city?
A: Because K.S.A. 79-3606(d) makes property sold to a political subdivision taxable when it will be used to provide gas, electricity, or heat to others — which is the case for a generator producing power for sale.

Q: Does the exemption cover the city's power lines?
A: No. Property to repair or replace transmission and distribution lines remains taxable; only labor for the first or initial construction of a new line is exempt.

Citations and references

• K.S.A. 79-3606(kk) — the Integrated Production Manufacturing Machinery and Equipment Exemption, which the Department applies to equipment a public utility uses to generate electricity.
• K.S.A. 79-3606(d) — exempts sales of property to Kansas political subdivisions unless the property is used to provide gas, electricity, or heat to others.
• Notice 00-08 — Department guidance on how the integrated production exemption applies to purchases for a public utility's generating plant (enclosed with the ruling).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-133

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

December 3, 2001

XXXX
XXXX
XXXX

RE: Your fax dated November 21, 2001

Dear XXXX:

Thank your for your recent fax. You ask if the City of XXXX's purchase of a diesel generator and associated equipment for use by its electric department is exempt from sales tax. The generator will be used to generate electricity for sales to businesses and residents in XXXX.

Please be advised that these purchase are exempt under K.S.A. 79-3606(kk). Subsection (kk) is the Integrated Production Manufacturing Machinery and Equipment Exemption. Under K.S.A. 79-3606(d) sales of property to Kansas political subdivisions are exempt unless the property is intended to be used to provide gas, electricity or heat to others. K.S.A. 79-3606(kk) exempts manufacturing machinery and equipment that is used in manufacturing and production. The department has determined that this exemption extends to equipment purchased by a public utility to generate electricity. According, the City of XXXX is entitled to claim exemption on its purchase and installation of the generator and the associated equipment at the city's generation plant. I have enclosed a copy of Notice 00-08. This notice provides a more in-depth discussion about how the exemption applies to purchases made for a public utility's generating plant.

Please note that this exemption does not extend to purchases to repair or replace the City's electric transmission and distribution lines. Purchases of property that makes up the distribution lines continue to be taxable, while labor services for the first or initial construction of a new line is exempt.

I hope that my letter and the enclosed notice answers all of your questions clearly. If you need to discuss this matter further, please call me at 785-295-3081. This is private letter ruling. It 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 ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Enclosure

Date Composed: 12/13/2001 Date Modified: 12/13/2001

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