Are pallets, labels, stretch wrap, tape, and ice used to ship product exempt from Kansas sales tax as ingredient or component parts?

Plain-English summary

A company asked whether the pallets, labels, stretch wrap, tape, and ice it buys to package and ship its product are exempt from Kansas sales/use tax. The Department's answer is yes — with one key condition.

The exemption. Under K.S.A. 79-3606(m), Kansas exempts property that becomes an "ingredient or component part" of the finished product sold at retail. The Department applied the statutory definition in K.S.A. 79-3602(l), which expressly declares that containers, labels, and shipping cases — as well as twine, wrapping paper, and similar distribution materials — are ingredient or component parts when they are used in distributing the product and are not returned to the producer, manufacturer, or compounder (or to the wholesaler/retailer) for reuse.

The four-part test. The ruling recites that, to be an ingredient or component part, an item must be "necessary and essential to the finished product," "used in or on the finished product," "become a physical part of the finished product," and "become an ingredient or compound part of property or service for retail sale." Packaging that travels with the product to the customer and is not returned meets this "distribution material" branch of the definition.

The regulation's returnable-container rule. The Department also cited K.A.R. 92-19-54(d)–(f): shipping/handling material that accompanies the product sold is not taxed (subsection (d)), but material a retailer buys for its own consumption, or that stays with the retailer (title does not pass) or is returned for reuse, is taxable (subsections (e)–(f)).

The holding. Putting the statute and regulation together, the Department concluded that "the pallets, labels, stretch wrap, tape and in some cases ice would be exempt from Kansas sales/use tax(es) when purchased by your company, if said property is not to be returned to the producer, manufacturer or compounder for reuse."

Bottom line: one-way packaging that ships out with the product and is not returned for reuse is an exempt ingredient/component part. Reusable or returnable shipping materials are taxable.

What this means for you

Manufacturers, processors, and shippers

The containers-and-packaging branch of the ingredient/component-part exemption can cover pallets, labels, wrap, tape, and even ice — but only when the material is non-returnable, one-way packaging that leaves with the sold product. Track whether each packaging item is disposable-with-the-shipment or part of a return/reuse program.

"Not returned for reuse" is the dividing line

This is the fact that flips the answer. Non-returnable stretch wrap and labels are exempt; a reusable pallet pool or a deposit/return container system is taxable, because those materials come back for reuse and are consumed by the seller rather than sold on with the product.

"In some cases ice"

The Department qualified ice with "in some cases," because ice is exempt only where it functions like distribution packaging that ships with the product and is not returned — for example, ice packed with perishable goods for delivery. Whether a given ice purchase qualifies depends on its use.

Buy exempt with an exemption certificate

K.S.A. 79-3606(m) lets a qualifying producer/manufacturer/compounder furnish the supplier an exemption certificate number for ingredient/component-part purchases. Use one for the qualifying packaging rather than paying tax and seeking a refund.

Common questions

Q: Are pallets, wrap, labels, and tape taxable in Kansas?
A: They are exempt as ingredient/component parts when used to distribute the product and not returned to the producer, manufacturer, or compounder for reuse; otherwise they are taxable.

Q: Why does "returned for reuse" matter?
A: The statute and K.A.R. 92-19-54 exempt one-way distribution materials that accompany the sold product, but tax materials that stay with, or are returned to, the seller for reuse.

Q: Is ice always exempt?
A: No. The Department said ice is exempt "in some cases" — only when it functions as non-returnable distribution material shipped with the product; other ice uses may be taxable.

Q: What are the four requirements to be an ingredient or component part?
A: The item must be necessary and essential to the finished product, be used in or on it, become a physical part of it, and become an ingredient or component part of property or service sold at retail.

Citations and references

• K.S.A. 79-3606(m) — exempts sales of tangible personal property that becomes an ingredient or component part of property or services produced, manufactured, or compounded for ultimate sale at retail, and allows an exemption certificate for such purchases.
• K.S.A. 79-3602(l) — defines "ingredient or component part" and declares containers, labels, and shipping cases (and twine, wrapping paper, etc.) used in distribution to be ingredient parts when not returned for reuse.
• K.A.R. 92-19-54(d)–(f) — the container/shipping-material rules: material accompanying the product sold is not taxed (d); material consumed by, retained by, or returned to the retailer is taxed (e)–(f).
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-001

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

January 7, 2002

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Dear Ms. TTTTTT:

We wish to acknowledge receipt of your letter dated December 3, 2001, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3606(m) exempts from sales tax: "all sales of tangible personal property which become an ingredient or component part of tangible personal property of services produced, manufactured or compounded for ultimate sale at retail within or without the state of Kansas; and any such producer, manufacturer or compounder may obtain from the director of taxation and furnish to the supplier an exemption certificate number for tangible personal property for use as an ingredient or component part of the property or services produced, manufactured or compounded".

Ingredient or component parts are items that become a part of a larger whole or finished product which will be sold to the final consumer. To be considered an ingredient or component part, the item must be:

necessary and essential to the finished product
be used in or on the finished product
become a physical part of the finished product, and
become an ingredient or compound part of property or service for retail sale.

For example, fabric, thread, buttons and zippers are component parts of an item of clothing (finished product) which will be sold at retail.

Other items considered to be ingredient or component parts are not as obvious. Containers, labels and shipping cases, twine and wrapping paper may be ingredient parts. When these items are used to distribute property for sale, and are not reusable or returned to the producer or manufacturer, they qualify as ingredient parts.

(K.S.A.) 79-3602(l) provides:

(l) “Ingredient or component part” means tangible personal property which is necessary or essential to, and which in actually used in and becomes an integral and material part of tangible personal property or services produced, manufactured or compounded for sale by the producer, manufacturer or compounder in its regular course of business. The following item of tangible personal property are hereby declared to be ingredients or component parts, but the listing of such property shall not be deemed to be exclusive nor shall such listing be construed to be a restriction upon, or an indication of, the type or types of property to be included within the definition of “ingredient or component part” as herein set forth:
(1) Containers, labels and shipping cases used in the distribution of property produced, manufactured or compounded for sale which are not to be returned to the producer, manufacturer or compounder for reuse.
(2) Containers, labels, shipping cases, paper bags, drinking straws, paper plates, paper cups, twine and wrapping paper used in the distribution and sale of property taxable under the provisions of this act by wholesalers and retailers and which is not to be returned to such wholesaler or retailer for reuse.
(3) Seeds and seedlings for the production of plants and plant products produced for resale.
(4) Paper and ink used in the publication of newspapers.
(5) Fertilizer used in the production of plants and plant products produced for resale.
(6) Feed for animals, fowl and aquatic plants and animals, the primary purpose of which is use in agriculture or aquaculture, as defined in K.S.A. 47-1901, and amendments thereto, the production of food for human consumption, the production of animal, dairy, poultry or aquatic plant and animals products, fiber, fur, or the production of offspring for use for any such purpose or purposes.
(Emphasis added.)

The statute is interpreted by Kansas Administrative Regulation (K.A.R. 92-19-54). The regulation provides, in subsections (d), (e) and (f):

(d) Each container, wrapper or other shipping or handling material actually accompanying the product sold is not subject to sales tax.
(e) Each retailer purchasing a container or other shipping or handling material for consumption which is not for resale as described in paragraph (d) is subject to sales tax. Each purchase by a retailer of a container or other shipping or handling material in which title remains with the retailer when the tangible personal property contained therein is sold by the retailer, or where the container or other shipping or handling materials are to be returned to the retailer by the consumer of the tangible personal property, is subject to sales tax.
(f) Each purchase of a container, wrapper or other shipping or handling material by a retailer using the container, wrapper or other handling material to provide nontaxable services is deemed to be consumed by the service provider and is subject to tax. (Emphasis added)

Based on the statute and the regulation, it is the opinion of this department that the pallets, labels, stretch wrap, tape and in some cases ice would be exempt from Kansas sales/use tax(es) when purchased by your company, if said property is not to be returned to the producer, manufacturer or compounder for reuse.

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, or case law, or published revenue ruling, that materially effects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 01/09/2002 Date Modified: 01/10/2002

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