Is meat bought to be processed and then sold at retail exempt from Kansas sales tax as an ingredient or component part?

Plain-English summary

A meat processor that buys meat, processes it, and ultimately sells it at retail to consumers asked whether its meat purchases are subject to Kansas sales tax. The Department's answer: the meat is exempt — it is an ingredient or component part of a product sold at retail.

The statutory basis. K.S.A. 79-3606(m) exempts:

"all sales of tangible personal property which become an ingredient or component part of tangible personal property [or] services produced, manufactured or compounded for ultimate sale at retail. . ."

The buyer obtains an exemption certificate number and furnishes it to the supplier to buy the meat tax-free.

The four-part test. The Department explained that to be an ingredient or component part, the item must:

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

The classic example is fabric, thread, buttons, and zippers in a garment. Less obvious items — containers, labels, shipping cases, twine, and wrapping paper — can also qualify when they are used to distribute the product for sale and are not reusable or returned to the producer.

The definition and container rules. K.S.A. 79-3602(l) defines "ingredient or component part" and declares certain items (non-returnable containers/labels/shipping cases; seeds; newspaper paper and ink; fertilizer; qualifying animal feed) to be component parts. K.A.R. 92-19-54(d)–(f) then draws the container line: material actually accompanying the product sold is not taxed (d); but a container kept for consumption, one in which title stays with the retailer, or one returned to the retailer, is taxable (e); and containers used to provide a nontaxable service are consumed by the provider and taxable (f).

Bottom line: meat bought to be processed into products sold at retail is an exempt ingredient/component part; buy it with an exemption certificate. Reusable or returnable containers, and materials consumed rather than passed on with the product, remain taxable.

What this means for you

Food processors and manufacturers

Raw inputs that become part of the finished product you sell at retail — like meat that is processed into retail cuts or products — are exempt ingredient/component parts under 79-3606(m). Buy them using an ingredient/component-part exemption certificate, not tax-paid.

Packaging and containers

Non-returnable packaging that goes out with the product to the customer is generally exempt. But packaging that is reusable, returned to you, or on which you keep title is taxable, and containers you use to deliver a nontaxable service are taxable to you as the consumer.

Keep the certificate on file

The exemption runs through an exemption certificate furnished to your supplier. Retain documentation showing the input becomes part of a product sold at retail.

Common questions

Q: Is meat for a processor's retail products taxable in Kansas?
A: No. The Department advised it is an exempt ingredient or component part under K.S.A. 79-3606(m), because it becomes part of a finished product sold at retail.

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

Q: Are containers and packaging exempt too?
A: Non-returnable packaging that accompanies the product to the buyer generally qualifies. Reusable or returned containers, containers on which the retailer keeps title, and containers used to provide a nontaxable service are taxable.

Q: How do I buy the meat tax-free?
A: Obtain an ingredient/component-part exemption certificate number and furnish it to your supplier.

Citations and references

• K.S.A. 79-3606(m) — exempts tangible personal property that becomes an ingredient or component part of property or services produced/manufactured/compounded for ultimate retail sale.
• K.S.A. 79-3602(l) — defines "ingredient or component part" and lists items (including non-returnable containers, labels, shipping cases; seeds; newspaper paper and ink; fertilizer; qualifying feed) declared to be component parts.
• K.A.R. 92-19-54(d)–(f) — container/packaging rules: accompanying material not taxed; reusable/returnable/title-retained containers taxable; containers used for nontaxable services taxable to the provider.
• 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-2002-038

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

May 2, 2002

XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXXX

Dear XXXXXXXXXX:

The purpose of this letter is to respond to your letter dated April 22, 2002.

I have enclosed a copy of your registration certificate.

Your purchase of meat is exempt from Kansas retailers’ sales tax. This meat is processed and ultimately sold at retail to consumers. I have enclosed an exemption certificate for that purpose.

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:

1. necessary and essential to the finished product,
2. be used in or on the finished product,
3. become a physical part of the finished product, and
4. 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)

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 by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 05/02/2002 Date Modified: 05/03/2002

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