What qualifies for Kansas's ingredient-or-component-part sales tax exemption, and when are containers and packaging exempt?

Plain-English summary

This ruling explains Kansas's ingredient-or-component-part exemption — the rule that lets a producer or manufacturer buy, tax-free, the things that become part of the product it makes for sale.

The exemption. 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 producer obtains an exemption certificate number from the Director of Taxation and furnishes it to the supplier.

The four-part test. To be an exempt 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.

For example, fabric, thread, buttons, and zippers are component parts of a garment sold at retail. Less obviously, containers, labels, shipping cases, twine, and wrapping paper may be ingredient parts — when they are used to distribute property for sale and are not reusable or returned to the producer or manufacturer.

The statutory definition and list. K.S.A. 79-3602(l) defines "ingredient or component part" and lists items declared to be ingredient/component parts (a non-exclusive list), including: containers, labels, and shipping cases used to distribute goods for sale and not returned for reuse; containers, labels, shipping cases, paper bags, drinking straws, paper plates, paper cups, twine, and wrapping paper used by wholesalers and retailers to distribute/sell taxable property and not returned for reuse; seeds and seedlings for resale plants; paper and ink for publishing newspapers; fertilizer for resale plants; and feed for animals used in agriculture/aquaculture and food production.

The container rules (K.A.R. 92-19-54). The regulation refines when packaging is taxed:

• (d) Each container, wrapper, or shipping/handling material actually accompanying the product sold is not subject to sales tax.
• (e) A retailer's purchase of such material for consumption (not for resale as in (d)) is taxable — including where title to the container remains with the retailer when the goods inside are sold, or where the container is to be returned to the retailer by the consumer.
• (f) A container/wrapper/handling material a retailer uses to provide nontaxable services is deemed consumed by the service provider and is taxable.

The through-line: packaging that ships out with the sold product and isn't returned/reused rides along tax-free as an ingredient part; packaging the seller keeps, gets back, or uses to perform a nontaxable service is consumed by the seller and is taxable.

What this means for you

Producers and manufacturers

Items that become a physical, necessary part of your finished product (raw materials, components) are exempt under 79-3606(m). Use your exemption certificate with suppliers. Run each input through the four-part test before treating it as exempt.

Packaging and containers

One-way packaging that accompanies the sold product and is not returned or reused generally qualifies as an exempt ingredient part. But packaging you retain title to, get returned, or reuse is taxable to you — and packaging used to deliver a nontaxable service is consumed by you and taxable.

Watch the "returned/reused" and "service" traps

The exemption turns on the packaging leaving with the product for good. Deposit/return systems, reusable totes you keep, and containers used in providing a nontaxable service all fall on the taxable side under K.A.R. 92-19-54(e)–(f).

Common questions

Q: What is the ingredient-or-component-part exemption?
A: K.S.A. 79-3606(m) exempts tangible personal property that becomes an ingredient or component part of a product produced for retail sale; the producer uses an exemption certificate with suppliers.

Q: What is 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 or component part of property or a service for retail sale.

Q: Are containers and packaging exempt?
A: They can be, when used to distribute property for sale and not reusable or returned to the producer/manufacturer. Packaging that accompanies the sold product is not taxed (K.A.R. 92-19-54(d)).

Q: When is packaging taxable?
A: When the retailer keeps title to it or it is returned for reuse, or when it is used to provide a nontaxable service — then the provider is the consumer and owes tax (K.A.R. 92-19-54(e)–(f)).

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 for ultimate retail sale; provides for an exemption certificate.
• K.S.A. 79-3602(l) — defines "ingredient or component part" and lists (non-exclusively) qualifying items, including one-way containers/labels/shipping cases, seeds, newspaper paper and ink, fertilizer, and agricultural feed.
• K.A.R. 92-19-54(d)–(f) — container rules: accompanying packaging not taxed; retained-title/returnable containers taxable; packaging used for nontaxable services consumed by the provider and taxable.
• 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-2002-051

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 12, 2002

XXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX

Dear XXXXXX:

The purpose of this letter is to respond to your letter dated May 21, 2002.

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: 06/24/2002 Date Modified: 06/24/2002

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