Does a manufacturer's purchase of CAD software used for product engineering and design qualify for the Kansas manufacturing exemption?

Plain-English summary

A manufacturer of custom bulk cables, wiring harnesses, and cable assemblies asked whether its purchase of canned AutoCAD software qualifies for the Kansas manufacturing sales tax exemption under K.S.A. 2001 Supp. 79-3606(kk). The company's engineering department uses AutoCAD to create and produce schematic drawings of its products — used exclusively for engineering, research and development, and design of those products. (For example, when a customer orders a wiring harness for a new aircraft model and gives the specifications, the company uses AutoCAD to design the new harness.)

The exemption. K.S.A. 2001 Supp. 79-3606(kk)(4) provides that certain machinery, equipment, and materials are deemed exempt even if they would not otherwise qualify as machinery and equipment used as an integral or essential part of an integrated production operation — specifically, "(A) Computers and related peripheral equipment that are utilized by a manufacturing or processing business for engineering of the finished product or for research and development or product design."

The Department's conclusion. The software purchase appears to qualify for the exemption under K.S.A. 2001 Supp. 79-3606(kk), assuming the software's primary use by the client is for engineering of the finished product or for research and development or product design. The exemption turns on that primary use test.

Note on a prior letter. The Department stated that its earlier letter of June 5, 2002 to the same client on this private letter ruling request should be considered revoked — this ruling supersedes it.

What this means for you

Manufacturers buying design/engineering software

Canned software (like CAD tools) that your business uses primarily for engineering the finished product, R&D, or product design can fall within the 79-3606(kk) manufacturing exemption — even though such computers/software aren't part of the physical production line. The statute expressly reaches computers and related peripheral equipment used for those design functions.

The test is "primary use"

The Department conditioned the exemption on the software's primary use being engineering, R&D, or product design. If the same software is mostly used for non-qualifying purposes (general administration, accounting, etc.), the exemption would not apply. Document how the tool is actually used.

Watch for superseding guidance

This ruling revoked an earlier 2002 letter to the same taxpayer — a reminder that a private letter ruling can be replaced. Rely on the most recent determination, and confirm the current version of 79-3606(kk), which has been amended over time.

Common questions

Q: Does canned CAD software qualify for the Kansas manufacturing exemption?
A: In the Department's view, yes — if the manufacturer's primary use of the software is for engineering the finished product, research and development, or product design, it appears to qualify under K.S.A. 2001 Supp. 79-3606(kk).

Q: Why does software qualify when it isn't on the production line?
A: Subsection (kk)(4)(A) deems computers and related peripheral equipment used for engineering, R&D, or product design to be exempt even if they are not an integral part of an integrated production operation.

Q: What is the key condition?
A: The software's primary use must be engineering of the finished product, R&D, or product design.

Q: Does this ruling replace an earlier one?
A: Yes. The Department revoked its earlier June 5, 2002 letter to the same client; this ruling supersedes it.

Citations and references

• K.S.A. 2001 Supp. 79-3606(kk) — the manufacturing machinery and equipment sales tax exemption.
• K.S.A. 2001 Supp. 79-3606(kk)(4)(A) — deems computers and related peripheral equipment used by a manufacturing or processing business for engineering of the finished product, R&D, or product design to be exempt even if not part of an integrated production operation.
• 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-2002-071

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 19, 2002

XXXX
XXXX
XXXX
XXXX

Re: Private Letter Ruling Request

Dear XXXX:

This letter responds to your e-mail dated May 3, 2002, in which you request a ruling as to whether the purchase by your client, XXXX, of certain canned software would qualify for the sales tax exemption under K.S.A. 2001 Supp. 79-3606(kk). You provided the following facts:

XXXX is a manufacturer of custom bulk cables, wiring harnesses and cable assemblies. . . .
XXXX purchases AutoCAD software. . . . AutoCAD software is software that XXXX's engineering department uses to create and to produce schematic drawings of its products. The schematics are exclusively used (created and produced) for engineering of XXXX's products, for research and development of XXXX's products and for the design of XXXX's products. For example, a customer will order a wiring harness for a new model of aircraft. The customer will identify the specifications of the wiring harness. XXXX will then utilize the AutoCAD software to design the new wiring harness.

K.S.A. 2001 Supp. 79-3606(kk)(4) provides in part:

The following machinery, equipment and materials shall be deemed to be exempt even though it may not otherwise qualify as machinery and equipment used as an integral or essential part of an integrated production operation: (A) Computers and related peripheral equipment that are utilized by a manufacturing or processing business for engineering of the finished product or for research and development or product design.

The software purchase appears to qualify for the sales tax exemption under K.S.A. 2001 Supp. 79-3606(kk), assuming the software’s primary use by your client is for engineering of the finished product or for research and development or product design. Please consider my prior letter to you dated June 5, 2002 concerning the private letter ruling requested for your client, XXXX, to be revoked.

Let me know if you have any further questions.

Very truly yours,

Richard L. Cram

Date Composed: 08/22/2002 Date Modified: 08/22/2002

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