Could a mechanical contractor rent fabrication equipment tax-free because it would be used to build machinery that qualified for Kansas's integrated-production exemption?

Plain-English summary

Equipment rented to a mechanical contractor for fabricating exempt production machinery was taxable, even though materials incorporated into the finished machinery could qualify for exemption.

The contractor planned to use rented equipment to fabricate machinery that would later manufacture snack foods. An integrated-production exemption certificate described the rented equipment itself as manufacturing equipment used to make snack food.

The Department said that description was factually wrong. The rented tools did not manufacture the food; they were used one step earlier to build the machinery that would do so.

Kansas allowed the contractor to claim exemption for materials fabricated into exempt integrated-production machinery. It did not provide an exemption for the contractor's own fabrication equipment or its lease. The lessor was told not to honor the certificate.

What this means for you

Mechanical contractors

Separate incorporated materials from fabrication tools. An exemption for the finished customer's machinery does not automatically cover your shop equipment.

Equipment rental companies

Review the stated use on exemption certificates. If the renter uses the equipment to build exempt machinery rather than directly in exempt production, this ruling says the rental remains taxable.

Manufacturers

The exemption analysis can change at each tier: manufacturing machinery may qualify, materials incorporated into it may qualify, and the contractor's fabrication tools may still be taxable.

Common questions

Q: Could the contractor buy incorporated materials tax-free?
A: Yes, when fabricated into qualifying exempt integrated-production machinery.

Q: Was the equipment used to fabricate that machinery exempt?
A: No.

Q: Why was the certificate rejected?
A: It incorrectly said the rented equipment manufactured snack food when it actually fabricated equipment that would manufacture snack food.

Citations and references

• K.A.R. 92-19-59 — Kansas Private Letter Ruling procedure

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-025

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 25, 2004

XXXXX
XXXXX
XXXXX

RE: Your fax received on May 12, 2004

Dear XXXXX:

Thank you for your recent fax. You ask if the Integrated Production Machinery and Equipment Exemption Certificate attached to the fax should be honored. Please be advised that is should not be. Contrary to what is claimed on the face of the certificate, the equipment being leased or rented will not be used as integrated production equipment. The equipment in question will be used by a mechanical contractor to fabricate equipment that qualifies for the integrated production exemption.

While a mechanical contractor may claim exemption when he purchases materials that he will fabricate into exempt integrated production machinery or equipment, the contractor may not claim an exemption for equipment that the contractor will use to fabricate the exempt equipment. This is reflected in the fact that the exemption certificate does not contain a provision for equipment rented to a contractor for use in fabricating exempt integrated production machinery and equipment. As completed, this certificate claims to be renting "various manufacturing equipment" that is to be "used in manufacture of snack food." This is factually wrong. The equipment is not used to manufacture snack food, but is used to fabricate equipment that is used to manufacture snack foods. There is no exemption in the law for this kind of a lease or rental.

This is a private letter ruling pursuant to K.A.R. 92-19-59, based on the representations you have made. To the extent those representations are incomplete or inaccurate, this ruling is 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,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 06/28/2004 Date Modified: 06/29/2004

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