When was an online retailer's separately stated gift-wrapping charge subject to Kansas sales tax under destination-based sourcing?

Plain-English summary

Gift wrapping was taxable when the wrapped item was delivered to Kansas, but Kansas did not tax the wrapping when the customer's first use occurred outside the state.

The online retailer separately charged for warehouse employees to gift-wrap merchandise before shipment. The items were shipped FOB destination.

Kansas used destination-based sourcing for taxable services. The relevant location was where the purchaser first used the gift-wrapping service, which could differ from where an employee performed the wrapping.

The Department concluded:

• If Kansas was the destination, the gift-wrapping charge was taxable under K.S.A. 79-3603(p).
• The wrapping charge's taxability did not depend on whether the underlying merchandise was taxable or exempt.
• If the wrapping occurred in Kansas but the item was shipped outside Kansas, no Kansas sales tax was collected on the wrapping because first use was outside Kansas.

What this means for you

Online retailers

Source gift-wrapping services to the delivery destination. Do not simply use the warehouse where the service was performed.

Tax calculation systems

Treat gift wrapping as its own taxable service. A tax-exempt product does not automatically make a Kansas-destination wrapping charge exempt.

Common questions

Q: Was gift wrapping a taxable Kansas service?
A: Yes.

Q: Did the item's taxability control the wrapping charge?
A: No.

Q: What if wrapping happened in Kansas but delivery was outside Kansas?
A: The ruling said no Kansas sales tax was collected because first use was outside the state.

Citations and references

• K.S.A. 79-3603(p) — taxable gift-wrapping service applied by the ruling

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-026

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 25, 2004

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Dear Sirs:

The purpose of this letter is to respond to your request dated March 8, 2004.

In your letter you stated:

XXXXXXXXXX sells various merchandise to customers who place orders on XXXXXXXXXX’s Internet site. A customer may choose to have the purchased item be gift wrapped by a XXXXXXXXXX employee prior to being shipped to the desired location. An employee at the warehouse location form which the product is shipped would perform the gift-wrapping. The gift-wrapping is separately stated on the receipt provided to the customer. The items are shipped FOB Destination.

You asked the following questions:

1. If your state were the destination for the gift-wrapping item, would the gift-wrapping be considered as part of the cost of the item? In which case, its taxability would be tied to the taxability of the item? Thus if the item is subject to sales and use tax, then the gift-wrapping charge is also subject to tax.

2. If your state were the destination of the gift-wrapped item, would the gift-wrapping be subject to sales tax regardless of taxability of the related item?

3. If your state is the where the gift wrapping service is performed but the item is shipped to a location outside your state, is the gift wrapping service subject to sales tax as an enumerated service?

Since July 1, 200, Kansas has applied to “destination-based” sourcing rules to all retail sales of taxable services and all sales of tangible personal property. This means the sale of a taxable service is sourced or taxed based on the location where the purchaser of the services makes first use of those services. This will often, but not always, be the same location as where the service is performed.

Gift-wrap is a taxable service in Kansas. See K.S.A. 79-3603(p). Thus, if Kansas were the destination of the gift-wrapped item, the gift-wrap service would be taxable. The taxability of the sale and the service are not tied together. The gift-wrapping service would be taxable regardless of the taxability of the sale of the item itself.

If the gift-wrapping service was done in Kansas, but the item was shipped to a location outside Kansas, then no Kansas retailer’s sales tax would be collected on the service. This is because the location where the purchaser of the gift-wrapping service first makes use of it falls outside Kansas.

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 to you, please contact me at your earliest convenience at (785) 296-5330.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

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

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