Which restaurant supplies were taxable, exempt ingredient or component parts, or resale items under Kansas PLR P-2004-037?

Plain-English summary

Kansas divided the restaurant products into taxable business-use items, exempt ingredient or component parts transferred with taxable meals, and items held for resale.

K.S.A. 79-3603(a) taxed retail sales of tangible personal property. K.S.A. 79-3606(m) exempted property that became an ingredient or component of property or services produced for retail sale. Section 79-3602(p)(2) included nonreturnable containers, bags, straws, plates, cups, labels, and wrapping used in distribution and sale.

Ingredient or component parts (“I”)

The ruling classified these as exempt when sold to the restaurant for the stated use:

• carryout bags and containers;
• coffee stirrers and stir sticks;
• complimentary mints;
• disposable cups, lids, placemats, silverware, plates, portion cups, and tray liners;
• foil used to wrap sandwiches;
• kids' meal toys and prizes;
• paper dollies, basket liners, and napkins;
• plastic to-go cups and steak markers;
• straws, toothpicks, and wetnaps.

Taxable items used or given away (“T”)

These were taxable to the restaurant:

• Kids Club applications, balloons, birthday-party invitations, and party kits when given away;
• complimentary crayons;
• disposable gloves;
• foil used in the kitchen;
• hairnets and beard nets;
• ice-cube bags used by the restaurant;
• newsletters;
• paper crowns;
• paper table covers; and
• disposable or reusable plastic table covers.

Resale items (“R”)

Kids Club applications, balloons, birthday-party invitations, and birthday-party kits sold rather than given away were classified as resale items. The ruling said the restaurant had to remit sales tax when it resold them.

What this means for you

Restaurants

Ask whether the item passes to the customer as an integral, nonreturnable part of the taxable meal or remains a restaurant-use supply. That distinction controlled most classifications.

Food-service suppliers

Obtain and retain the appropriate exemption documentation for items sold as ingredient or component parts. Similar-looking items can be taxable when used for preparation or operations instead.

Promotional programs

Giveaways were taxable inputs, while the same party-program items sold to customers were resale items with tax due on the sale.

Common questions

Q: Were carryout containers and disposable cups exempt to the restaurant?
A: Yes, as ingredient or component parts.

Q: Were gloves, hairnets, and kitchen foil exempt?
A: No. They were taxable restaurant-use items.

Q: Were kids' meal toys exempt?
A: Yes, the ruling classified them as ingredient or component parts.

Q: How were party kits treated?
A: Taxable to the restaurant when given away; resale items when sold, with tax due on resale.

Citations and references

• K.S.A. 79-3603(a) — retail sales of tangible personal property
• K.S.A. 79-3606(m) — ingredient or component exemption
• K.S.A. 79-3602(p)(2) — ingredient or component definition

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-037

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 30, 2004

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Dear XXXXXXXXXX,

This is a formal response to your letter dated April 21, 2004. In your letter you listed a number of products and asked which would be subject to Kansas retailer’s sales tax.

Kansas sales tax law imposes tax on the sale of tangible personal property and enumerated services. KS.A. 79-3603(a) imposes sales tax on “the gross receipts received from the sale of tangible personal property at retail within this state.” Sales of items labeled with a “T” fit into this enumeration and are thus taxable.

K.S.A. 79-3606(m) provides a tax exemption for “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 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.”

An “ingredient or component part” is “tangible personal property which is necessary or essential to, and which is 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” and includes “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.” K.S.A. 79-3602(p)(2).

Some of the items you listed fit into this ingredient or component part exemption. They are labeled with an “I.” The sale of these items by XXXXX to a restaurant would be exempt from Kansas retailer’s sales tax.

Finally, any items sold to a restaurant for resale would be taxable. The restaurant would be required to remit sales tax upon their resale. These items are labeled with an “R.”

The items you listed:

Application to Kids Club (given away) - T
Application to Kids Club (sold) - R
Balloons for Birthday Parties (given away) - T
Balloons for Birthday Parties (sold) - R
Birthday Party Invites (given away) - T
Birthday Party Invites (sold) - R
Birthday Party Kit (given away) - T
Birthday Party Kit (sold) - R
Carryout Bags - I
Carryout Containers - I
Coffee Stirrers - I
Complementary Crayons - T
Complementary Mints - I
Disposable Drinking Cups – I
Disposable Drinking Lids - I
Disposable Gloves - T
Disposable Placemats - I
Disposable Silverware - I
Foil (kitchen use) - T
Foil (wrap for sandwiches) - I
Hairnets/Beardnets (used by restaurants) - T
Ice cube bags (used by restaurant) - T
Kid’s Meal Toys - I
Kid’s Prizes - I
Newletters - T
Paper Dollies - I
Paper Crowns for Customers - T
Paper Liners for Baskets (for serving to customers) - I
Paper Napkins - I
Paper Table Covers - T
Plastic Cups to go - I
Plastic Plates - I
Plastic Steak Markers - I
Plastic Table Covers (disposable) - T
Plastic Table Covers (reusable) - T
Portion Cups (disposable) - I
Stir Sticks - I
Straws - I
Toothpicks - I
Trayliners (disposable) - I
Wetnaps – I

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 Ciardullo
Tax Specialist

Date Composed: 07/06/2004 Date Modified: 07/09/2004

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