Are transfers of tangible personal property between two related companies subject to Kansas sales tax?

Plain-English summary

A company asked whether transfers of tangible personal property between two related legal entities are subject to Kansas sales tax. The Department advised that they are — in both scenarios the company described, it would be obligated to collect Kansas sales tax. The Department noted at the outset that its reply "is an informational letter only and not a private letter ruling pursuant to K.A.R. 92-19-59."

The controlling authority is the regulation K.A.R. 92-19-72(b), which the Department quoted: "Each transfer of tangible personal property and taxable services between separate legal entities for use or consumption, and not for resale, shall be taxable, even though the entities: (1) Share common principals or ownership and operations; (2) share the same business location; (3) file consolidated income tax returns for federal and state income purposes; or (4) do not enjoy a profit or expense as a result of the transaction."

Applying that regulation, the Department concluded that in "both Scenario I and II, your company would be obligated to collect Kansas sales tax." It added that the Kansas Supreme Court had upheld the regulation: in a decision dated December 8, 1995, the court "held that this regulation was valid" (PEMCO, Inc. v. Kansas Department of Revenue, 907 P.2d 863, 258 Kan. 717 (1995)).

What this means for you

Companies with related entities

Do not assume that moving property between affiliated companies is tax-free. When one separate legal entity transfers tangible personal property (or a taxable service) to another for that entity's use or consumption — not for resale — Kansas treats it as a taxable transaction, and tax must be collected.

Shared ownership or location doesn't change the result

The regulation is explicit that the transfer is still taxable even if the two entities share owners, principals, or operations, sit at the same address, file consolidated returns, or neither profits nor loses on the transfer.

The resale exception

The tax applies to transfers "for use or consumption, and not for resale." Property genuinely transferred for resale can still move on a resale exemption certificate; it is the use/consumption transfers between separate entities that are caught.

Settled law

This is not a novel or contestable position — the Kansas Supreme Court upheld the underlying regulation in the PEMCO case.

Common questions

Q: Is a transfer of property between two commonly owned companies taxable in Kansas?
A: Yes, if it is for the receiving entity's use or consumption and not for resale. K.A.R. 92-19-72(b) makes such transfers between separate legal entities taxable.

Q: Does sharing owners, an address, or a consolidated return change that?
A: No. The regulation expressly keeps the transfer taxable despite common ownership, a shared location, consolidated returns, or the absence of any profit.

Q: Is the regulation valid?
A: Yes. The Kansas Supreme Court upheld it in PEMCO, Inc. v. Kansas Department of Revenue (1995).

Citations and references

• K.A.R. 92-19-72 (subsection (b)) — makes each transfer of tangible personal property and taxable services between separate legal entities for use or consumption (not resale) taxable, even where the entities share ownership/operations, share a location, file consolidated returns, or realize no profit.
• PEMCO, Inc. v. Kansas Department of Revenue, 258 Kan. 717, 907 P.2d 863 (1995) — the Kansas Supreme Court decision upholding the validity of that regulation.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-1999-06

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

March 2, 1999

TTTTTTTTTTT
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Dear Ms. TTTTTT:

We wish to acknowledge receipt of your letter dated November 5, 1998, regarding the application of Kansas Retailers’ Sales tax.

This is an informational letter only and not a private letter ruling pursuant to K.A.R. 92-19-59.

K.A.R. 92-19-72(b) states in part: “Each transfer of tangible personal property and taxable services between separate legal entities for use or consumption, and not for resale, shall be taxable, even though the entities:
(1) Share common principals or ownership and operations;
(2) share the same business location;
(3) file consolidated income tax returns for federal and state income purposes; or
(4) do not enjoy a profit or expense as a result of the transaction. . .”

Please be advised that in both Scenario I and II, your company would be obligated to collect Kansas sales tax, since these transactions would be considered subject to Kansas sales tax, pursuant to K.A.R. 92-19-72(b). The Supreme Court of Kansas, in a decision dated December 8, 1995, held that this regulation was valid. See PEMCO, INC. V. KANSAS DEPARTMENT OF REVENUE 907 P. 2d 863, 258 Kan. 717 (Kan. 1995).

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 03/22/1999 Date Modified: 10/10/2001

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