Are third-party laboratory testing services for pharmaceutical development subject to Kansas sales tax, and does the customer need an exemption certificate?

Plain-English summary

A pharmaceutical developer paid outside laboratories to test samples during new-drug development and could not find a Kansas exemption certificate for those services. The Department explained that no certificate was needed because the testing charges were not taxable in the first place.

Kansas taxes retail sales of tangible personal property and services specifically enumerated in the sales-tax act. Laboratory sample testing was not an enumerated taxable service, so the laboratory should not charge Kansas sales tax and the customer does not need to claim an exemption.

Delivering the results on paper, a certificate, or another tangible medium such as a CD did not change the result. The testing results were the true object of the contract; the report was incidental, like an attorney giving a client a paper will or an accountant giving a client a paper or CD copy of a tax return.

The laboratory, however, was the consumer of the items it used. It had to pay sales tax on its own purchases, including blank paper and certificates used to document the results.

What this means for you

Businesses buying laboratory testing

Do not issue an exemption certificate merely to avoid tax on the testing service described here. Give the laboratory a copy of the opinion if it incorrectly assumes the charge is taxable without one.

Testing laboratories

Do not collect Kansas sales tax on standalone testing services merely because you deliver a written or electronic report. Pay sales tax on supplies and materials you consume in performing the tests.

Pharmaceutical and research companies

The holding applies to third-party testing services purchased during product development. A transaction whose real object is buying equipment, samples, or another product could require a different analysis.

Common questions

Q: Are laboratory testing services taxable in Kansas?
A: Not under this opinion. The Department said they were not among the services enumerated as taxable.

Q: Does the customer need an exemption certificate?
A: No. A charge that is not taxable does not need a statutory exemption or exemption certificate.

Q: Does a paper report or CD make the transaction taxable?
A: No. The Department treated the test results as the true object and the tangible report as incidental.

Q: Does the laboratory buy its paper and certificates exempt?
A: No. The laboratory is the consumer and pays sales tax on those purchases.

Citations and references

• Kansas retailers' sales tax act — taxes tangible personal property and enumerated services, as described in the letter
• Kansas Department of Revenue 2006 Self Audit Fact Sheet — cited as stating that third-party laboratory testing charges are not taxable

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2010-011

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

January 7, 2011

XXXXX
XXXXX
XXXXX

RE: Your recent e-mail

Dear XXXXX:

Thank you for your recent letter. Your company routinely pays for testing services performed by third-party testing laboratories in the course of its development of new pharmaceuticals. The department's Audit Services Bureau published a Self Audit Fact Sheet in 2006 that states payments for testing services performed by a laboratory are not subject to sales tax. You have searched for an exemption certificate to provide to third-party laboratories that your company contracts with to test its products. You cannot locate one on the department's web site and ask for assistance.

The Kansas retailers sales tax act (Act) imposes sales tax on retail sales of tangible personal property and on retail charges for services enumerated in the Act. The services that a laboratory performs testing samples are not enumerated in the act as taxable services. Therefore, charges for such services are not taxable. The department does not publish an exemption certificate for such testing services because the services are not taxable in the first place, and therefore, do not need to be "exempted" by the Act for the charges be non-taxable.

Because a testing laboratory does not perform taxable services, all of its purchases are subject to sales tax, including purchases of any blank paper or certificates the laboratory issues to customers to document test results. The delivery of laboratory testing results on a tangible media is not a taxable sale of tangible personal property because the testing results are the true object of the contract for the testing services. This is the same tax treatment accorded to an attorney who drafts a will and provides a paper original or copy to a client or when an accountant completes and files a tax return and provides a paper copy or CD copy of the return to its client. In these examples, the client is not required to present an exemption certificate to the attorney or accountant for the will or tax return. Similarly, your company is not required to present an exemption certificate to a testing laboratory when it pays for testing services.

If a testing laboratory requires your company to provide an exemption certificate to them for testing services, the testing laboratory apparently is acting under the assumption its charges for testing your samples are taxable unless they secure an exemption certificate. This is incorrect for the reasons discussed in this letter. Please provide a copy of this letter to any laboratory that asks for an exemption. This will alert them that their charges for testing services are not subject to Kansas sales tax and they are not required to secure an exemption certificate when charging customers for such services.

You and any testing company that receives a copy of this letter should contact the department at 785-296-3081 and ask to discuss any questions that are not answered by this letter with a tax specialist.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 01/11/2011 Date Modified: 01/11/2011

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