May a Kansas pet-food manufacturer buy nonreturnable pallets and shrink wrap without sales tax?

Plain-English summary

A Kansas pet-food manufacturer bagged its product, placed the bags on wood pallets, and heat-wrapped the bags and pallets in plastic shrink wrap for handling, shipment, and storage. Neither the manufacturer nor anyone else required the wholesale or retail buyer to return the pallets or shrink wrap.

The Department said the manufacturer could buy both items without Kansas sales tax. K.S.A. 79-3602(p) treats nonreturnable containers, labels, shipping cases, and wrapping materials used to distribute products for sale as “ingredient or component parts,” and K.S.A. 79-3606(m) exempts those parts.

Because the pallets and shrink wrap accompanied the pet food into distribution and were not returnable for reuse, the manufacturer could claim a resale exemption when buying the finished pallets and shrink wrap. The same treatment applied when it bought wood and fabricated the pallets itself.

What this means for you

Manufacturers

Nonreturnable shipping and wrapping materials that accompany your product to the buyer may qualify for Kansas's ingredient-or-component-part exemption. The no-return-for-reuse fact was decisive here.

Pet-food producers

For the arrangement described, you may issue a resale exemption for wood pallets, shrink wrap, or wood used to fabricate the pallets. Keep records showing that buyers are not obligated to return the materials.

Businesses using reusable pallets

This letter does not decide the treatment of pallets or wrapping materials that must be returned to the manufacturer or another party for reuse. The quoted statutory definition specifically addresses containers and shipping materials that are not returned.

Common questions

Q: Are the pallets exempt even though they do not become part of the pet food itself?
A: Yes. The statutory definition expressly includes nonreturnable containers and shipping cases used to distribute manufactured property for sale.

Q: Is the shrink wrap exempt?
A: Yes. The Department treated it as exempt nonreturnable wrapping used in distributing the pet food.

Q: What if the manufacturer builds its own pallets?
A: It may claim the exemption when buying the wood used to fabricate the nonreturnable pallets.

Q: What fact could change the result?
A: A return-for-reuse obligation. The letter repeatedly relied on the fact that the buyer had no duty to return the pallets or shrink wrap to anyone.

Citations and references

• K.S.A. 79-3602(p) — definition of “ingredient or component part,” including specified nonreturnable containers and shipping materials
• K.S.A. 79-3606(m) — exemption for ingredient or component parts

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2011-011

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

November 17, 2011

XXXX
XXXX
XXXX

RE: Your letter dated November 7, 2011

Dear XXXX:

Thank you for your recent letter. One of your clients manufacturers pet food in Kansas. The pet food is bagged and placed on wood pallets. The bags and pallets are then wrapped in shrink wrap, which is a plastic film that shrinks tightly over the bags and pallet when heat is applied. This allows the pet food to be easily handled at the manufacturing plant and during subsequent shipment and storage.

The manufacturer does not have an ownership interest in the pallets or shrink wrap that is separate or apart from its ownership interest in the pet food. The wholesale or retail buyer that unwraps the shrink-wrapped pet food bags for sale or distribution has no obligation whatsoever to return the pallets or shrink wrap to the manufacturer or to anyone else.

You ask if the pallets or shrink wrap are subject to Kansas sales tax when purchased by the manufacturer. The answer is no. This is because of the definition of "ingredient or component part" in K.S.A. 79-3602(p) and the exemption for such parts in K.S.A. 79-3606(m).

The definitions provides in parts relevant here:

(p) "Ingredient or component part" means 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. The following items of tangible personal property are hereby declared to be ingredients or component parts, but the listing of such property shall not be deemed to be exclusive nor shall such listing be construed to be a restriction upon, or an indication of, the type or types of property to be included within the definition of "ingredient or component part" as herein set forth:
(1) Containers, labels and shipping cases used in the distribution of property produced, manufactured or compounded for sale which are not to be returned to the producer, manufacturer or compounder for reuse.
(2) 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. . . .

In the example you provide, the wholesale or retail buyer that unwraps the shrink-wrapped pet food bags for sale or distribution has no obligation whatsoever to return the pallets or shrink wrap to the manufacturer or to anyone else for reuse. Because of this, the pallets are treated as ingredient or component of the manufacturer products. This means the manufacturer can claim a resale exemption when it buys the shrink wrap and pallets or when it buys wood that it fabricates into the pallets.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 11/17/2011 Date Modified: 11/17/2011

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