Are video captioning services taxable in Kansas, and can the blank tape be bought exempt?

Plain-English summary

A company that captions videos asked two things: (1) whether it must charge sales tax for its services, and (2) how to buy and sell the blank tape stock it uses. Its captioning "requires that a copy of an original video be made and captions are added to the copy as it is copied." It had been buying blank tape stock and paying sales tax on those purchases, never buying tax-exempt.

Captioning is a taxable service. Kansas taxes "the sale of tangible personal property and enumerated services" (K.S.A. 79-3603(a)) and specifically "the gross receipts received for the service of . . . servicing, altering . . . tangible personal property" (K.S.A. 79-3603(q)). The Department concluded "that the captioning services you perform are a taxable service. Therefore, your company should collect sales tax on the gross receipts you receive from your customers for the caption service."

The blank tape is an exempt ingredient/component part. "The tape that you alter for your customer is an 'ingredient or component part.'" K.S.A. 79-3602(l) defines that term as 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." Kansas "exempts the purchase of ingredient or component parts by the person that is producing tangible personal property or a taxable service for resale" (K.S.A. 79-3606(m)). So "[t]he video tapes used in providing this service may be purchased by your company exempt as they are an ingredient or component part of providing the service."

Bottom line: collect sales tax on your captioning charges (a taxable altering service), and buy the blank tape stock exempt as an ingredient/component part of the taxable service you produce — a change from the company's prior practice of paying tax on the tape.

What this means for you

Altering a customer's property is a taxable service

Kansas taxes servicing and altering tangible personal property. A process that alters video content — like adding captions to a tape — is a taxable service, and you collect tax on what you charge your customers for it.

Buy your ingredient/component inputs exempt

Materials that become an integral, material part of the taxable service you produce are ingredient or component parts you can buy exempt under K.S.A. 79-3606(m). Here, the blank tape that carries the captioned video qualifies — so use an exemption certificate rather than paying tax on it.

Fix past over-payment prospectively

The company had been paying tax on tape it could buy exempt. Going forward, provide vendors an ingredient/component exemption certificate; consult the Department about the proper procedure for any tax paid in error on qualifying purchases.

Common questions

Q: Do I charge Kansas sales tax on video captioning?
A: Yes. Captioning is "a taxable service," so "collect sales tax on the gross receipts you receive from your customers for the caption service."

Q: Can I buy the blank tape stock tax-free?
A: Yes. The tape is "an ingredient or component part of providing the service," so it "may be purchased by your company exempt" under K.S.A. 79-3606(m).

Q: Why is the tape exempt but the service taxable?
A: The service you sell is taxable, and the tape is an input that becomes an integral part of that produced service — Kansas exempts such ingredient/component inputs so the tax falls once, on the final taxable service.

Citations and references

• K.S.A. 79-3603(a) — imposes Kansas sales tax on sales of tangible personal property and enumerated services.
• K.S.A. 79-3603(q) — taxes the gross receipts for the service of servicing or altering tangible personal property; the basis for taxing captioning.
• K.S.A. 79-3602(l) — defines "ingredient or component part" as property essential to and becoming an integral, material part of the property or service produced.
• K.S.A. 79-3606(m) — exempts the purchase of ingredient or component parts by a person producing property or a taxable service for resale; the basis for buying the blank tape exempt.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-155

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

July 16, 1999

XXXXXX
XXXXXXXXXX
XXXXXXXX
XXXXXXXXXXXXXX

Dear XXXXXXXXXXXX:

I have been asked to respond to your letter dated April 23, 1999. In it, you ask for guidance in the application of Kansas retailers’ sales tax.

In your letter you stated:

I am writing to request a private letter ruling on two issues: 1) whether my company is required to charge sale tax for the services it provides; and 2) how to appropriately buy and sell blank tape stock under the sales tax provisions.

One of my company’s services involves captioning videos for our clients. The captioning process requires that a copy of an original video be made and captions are added to the copy as it is copied. We purchase the blank tape stock that we use and we have paid sales tax on those purchases. We have never bought blank tape using a tax-exempt status.

Kansas retailers’ sales tax law imposes tax on the sale of tangible personal property and enumerated services. K.S.A. 79-3603(a). Kansas taxes “the gross receipts received for the service of . . . servicing, altering. . .tangible personal property. . .” K.S.A. 79-3603(q).

The tape that you alter for your customer is an “ingredient or component part.” The term “ ‘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,. . .” K.S.A. 79-3602(l).

Kansas exempts the purchase of ingredient or component parts by the person that is producing tangible personal property or a taxable service for resale. K.S.A 79-3606(m).

It is the opinion of the Kansas Department of Revenue that the captioning services you perform are a taxable service. Therefore, your company should collect sales tax on the gross receipts you receive from your customers for the caption service. The video tapes used in providing this service may be purchased by your company exempt as they are an ingredient or component part of providing the service.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 07/26/1999 Date Modified: 10/11/2001

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