Is a pathology proficiency-testing subscription taxable in Kansas, and does the provider owe use tax on specimens shipped in from out of state?

Plain-English summary

An accreditation organization runs a proficiency-testing program that pathology laboratories must join to stay accredited. It transfers "proficiency testing materials (PT Materials)" — typically a human-serum specimen "'spiked' with the analytes" — to a lab, the lab analyzes them "blind," and the organization scores the results. Labs pay "a single subscription amount for participating," with "[n]o separate charge . . . for the PT Materials and for the testing service." The organization asked for three rulings: that the "true object" is a nontaxable testing service (so it is the consumer of the PT Materials), that it owes no Kansas use tax on specimens shipped in by common carrier from out of state, and (failing that) that it gets a credit for tax paid to the shipping state.

The framework. Kansas uses a "two step analysis": is the transaction generally taxable, and if so is there an exemption? "[S]ales tax is imposed on all transactions involving the transfer of tangible personal property. With services, however, tax is imposed only on those transactions which are specifically enumerated in the sales tax act."

The service is not enumerated. "[T]he proficiency testing service provided by [the organization] is not subject to the Kansas sales tax," because "the type of service [it] provides has not been enumerated in the sales tax act as a service which is subject to tax."

True object → provider is the consumer of the materials. "[T]he PT Materials in question are incidental to the testing service," so the Department found the organization "is the consumer of the PT Materials." It followed that the organization "is not subject to use tax on specimens shipped to Kansas laboratories by common carrier from outside Kansas." (Because that resolved the use-tax question, the requested credit for tax paid to another state did not come into play.)

The input-tax caveat. As a nontaxable-service provider, the organization "must pay sales tax on all articles of tangible personal property and all services purchased by it in Kansas which enables it to provide the nontaxable service."

Bottom line: the proficiency-testing subscription is a nontaxable, non-enumerated service; the test materials are incidental, so the provider (not the lab) is treated as their consumer and owes no Kansas use tax on out-of-state common-carrier shipments — but it owes tax on its own Kansas inputs.

What this means for you

Accreditation bodies and testing-service providers

When your true object is a service Kansas does not enumerate as taxable, the subscription or participation fee is not taxed, and materials that are merely incidental to delivering the service make you their consumer rather than a reseller. You then owe tax on what you buy in Kansas to provide the service.

Pathology and clinical laboratories

The lab's participation fee is not a taxable purchase of goods here — it is paying for a nontaxable testing service, and the specimens it receives are incidental to that service. The tax responsibility for the materials sits with the provider, not the lab.

Interstate shipments of incidental materials

Where the provider is the consumer of materials shipped into Kansas by common carrier from another state, Kansas use tax did not attach in this ruling. Analyze both the true-object/consumer question and the interstate-shipment facts before assuming use tax is owed.

Common questions

Q: Is a proficiency-testing subscription taxable in Kansas?
A: No. The Department concluded the proficiency-testing service "is not subject to the Kansas sales tax" because it "has not been enumerated in the sales tax act as a service which is subject to tax."

Q: Who is the consumer of the test specimens?
A: The provider. Because "the PT Materials . . . are incidental to the testing service," the Department found the organization "is the consumer of the PT Materials."

Q: Does the provider owe use tax on out-of-state specimens?
A: No. The organization "is not subject to use tax on specimens shipped to Kansas laboratories by common carrier from outside Kansas." It does, however, owe Kansas tax on its own in-state purchases used to provide the service.

Citations and references

• Two-step analysis / non-enumerated service — Kansas taxes services only when specifically enumerated; the proficiency-testing service is not enumerated, so it is not taxable, and the provider pays tax on its own Kansas inputs.
• True-object doctrine — where tangible materials are incidental to a nontaxable service, the service provider is treated as the consumer of those materials; here that also meant no Kansas use tax on the out-of-state common-carrier shipments.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-181

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

August 9, 1999

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Sales and Use Tax

Dear XXXXX,

Your correspondence of July 20, 1999, has been referred to me for response. Thank you for your inquiry.

By your letter you request a ruling regarding the proper sales and use tax treatment of certain proficiency testing materials (PT Materials) that are transferred by XXX XXXXX XXXXXXXXXX XXXXXXX XXXXX to pathology laboratories in Kansas in connection with proficiency testing services provided by XXX XXXXX to such laboratories. As a basis for your request you provide rather detailed background material which describes the process. The essence of your letter is as follows:

Federal law requires that every pathology laboratory in the United States be accredited periodically by the Department of Health and Human Services or another organization recognized by them as having standards that are equivalent to or more stringent than federal accreditation standards. XXX XXXXX is one of only a few organizations so recognized.

In order to obtain accreditation, a laboratory must, inter alia, participate in a proficiency testing program. A proficiency testing program evaluates the ability of participating laboratories to accurately perform diagnostic services for patients. Specifically, the proficiency testing program involves (i) the transfer to a participating laboratory of a specimen (i.e. the PT Materials) the composition of which is unknown to the laboratory, (ii) the analysis of the PT Materials by the laboratory and transmission of the laboratory’s findings to XXX XXXXX, and (iii) the processing and evaluation of the laboratory’s findings by XXX XXXXX.

Most of the PT Materials consist of a human serum or other biological base that is “spiked” with the analytes for which each participating laboratory must test. The specific proficiency testing modules in which a laboratory will enroll depends on the scope of the work done at the laboratory. Thus, a laboratory performing a wide range of analyses will participate in a larger number of modules than a laboratory doing only basic testing. Each specific proficiency testing module is priced separately.

The manufacturer generally delivers the PT Materials by common carrier to a third party repackager retained by XXX XXXXX or ships the PT Materials by common carrier directly to each participating laboratory. The manufacturer invoices XXX XXXXX for the PT Materials at the time the manufacturer ships the PT Materials to the repackager or directly to the laboratories. The repackager breaks down the manufacturer’s bulk shipment in to individual packages for shipment to the laboratories, adds printed instructions supplied by XXX XXXXX, and then ships the materials by U.S. Mail or by common carrier to the participating laboratories.

The laboratory has no independent use for the PT Materials apart from participating in the testing program. Once a participating laboratory has concluded its analysis of the PT Materials, the laboratory generally disposes of those materials. The laboratory sends a report of its analysis to XXX XXXXX which evaluates the laboratory’s analysis, and provides its findings to the laboratory and to the accreditation organization designated by the laboratory.

XXX XXXXX charges laboratories a single subscription amount for participating in the proficiency testing program. No separate charge is made for the PT Materials and for the testing service.

In your letter you request three rulings. These are:

I. The “true object” of XXX XXXXX’s proficiency testing program is the administration of a proficiency testing service rather than the provision of the PT Materials; therefore XXX XXXXX’s charges for participation in the proficiency testing program are not subject to sales or use tax, and XXX XXXXX is deemed to be the consumer of the PT Materials.

II. XXX XXXXX is not subject to use tax on specimens shipped to Kansas laboratories by common carrier from outside Kansas.

III. If XXX XXXXX is subject to use tax on specimens shipped to Kansas laboratories by common carriers from outside Kansas, XXX XXXXX is entitled to a credit for tax properly paid to the state from which such materials were shipped.

In deciding whether a particular transaction is subject to Kansas sales tax, a two step analysis is generally necessary. The first step is to determine whether the sales tax act generally imposes tax on the type of transaction in question. The second step is to determine whether the act provides an exemption for the particular type of transaction.

As a rule, sales tax is imposed on all transactions involving the transfer of tangible personal property. With services, however, tax is imposed only on those transactions which are specifically enumerated in the sales tax act. Exemptions for transactions involving either tangible personal property or services are allowed as specifically enumerated.

After reviewing the information provided in your letter, we have concluded the proficiency testing service provided by XXX XXXXX is not subject to the Kansas sales tax. This determination is based on our belief that the type of service XXX XXXXX provides has not been enumerated in the sales tax act as a service which is subject to tax.

In addition, we find the PT Materials in question are incidental to the testing service XXX XXXXX provides. As a result, pursuant to your request, we find XXX XXXXX is the consumer of the PT Materials. We also find XXX XXXXX is not subject to use tax on specimens shipped to Kansas laboratories by common carrier from outside Kansas.

You should be aware that XXX XXXXX must pay sales tax on all articles of tangible personal property and all services purchased by it in Kansas which enables it to provide the nontaxable 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.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

Date Composed: 09/10/1999 Date Modified: 10/10/2001

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