Can a for-profit hospital or lab buy tangible personal property tax-free under the nonprofit-hospital or consumed-in-production exemptions?

Plain-English summary

A "for profit" hospital or laboratory asked whether it could buy tangible personal property and taxable services free of Kansas sales tax. The Department closed off both exemptions the entity might have hoped to use.

Not a nonprofit hospital — no 79-3606(b) exemption. K.S.A. 79-3606(b) exempts "all sales of tangible personal property or service . . . purchased directly by . . . a public or private nonprofit hospital . . . and used exclusively for . . . hospital . . . purposes." Because the requesting organization "is not a nonprofit hospital, it would be inappropriate for the organization to make purchases of tangible personal property and taxable services exempt from Kansas sales tax(es), as if it were a nonprofit hospital." The hospital exemption is limited to nonprofit hospitals; a for-profit entity does not get it.

Consumed-in-production exemption does not fit either. K.S.A. 79-3606(n) exempts property "consumed in the production, manufacture, processing . . . the providing of services or the irrigation of crops." But K.A.R. 92-19-53(b) narrows what "service" means: "the term 'service' refers only to taxable services enumerated under the sales tax act." And "[e]ach person providing a nontaxable service shall pay sales tax on all articles of tangible personal property and all services purchased by the person to provide the nontaxable service, and may not claim an exemption from sales tax."

Why it fails here. The entity's output — "pathology and clinical tests results" — is "not subject to sales tax in this state." Because those testing services are not taxable, "the respective purchases made in order to render said services would not come within the scope of the sales tax exemption in K.S.A. 79-3606(n)." A provider of a nontaxable service is the final consumer of what it buys and must pay tax on those purchases.

Bottom line: a for-profit hospital or lab gets neither the nonprofit-hospital exemption (it is not a nonprofit hospital) nor the consumed-in-production exemption (its testing services are nontaxable). It must pay Kansas sales or use tax on its purchases.

What this means for you

For-profit hospitals, labs, and clinics

You cannot buy tangible personal property or services tax-free under the nonprofit-hospital exemption — that exemption is only for nonprofit hospitals. Plan to pay sales or use tax on your purchases.

Providers of nontaxable services generally

If what you sell is a nontaxable service (like pathology or clinical testing), you are the final consumer of the property and services you buy to provide it. The consumed-in-production exemption does not apply, so pay tax on your inputs.

Distinguishing taxable vs. nontaxable outputs

The consumed-in-production exemption for "services" only reaches property consumed in providing taxable, enumerated services. If your service is not on the taxable list, your inputs are taxable to you.

Common questions

Q: Can a for-profit hospital use the nonprofit-hospital sales tax exemption?
A: No. K.S.A. 79-3606(b) applies only to public or private nonprofit hospitals. A for-profit entity cannot buy exempt as if it were a nonprofit hospital.

Q: Does the consumed-in-production exemption help a for-profit lab?
A: No. Under K.A.R. 92-19-53(b), that exemption covers property consumed in providing taxable services. Because pathology and clinical testing are nontaxable services, purchases to provide them are not exempt under K.S.A. 79-3606(n).

Q: So who pays the tax on the lab's supplies?
A: The lab does. A provider of a nontaxable service is the final consumer and must pay sales tax on the property and services it buys to render the service.

Citations and references

• K.S.A. 79-3606(b) — exempts purchases made directly by a public or private nonprofit hospital; unavailable to a for-profit hospital or lab.
• K.S.A. 79-3606(n) — exempts property consumed in production, manufacture, and the providing of services; does not reach purchases used to provide a nontaxable service.
• K.A.R. 92-19-53(b) — limits the consumed-in-production "service" to taxable enumerated services and requires a provider of a nontaxable service to pay sales tax on its purchases; the basis for denying the exemption on the lab's testing supplies.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-215

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 20, 1999

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Dear Mr. TTTTTTTT:

We wish to acknowledge receipt of your letter dated August 25, 1999, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3606(b) exempts from sales tax: "all sales of tangible personal property or service, including the renting and leasing of tangible personal property purchased directly by......a public or private nonprofit hospital...and used exclusively for...hospital...purposes, except when: (1) Such...hospital is engaged or proposes to engage in any business specifically taxable under the provisions of this act and such items of tangible personal property or service are used or proposed to be used in such business,..."

Please be advised that since TTTTTTTTTTTTTTTTTT, is not a nonprofit hospital, it would be inappropriate for the organization to make purchases of tangible personal property and taxable services exempt from Kansas sales tax(es), as if it were a nonprofit hospital.

K.S.A. 79-3606(n) exempts from sales tax: "all sales of tangible personal property which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, the providing of services or the irrigation of crops for ultimate sale at retail within or without the state of Kansas; and any purchaser of such property may obtain from the director of taxation and furnish to the supplier an exemption certificate number for tangible personal property for consumption in such production, manufacture, processing, mining, drilling, refining, compounding, irrigation and in providing such services."

K.A.R. 92-19-53(b) states in part: “For purposes of determining whether tangible personal property is consumed in the providing of services, the term “service” refers only to taxable services enumerated under the sales tax act. Each person providing a nontaxable service shall pay sales tax on all articles of tangible personal property and all services purchased by the person to provide the nontaxable service, and may not claim an exemption from sales tax. . . “

In closing, since the pathology and clinical tests results that TTTTTTTTTTTTTTTT are not subject to sales tax in this state, the respective purchases made in order to render said services would not come within the scope of the sales tax exemption in K.S.A. 79-3606(n).

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. 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: 10/11/1999 Date Modified: 10/11/2001

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