Is transferring motor vehicles to a company solely in exchange for equity a taxable sale in Kansas?

Plain-English summary

A taxpayer was contributing tractors and trailers to a wholly owned company (a single-member LLC) in exchange for equity. When registering and tagging some of the vehicles, the Motor Carrier Services Bureau told the taxpayer that sales tax was due — even though earlier transfers of similar vehicles to the same company had been made without tax. The reason given was that the two entities had different federal employer identification numbers (FEINs). The taxpayer asked for a ruling on whether the transfers are taxable.

Kansas taxes both the retail sale and the isolated or occasional sale of a motor vehicle and trailers. But K.S.A. 79-3603(o) provides an exception where the transfer is "by a person to a corporation solely in exchange for stock or securities in such corporation." Because the Kansas sales tax statutes define "person" to include "corporation," the Department concluded that transferring the motor vehicles to the company as part of the contribution is exempt — provided the transfer is "solely in exchange for stock or securities" in the company.

What this means for you

If you contribute vehicles or other property to your company in exchange for an ownership interest, the transfer can be exempt from Kansas sales tax.

• Contributions for equity can be exempt. 79-3603(o) excepts a transfer to a corporation "solely in exchange for stock or securities."
• "Solely" is the key condition. The exemption applies when equity is the only consideration; receiving cash, debt relief, or other consideration alongside the equity can jeopardize it.
• Different FEINs don't defeat it. The fact that the contributing and receiving entities had different FEINs did not make the transfer taxable.
• "Person" includes an entity. Because the statutes define "person" to include a corporation, an entity-to-entity contribution for equity fits within 79-3603(o).
• Vehicles still need registration. The transfer is exempt from sales tax, but you still register and title the vehicles — just without paying sales tax on a qualifying contribution.

Common questions

Is contributing vehicles to my company for equity taxable in Kansas?
No, if it is solely in exchange for stock or securities. K.S.A. 79-3603(o) excepts such transfers from the tax on motor vehicle sales.

What does "solely in exchange for stock or securities" mean?
Equity must be the only consideration. If you also receive cash or other consideration, the transfer may not qualify.

Does it matter that the two entities have different FEINs?
No. The Department found the transfer exempt despite the different FEINs, because it was a contribution solely for equity.

Can another business rely on this ruling?
Not directly. A private letter ruling binds the Department only for the requesting taxpayer and stated facts; treat it as guidance.

Citations and references

• K.S.A. 79-3603(o) — after Kansas taxes the retail and isolated or occasional sale of motor vehicles and trailers, excepts a transfer "by a person to a corporation solely in exchange for stock or securities in such corporation." The Department applied it (noting "person" includes "corporation") to exempt the contribution of tractors and trailers for equity.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1999-61.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 8, 1999

XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX

Dear XXXXXXXXXXX:

I acknowledge receipt of your letter dated February 3, 1999.

You stated that you were in the process of transferring three tractors and four trailers from XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX a wholly owned company of XXXXXX. When you applied for registration and titles at the Motor Carrier Services Bureau, you were informed that you had to pay sales tax in order to register and tag these vehicles.

XXXXXXXXXX was formed as of July 1, 1998 with assets that were transferred from XXXX in exchange for equity in XXXXXX. At that time your conversation with XXXXXX in the Taxpayer Assistance Bureau led you to believe that this transfer was not a taxable event. No sales tax was paid when you registered and tagged five tractors and five trailers. In August, 1998, you registered and tagged two more tractors and two more trailers without paying sales tax. On September 29, 1998 you transferred an additional tractor without paying sales tax. All these assets have been transferred from XXXX to XXXXXX in exchange for equity in XXXXX.

When you were transferring, registering and tagging the current three tractors and four trailers, the question of tax again arose. This time your were told this was a taxable event due to the different FEIN’s of XXXX and XXXXXXX. You later submitted a request for a private letter ruling.

All the assets in question have been transferred from XXXX to XXXXXX in exchange for equity. XXXXXX is a single member LLC with that member being XXXX. You now request a private letter ruling concerning the taxability of the above transfers.

Kansas law taxes the retail sale and the isolated or occasional sale of a motor vehicle and trailers. However, there is an exception to this imposition where the transfer is "by a person to a corporation solely in exchange for stock or securities in such corporation." K.S.A. 79-3603 (o). Because the sales tax statutes define "person" to include "corporation," any transfer of motor vehicles from XXXX to XXXXXX as part of the contribution would be exempt as well, provided it is "solely in exchange for stock or securities" in XXXXXX.

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: 03/09/1999 Date Modified: 10/11/2001

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