When a seller ships goods into Kansas and stocks them at a customer's site as inventory for resale, is that shipment subject to Kansas use tax — or is tax due only when the customer draws items from the stock?

Plain-English summary

A company with offices in Kansas (and in Missouri) stocks goods at a Kansas customer's site and lets the customer draw from that stock as needed. It asked whether the shipments into Kansas owe use tax, or whether sales tax is due instead when the customer takes items. The Department ruled that tax attaches at the draw-down, not the delivery — because what the seller ships in is inventory held for resale.

The arrangement. The seller's Missouri office ships material to the Kansas (Lenexa) customer's premises "for storage and later use." The customer does not pay for the material when it arrives; it pays only as it takes items from the stock, and the seller then ships replenishment to refill the shelf. When the customer no longer wants the seller storing stock there, the seller returns the remaining balance to Missouri. The seller asked: is this Kansas use tax (goods shipped from out of state) or Kansas sales tax (goods stored in Kansas)?

Nexus first. The Department noted the seller's Olathe and Wichita, Kansas offices "give you nexus with the state of Kansas," so the seller "must collect and remit the applicable state and local sales and/or use tax due on a given transaction." The question was which tax and when.

The key characterization — it's resale inventory, not "storage." "When you ship material to your Lenexa customer's premises you are not shipping the material there for storage, as that term is understood for use tax purposes. Instead, you ship the material there to be held as an inventory for resale." Because it is resale inventory, "the material originally shipped to your Lenexa customer's premises is not subject to use tax." Use tax is a tax on the use/consumption of goods; goods held for resale are not being consumed, so the inbound shipment is not use-taxed.

Tax attaches at the sale. "When your Lenexa customer pulls an item from inventory, a retail sale has occurred. At that time you should collect both state and local sales tax from your customer and remit the tax to the state of Kansas." Replacement items shipped to refill the stock "will also be considered inventory held for resale and will not be subject to sales or use tax." And when the leftover balance is returned to Missouri, "there will be no tax incident."

Bottom line: stocking goods at a customer's Kansas site as resale inventory is not a taxable "use." The taxable event is the retail sale that happens when the customer pulls an item — and that sale carries Kansas state and local sales tax.

What this means for you

Distributors and vendors running consignment-style or vendor-managed stock in Kansas

If you ship goods into Kansas and hold them at a customer's location as inventory the customer buys from over time, the inbound shipment is not use-taxed. The taxable retail sale — and your duty to collect Kansas state and local sales tax — arises when the customer draws an item from the stock. Replenishment shipments are likewise untaxed resale inventory.

Watch the "storage" vs. "resale inventory" line

Use tax can apply to goods a business ships into Kansas for its own use or consumption. This ruling turned on the fact that the goods were held for resale, not for the holder's own use. Document that the stock is inventory the customer purchases from — that characterization is what keeps the inbound shipment out of use tax.

Nexus means you collect either way

The seller had Kansas offices, so it had nexus and an obligation to collect the correct Kansas tax. The ruling did not excuse tax — it identified the right tax (sales) and the right moment (the draw-down). Pulling leftover stock back out of state is not itself a taxable event.

Common questions

Q: Does shipping goods into Kansas to stock at a customer's site trigger use tax?
A: Not when the goods are held as inventory for resale. The Department ruled the inbound shipment is not use-taxed; it is resale inventory, not "storage" for the holder's own use.

Q: When is Kansas tax actually due?
A: When the customer pulls an item from the stock. That draw-down is the retail sale, and the seller must collect both state and local Kansas sales tax on it.

Q: Are replenishment shipments and returned leftovers taxable?
A: No. Replacement items shipped to refill the stock are also non-taxable resale inventory, and returning the remaining balance to the seller's out-of-state office is not a taxable event.

Citations and references

• The Department decided this ruling on the general Kansas sales/use tax framework — the distinction between goods held as inventory for resale (not a taxable "use") and the retail sale that occurs when the customer draws an item — without citing a specific K.S.A. section in the letter. The seller's Kansas offices gave it nexus and a duty to collect the applicable state and local tax; the resale-inventory characterization placed the taxable event at the draw-down retail sale rather than the inbound shipment.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-044

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 22, 2000

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Sales Tax

Dear XXXXX:

Your correspondence of May 26, 2000 has been referred to me for response. Thank you for your inquiry. Please accept my apologies for the delay in responding.

The information and inquires set forth in your letter are as follows:

Our company (XXXX XXXX XX., XXX.) has offices in Kansas City, Missouri and in Wichita and Olathe, Kansas as well as in other cities in the United States. Our Kansas City, Missouri branch’s customer, in this case, is located in Lenexa, Kansas. Our Wichita and Olathe, Kansas offices are not part of this transaction and are not involved in any way.

Scenario:
Our Kansas City, Missouri office ships material to its Lenexa, Kansas customer’s premises for storage and later use. Our Kansas City, Missouri location bills its Lenexa customer at that time and includes the appropriate Kansas seller’s use tax rate, which is paid over to the State of Kansas at the end of the month. However, the customer does not pay for this material at this time since it is shipped for storage only. As needed, the Lenexa customer takes material from the stock that we are storing on his premises. We then bill the customer for the amount of the inventory that we ship to replenish the stock that he has taken. The customer does pay these invoices. We also include the use tax rate on these replenishment shipments / billings. At some point, when the customer no longer wants us to store our inventory in his warehouse, we will return the balance of inventory to our Kansas City, Missouri office and ask the state for a refund of taxes previously billed and paid on that remaining inventory.

In summary, the customer is not actually paying for the original shipment that is stored on his premises, but rather for the material that we ship to his premises to replenish the items taken by him.

Are the transactions subject to the Kansas use tax rate since the material was shipped from out of state into Lenexa? Or is the sales tax rate due since the material was stored in Lenexa?

Your offices in Olathe and Wichita, Kansas give you nexus with the state of Kansas. As a result, you are required to collect and remit the applicable state and local sales and/or use tax due on a given transaction.

In our opinion, based on the facts you present, when you ship material to your Lenexa customer’s premises you are not shipping the material there for storage, as that term is understood for use tax purposes. Instead, you ship the material there to be held as an inventory for resale. As a result, we believe the material originally shipped to your Lenexa customer’s premises is not subject to use tax.

When your Lenexa customer pulls an item from inventory, a retail sale has occurred. At that time you should collect both state and local sales tax from your customer and remit the tax to the state of Kansas. If you ship replacement items to the Lenexa customer’s premises these items will also be considered inventory held for resale and will not be subject to sales or use tax.

When the customer no longer wants you to store your inventory in his warehouse and the balance of the inventory is returned to your Kansas City, Missouri office there will be no tax incident.

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: 09/22/2000 Date Modified: 10/11/2001

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