Do repairs to a power plant's electricity-generating engines and an upgrade of its control (SCADA) system qualify for Kansas's manufacturing machinery and equipment exemption?

Plain-English summary

An electric power plant asked whether Kansas's exemption for manufacturing machinery and equipment covers three things: repairs to two internal combustion engines damaged by fire, repairs to a plant building, and an upgrade to its SCADA system (the communications/control system that monitors load and how much electricity is generated and consumed). The Department split the answer between production equipment (exempt) and the building (taxable).

Generating engines — repair labor and parts are exempt. Because the engines are used to generate electrical power for resale, they are exempt integrated-production machinery and equipment. The Department ruled the service to repair the engines and the purchase of repair parts for them are exempt from Kansas retailers' sales and compensating tax under K.S.A. 79-3606(kk).

SCADA control-system upgrade — exempt. The labor services and components to upgrade the SCADA system are also exempt under K.S.A. 79-3606(kk), as part of the machinery and equipment used in the direct production and distribution of electricity for resale.

Building repairs — taxable. Repairs to the building, including both labor and materials, are subject to sales tax. The building is not part of the exempt production machinery and equipment.

Bottom line: at a power plant generating electricity for resale, repairs and parts for the generating engines and the SCADA control upgrade are exempt under 79-3606(kk), but repairing the building itself (labor and materials) is taxable.

What this means for you

Electric utilities and other manufacturers

Machinery and equipment used in the direct production and distribution of your product for resale — and the repair labor and parts for that equipment — can qualify for exemption under 79-3606(kk). Here, the generating engines and the SCADA control system both qualified.

Draw the line at the building

The exemption does not reach the building. Building repair labor and materials are taxable, even at a facility whose production equipment is exempt. Separate your building/real-property work from your production-equipment work when applying the exemption.

Control and monitoring systems can qualify

The SCADA upgrade — communications and computers that read the system's load and output — was treated as exempt production/distribution equipment. Control, monitoring, and communications components integral to production can fall within 79-3606(kk), not just the primary machinery.

Common questions

Q: Are repairs and parts for the plant's generating engines taxable?
A: No. Because the engines generate electricity for resale, the repair service and repair parts are exempt under K.S.A. 79-3606(kk).

Q: Is the SCADA system upgrade exempt?
A: Yes. The labor services and components to upgrade the SCADA system are exempt under K.S.A. 79-3606(kk).

Q: What about repairs to the plant building?
A: Building repairs — both labor and materials — are subject to sales tax; the building is not exempt production equipment.

Citations and references

• K.S.A. 79-3606(kk) — exempts machinery and equipment used in the direct production and distribution of a product for resale, and the repair labor and parts for it; the basis for exempting the generating-engine repairs/parts and the SCADA upgrade, while building repairs remain taxable.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-074

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

July 20, 2001

XXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX
XXXXXXXXXX

Dear XXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated July 16, 2001. In it, you request a private letter regarding the sales tax exemption for manufacturing machinery and equipment.

In your letter, you stated:

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Another concern is repair of two internal combustion engines damaged by fire at power plant XXXXXX. Are we exempt from sales tax on labor to repair the engines and replacement parts? How about contractors labor for building repairs and materials?

Also we will be updating our SCADA System. (communication modems between three power plants) The computers read the systems load, reads out how much electricity is being generated and consumed. Are the computers and modern lines exempt per K.S.A. 79-3606 (kk), 2, D.?

Per our telephone conversation it was determined that the internal combustion engines are used to generate electrical power for resale.

It is the opinion of the Kansas Department of Revenue that the service to repair and purchase of repair parts for the internal combustion engines that are utilized in the direct production and distribution of electricity intended for resale by your plant are exempt from Kansas retailers’ sales and compensating tax pursuant to K.S.A. 79-3606(kk).

Repairs to the building including labor and materials are subject to sales tax.

The purchase of labor services and components to upgrade the SCADA System are exempt from Kansas retailers’ sales and compensating tax pursuant to K.S.A. 79-3606(kk).

This is a private letter ruling pursuant to Kansas Administrative Regulation 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 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 ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC:mdc

Date Composed: 07/30/2001 Date Modified: 10/11/2001

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