Are a city's building materials to construct an electricity-generation facility taxable, and is the generation machinery exempt?

Plain-English summary

A city is constructing a new building/facility to house electricity-generation machinery and asked how Kansas sales tax applies. The Department's answer separates the generation machinery (exempt) from the building materials used to construct the facility (taxable).

Generation machinery is exempt. The Department noted that K.S.A. 79-3606(kk) exempts "all sales of machinery and equipment used directly and primarily for the purposes of manufacturing of electricity intended for resale by a political subdivision." Because the city's machinery will generate electricity, it "would come within the scope" of that exemption — and the labor to install the exempt machinery is also exempt.

But transmission equipment is not. The Department cautioned that "equipment used to transmit electrical power (i.e., transmission lines, substations, and line transformers) would not be considered manufacturing machinery and equipment." The exemption follows generation (production), not the transmission/distribution system.

The building materials are taxable — and no project exemption. Under K.S.A. 79-3603(l) (tax on sales of materials and supplies to contractors erecting structures), the Department ruled the city's purchases of building materials and supplies to construct the generation facility are subject to Kansas sales/use tax, and that the city "would not be able to secure a project exemption certificate for these purchases." The ordinary government project exemption does not reach this construction because the facility supports selling electricity to others.

The government exemption's utility exception. The city had asked the Department to review its proposed exemption certificate. The Department rewrote the K.S.A. 79-3606(b) reference to make the limit clear: sales of tangible personal property and services purchased directly by a political subdivision and used exclusively for political-subdivision purposes are exempt — EXCEPTION: when a political subdivision is engaged in furnishing gas, water, electricity, or heat to others, property and services used in that business are taxable. The only exempt purchases for city utility departments are items immediately consumed in providing the taxable utility service (e.g., chemicals to clean and purify water) and equipment qualifying as processing equipment under 79-3606(kk).

Bottom line: the city's generation machinery and its installation labor are exempt (79-3606(kk)), but the building shell it goes into is taxable (79-3603(l), no project exemption), and the general government exemption (79-3606(b)) is withheld for property used to sell utilities to others — leaving only immediately-consumed items and production equipment exempt.

What this means for you

Municipal electric utilities and their contractors

Treat the generation plant as production: the machinery and equipment to generate electricity for resale, and its installation labor, ride the 79-3606(kk) exemption. But the building materials and supplies used to construct the facility are taxable, and you cannot use a project exemption certificate for them.

Draw the line at generation vs. transmission

Generation equipment is exempt; transmission lines, substations, and line transformers are not. Sort each purchase by whether it produces the electricity or moves it to customers.

The government exemption has a utility carve-out

When a city furnishes utilities to others, the ordinary 79-3606(b) direct-purchase exemption does not apply to property used in that business. For utility departments, only immediately consumed items (like water-treatment chemicals) and 79-3606(kk) processing equipment stay exempt.

Common questions

Q: Is a city's electricity-generation machinery exempt from Kansas sales tax?
A: Yes. Under K.S.A. 79-3606(kk), machinery and equipment used directly and primarily to generate electricity for resale by a political subdivision are exempt, and the labor to install it is exempt too.

Q: Are the building materials to construct the generation facility exempt?
A: No. Those purchases are taxable under K.S.A. 79-3603(l), and the city cannot obtain a project exemption certificate for them.

Q: What about the city's transmission lines and substations?
A: Not exempt. The Department said transmission lines, substations, and line transformers are not manufacturing machinery and equipment.

Q: Can a city utility department buy anything exempt under 79-3606(b)?
A: Only items immediately consumed in providing the taxable utility service (like water-treatment chemicals) and equipment that qualifies as processing equipment under 79-3606(kk); the general government exemption is withheld for property used to furnish utilities to others.

Citations and references

• K.S.A. 79-3606(kk) — exempts machinery and equipment used directly and primarily to manufacture electricity intended for resale by a political subdivision; the Department applied it to the city's generation equipment and its installation labor.
• K.S.A. 79-3603(l) — taxes sales of materials and supplies to contractors erecting structures; the basis for taxing the city's building materials for the generation facility.
• K.S.A. 79-3606(b) — the direct-purchase exemption for political subdivisions, with an exception making property taxable when the subdivision furnishes gas, water, electricity, or heat to others.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-097

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 27, 2001

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RE: City of TTTTTTT

Dear Ms. TTTTTTTT:

We wish to acknowledge receipt of your letter dated August 23, 2001, regarding the application of Kansas Retailers’ Sales tax.

Among other things, K.S.A. 79-3606(kk) exempts from sales tax, all sales of machinery and equipment used directly and primarily for the purposes of manufacturing of electricity intended for resale by a political subdivision of the state of Kansas.

It is the understanding of this department that the City of TTTTTTT is in fact constructing a new building and/or facility, which will house machinery and equipment used directly and primarily for the purposes of manufacturing of electricity. This machinery and equipment would come within the scope of the sales tax exemption in K.S.A. 79-3606(kk). Additionally, the labor services to install the exempt machinery and equipment would also be exempt from Kansas sales tax(es). It should be noted that equipment used to transmit electrical power (i.e., transmission lines, substations, and line transformers) would not be considered manufacturing machinery and equipment.

K.S.A. 79-3603(l) imposes a sales tax upon: “the gross receipts received from the sales of tangible personal property to all contractors. . . of materials and supplies for use by them in erecting structures for others, or building on, or otherwise improving, altering, or repairing real or personal property for others. . .”

The City of TTTTTTT purchases of building materials and supplies, which are used to construct the building and/or facility for generating electricity would be subject to the appropriate Kansas sales/use tax(es). The city would not be able to secure a project exemption certificate for these purchases.

In closing, you have asked the department to review the exemption certificate that the City of TTTTTTT proposes to issue to its contractors/vendors. I would change the reference to K.S.A. 79-3606(b) to read as follows: K.S.A. 79-3606(b) exempts from sales tax all sales of tangible personal property and services, including the renting or leasing of tangible personal property, purchased directly by a political subdivision thereof, and used exclusively for political subdivision purposes. EXCEPTION: When a political subdivision is engaged or proposes to engage in the business of furnishing gas, water, electricity or heat to others, the sale of tangible personal property or services used or proposed to be used in such business are taxable. The only purchases which would be exempt from sales tax when purchased for use by city utility departments would be those items which are immediately consumed in providing the taxable utility services (i.e., chemicals used to clean and purify water) and equipment that qualifies as processing equipment under K.S.A. 79-3606(kk).

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: 09/14/2001 Date Modified: 10/11/2001

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