Does a steel-and-pipe retailer's new cutting machine qualify for the Kansas integrated plant (production) exemption?

Plain-English summary

A steel and pipe retailer/wholesaler added a facility at its Kansas City location to cut products for customers and bought a large new cutting machine. It asked whether the machine qualifies for the Kansas integrated plant exemption at K.S.A. 79-3606(kk) — the broadened integrated-production-operation exemption the legislature enacted in 2000. The Department's answer is no: the machine is taxable, because the company is not a manufacturer.

Why it fails. The exemption is for machinery and equipment used as an integral part of an integrated production operation — an operation that transforms raw materials into a finished product. The statute expressly does not cover:

"nonindustrial businesses whose operations are primarily retail and that produce or process tangible personal property as an incidental part of conducting the retail business."

The Department found that a pipe and metal business that cuts pipe and metal to an end user's specification is not a manufacturer or processor. The end users here are customers such as contractors who buy the materials to build buildings or have them altered. The company's cutting work — "base plates for building columns, panels for doors, yokes for farm tillage equipment, end plates for floor sales, counter weights for forklists and bride leveling plates" (as written in the request) — is done for the end user and is not part of an integrated production process that transforms raw materials into finished products for resale. The business is primarily retail, cutting steel for its customers as an incidental part of its retail operations.

Bottom line: cutting materials to a customer's spec, incidental to a retail/wholesale steel business, is not manufacturing — so the cutting equipment does not qualify for the 79-3606(kk) integrated-production exemption and its purchase is subject to Kansas sales tax.

What this means for you

Fabricators and processors who also sell at retail

The exemption turns on whether you are running an integrated production operation that transforms raw materials into a finished product for sale at retail — not on whether a machine is expensive or does real work. If your cutting, shaping, or finishing is done to a customer's order as part of a retail/wholesale sales business, the Department is likely to treat it as incidental to retail and deny the exemption on the equipment.

Steel service centers / cut-to-length operations

This ruling squarely addresses a steel service center. Cutting stock to a buyer's dimensions for that buyer's use reads as retail service to an end user, not production of a new article for resale — expect the machinery to be taxable.

True manufacturers

If your operation genuinely transforms raw materials into a distinct finished product that you then sell at retail, the 79-3606(kk) integrated-production exemption can apply — but be ready to show the production process, not just that machinery is used in your business.

Common questions

Q: Why doesn't a big cutting machine qualify for the manufacturing exemption?
A: Because the exemption requires an integrated production operation that transforms raw materials into a finished product. The Department found this company is a primarily retail steel/pipe business that cuts to customer spec incidentally — not a manufacturer.

Q: Does it matter that the 79-3606(kk) exemption was broadened in 2000?
A: The 2000 expansion widened what counts as integral production machinery, but it did not change the threshold requirement that the taxpayer be engaged in manufacturing or processing. A primarily retail business is still excluded.

Q: Who are the "end users" the ruling refers to?
A: The company's customers — for example, contractors who buy the cut materials to construct buildings or have the materials altered for their own use, rather than to resell a manufactured product.

Citations and references

• K.S.A. 79-3606(kk) — the Kansas integrated production (integrated plant) exemption for machinery and equipment used as an integral part of an integrated production operation; excludes nonindustrial businesses that are primarily retail and process property only incidentally.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-049

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

May 21, 2002

XXXX
XXXX
XXXX

RE: Your letter of April 22, 2002

Dear XXXX:

Thank you for your letter. You ask if the purchase of a large piece of equipment qualifies for exemption under the Kansas integrated plant exemption found at K.S.A. 79-3606(kk). This exemption was enacted by the Kansas legislature in 2000. Before that, K.S.A. 79-3606(kk) was a more limited exemption that only extended to equipment that touched or effected the item being manufactured. You state that your business is "a retail/wholesaler of steel and pipe products and have added a new facility at our Kansas City location to handle manufacturing of cut products for our customers." Your internet site provides a more in-depth view:

As I will explain, the purchase of the new machine by your company does not qualify for exemption from Kansas sales tax under K.S.A. 79-3606(kk) since your company does not qualify as a manufacturer.

Manufacturing and processing operations generally involve transforming raw materials into a finished product. Under the law, "[m]anufacturing or processing businesses do not include, by way or illustration but not of limitation, nonindustrial businesses whose operations are primarily retail and that produce or process tangible personal property as an incidental part of conducting the retail business. . . ." Under the law, a pipe and metal business that cuts pipe and metal to an end user's specification is not a manufacturer or processor. End users include contractors who buy materials to build buildings or have materials altered by a business such as yours.

You indicate that you use the equipment in question to cut: "base plates for building columns, panels for doors, yokes for farm tillage equipment, end plates for floor sales, counter weights for forklists and bride leveling plates." These services appear to be done for the end user and are not part of an integrated production process that transforms raw materials into finished products. Your business is primarily a retail business that cuts steel for its customers as incidental part of its retail operations.

I believe that I have answered all of your questions. If you have more, please call me at 785-296-3081 and we will discuss them. 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,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 06/18/2002 Date Modified: 06/24/2002

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