Are repair labor and repair parts for manufacturing machinery taxable when the customer and delivery are out of state?

Plain-English summary

A business that repairs manufacturing machinery and equipment asked how Kansas sales tax applies when the customer is out of state and the repaired machinery is delivered outside Kansas. The answer splits labor and parts.

The exemption is limited to machinery "used in this state." For the repair of manufacturing machinery to be exempt from Kansas retailers' sales tax, the machinery must be for use in Kansas. The Department quoted K.S.A. 79-3606(kk), which exempts:

• (1)(A) all sales of machinery and equipment "which are used in this state" as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility;
• (B) all sales of installation, repair and maintenance services performed on such machinery and equipment; and
• (C) all sales of repair and replacement parts and accessories purchased for such machinery and equipment.

Because the exemption's repair-service and parts provisions attach to machinery used in this state, and here the machinery serves an out-of-state customer, the exemption does not shelter the labor.

How the charges are taxed on these facts:

• Labor — taxable. The repair-service exemption depends on the machinery being used in Kansas, which is not the case here, so the labor charges are subject to Kansas sales tax.
• Repair parts — not taxable. The charges for repair parts are not subject to Kansas retailers' sales tax because the customer is located outside Kansas and delivery of the repaired machinery is made to the customer or its agent outside the state — an interstate sale of the parts.

So the same job produces a taxable labor charge but non-taxable parts, driven by the out-of-state customer and out-of-state delivery.

What this means for you

Kansas repair shops serving out-of-state manufacturers

Don't assume the manufacturing machinery exemption applies just because the equipment is production machinery — the exemption reaches machinery used in Kansas. For an out-of-state customer's machinery, your repair labor is taxable in Kansas.

Parts delivered out of state

The parts you supply can be non-taxable when the customer is out of state and you deliver the repaired machinery outside Kansas — an interstate sale. Keep proof of the out-of-state delivery to support not taxing the parts.

Separate labor and parts on the invoice

Because labor and parts are taxed differently on these facts, state them separately and retain documentation of the customer's location and the delivery destination.

Common questions

Q: Is the repair labor taxable when the machinery belongs to an out-of-state customer?
A: Yes. The 79-3606(kk) exemption applies to machinery used in Kansas; for an out-of-state customer the labor is taxable.

Q: Are the repair parts taxable?
A: No, on these facts. The parts are not subject to Kansas retailers' sales tax because the customer is out of state and the repaired machinery is delivered outside Kansas.

Q: What makes the parts non-taxable?
A: The out-of-state customer plus delivery of the repaired machinery to the customer or its agent outside Kansas — an interstate sale of the parts.

Q: Would the answer change if the machinery were used in Kansas?
A: The 79-3606(kk) exemption is written for machinery used in this state, so in-Kansas production machinery is analyzed under that exemption; this ruling addresses the out-of-state scenario.

Citations and references

• K.S.A. 79-3606(kk) — exempts sales of manufacturing machinery and equipment "used in this state," plus installation/repair/maintenance services and repair/replacement parts for such machinery.
• On these facts the Department held repair labor is taxable (machinery not used in Kansas) while repair parts are not taxable (out-of-state customer and out-of-state delivery of the repaired machinery).
• 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-2002-052

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 12, 2002

XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX

Dear XXXXXXXXX:

The purpose of this letter is to respond to your letter dated May 17, 2002.

In order for the gross receipts for the service of repair of manufacturing machinery and equipment to be exempt from Kansas retailers’ sales tax, the machinery and or equipment must for use in this state. K.S.A. 79-3606(kk) states in pertinent part:

The following shall be exempt from the tax imposed by the act: . . . (1) (A) all sales of machinery and equipment which are used in this state [emphasis added] as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility;
(B) all sales of installation, repair and maintenance services performed on such machinery and equipment; and
(C) all sales of repair and replacement parts and accessories purchased for such machinery and equipment.

In the scenario contained in your letter, the charges for labor and the charges for replacement parts are taxed differently.

The charges for labor would be taxable. However, any charges for repair parts would not be subject to Kansas retailers’ sales tax, if as in your letter the customer is located outside of Kansas and delivery of the repaired machinery is delivered to the customer or his agent outside the state of Kansas.

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 by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

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

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