Does a desktop publishing business qualify for the Kansas integrated plant (manufacturing) exemption on its equipment?

Plain-English summary

A desktop publishing business asked whether the integrated plant (manufacturing) exemption applies to it. The Department's answer: no.

Why. Businesses that produce articles to a customer's special order are typically retailers. The Department listed desktop publishers, drapery makers, custom tailors, custom boot makers, T-shirt printers, and hat-embroiderers as businesses that do not operate an integrated production operation and do not qualify under K.S.A. 79-3606(kk). Desktop publishing is not a business "commonly regarded by the general public as an industrial production operation" (K.S.A. 79-3606(kk)(2)(D)), and the statute excludes "nonindustrial businesses … whose operation is primarily retail and that produce or process tangible personal property as an incidental part of conducting the retail business" (K.S.A. 79-3606(kk)(2)(D)(i)). The Department added that an industrial business is one that employs large numbers of personnel and makes large capital expenditures to create something of value — which desktop publishing is not.

What the business must do. Though not an industrial manufacturer, a desktop publisher fabricates items to customers' special orders, so it must collect sales tax on the total amount charged. It can claim the ingredient or component part exemption on materials that become part of the product it transfers to customers — here, ink, paper, press chemical, envelopes, adhesive, and thermo powder. Exempt materials do not include cleaning supplies, oil, or other maintenance items for its equipment. And when it buys taxable items from out of state with no use tax billed, it must accrue consumers' use tax on the cost (including shipping).

Sourcing. Shipping the product to a Kansas address is taxable (tax base includes the shipping charged to the customer, at the local rate at the seller's place of business), whether ordered by internet, mail, or phone, and even if billed to an out-of-state customer. Shipping to an out-of-state address is not subject to Kansas tax.

What this means for you

Desktop publishers and custom-order print shops

You are a retailer/fabricator, not a manufacturer. Your equipment is taxable — don't claim the 79-3606(kk) exemption. But buy your consumable production materials (ink, paper, press chemicals, envelopes, adhesive, thermo powder) exempt as ingredients/components with an exemption certificate.

Collect on the full custom-order charge

Because you fabricate to special order, charge sales tax on the whole amount billed to the customer, including taxable shipping to a Kansas destination.

Maintenance items and out-of-state buys

Cleaning supplies, oil, and other machine-maintenance items are taxable, and you must self-assess consumers' use tax on taxable items bought out of state without tax.

Common questions

Q: Can a desktop publisher buy its equipment tax-free as manufacturing machinery?
A: No. The Department treats desktop publishing as a retail/fabrication business, not an industrial manufacturer, so the 79-3606(kk) exemption doesn't apply to its equipment.

Q: What can we buy exempt?
A: The materials that become part of the finished product — ink, paper, press chemical, envelopes, adhesive, and thermo powder — under the ingredient/component part exemption. Cleaning supplies and oil are not exempt.

Q: Do we charge tax on the whole job?
A: Yes. As a fabricator producing items to a customer's special order, you collect sales tax on the total amount charged, including taxable shipping to a Kansas address.

Q: We bought supplies from an out-of-state vendor with no tax. Do we owe anything?
A: Yes — accrue consumers' use tax on the cost, including shipping.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department distinguishes custom-order retailers from industrial manufacturers.

Citations and references

• K.S.A. 79-3606(kk) — the manufacturing machinery and equipment (integrated plant) exemption; a desktop publisher does not qualify.
• K.S.A. 79-3606(kk)(2)(D) — limits "manufacturing or processing" to operations commonly regarded as industrial production; desktop publishing is not.
• K.S.A. 79-3606(kk)(2)(D)(i) — excludes nonindustrial businesses that are primarily retail and produce property incidental to the retail business.
• Ingredient/component part exemption — allows tax-free purchase of ink, paper, press chemical, envelopes, adhesive, and thermo powder that become part of the product; cited as the taxpayer's available exemption.
• Consumers' use tax — owed on taxable out-of-state purchases (including shipping) when no tax is billed.
• 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-2002-098

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

November 20, 2002

XXXX
XXXX
XXXX

RE: Your letter postmarked November 12, 2002

Dear XXXX:

I have been asked to answer your letter that we received last week. Among other things, you ask if the integrated plant exemption applies to your desktop publishing business. Please be advised that it does not. Businesses that produce articles to the special order of customers typically are retailers. Businesses like desk top publishers, drapery makers, custom tailors, customer boot makers, T-shirt printers, hat-embroiderers, and similar businesses do not operate an integrated production operation and do not qualify for exemption under K.S.A.79-3606(kk). Desk top publishing is not a business that "is commonly regarded by the general public as an industrial production operation to manufacture, process, fabricate, finish, or assemble items for wholesale or retail distribution as part of what is commonly regarded by the general public as an industrial manufacturing or operation." K.S.A. 79-3606(kk)(2)(D). "[M]anufacturing or processing businesses do not include, by way of illustration by not of limitation, nonindustrial businesses that whose operation is primarily retail and that produce or process tangible personal property as an incidental part of conducting the retail business." K.S.A. 79-3606(kk)(2)(D)(i). An industrial business is one that employs large numbers of personnel and make large capital expenditures to create something of value. Desktop publishing does not an industrial processing or manufacturing operation.

While you are not engaged in industrial manufacturing or processing, you do fabricate items to the custom order of your customers. As someone who fabricated items to a customer special order, you must collect sales tax on the total amount charged to your customers. You can claim the ingredient or component part exemption when you buy materials that become part of the tangible personal property that is transferred to your customers. In your case this would include ink, paper, press chemical, envelopes, adhesive and thermo powder. Items that are exempt do not include cleaning supplies, oil or other items that you use to maintain your equipment. Please note that when you buy taxable items from outside the state and no use tax is billed to you, you must accrue consumers' use tax on the cost of the item, which includes shipping.

When you ship your product to a Kansas address, the sale is subject to Kansas sales tax. The tax base includes the shipping charges that you bill to the customer. The local sales tax that should be charged are the local taxes in place at your place of business. These sales are taxable whether the order is place via the internet, mail, or telephone. They are taxable even though you bill an out-of-state customer for the in-state sale.

Conversely, if you ship your product to an address outside Kansas, the charges are not subject to Kansas tax. These sales are exempt even though you bill an in-state customer for the out-of-state sale.

I hope that this answers your questions clearly. If you need to discuss this matter further, please call me at 785-295-3081. This is private letter ruling. It 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 ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 11/21/2002 Date Modified: 11/21/2002

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