Does a custom reprographics/imaging business (blueprinting, diazo copying, CAD plotting) qualify for the Kansas manufacturing (integrated plant) exemption on its equipment and repair parts?

Plain-English summary

A reprographics and imaging business — describing itself as an industry leader that started as a blueprinter for architects, engineers, and the oil field and now offers digital color imaging, diazo and plain-paper copying, quick copying, mapping, CAD plotting, mounting and laminating, and drafting/plotting supplies — asked whether the integrated plant (manufacturing) exemption applied to it. The Department's answer: no.

Why. Businesses that produce articles to a customer's special order are treated as retailers, not as industrial processors or manufacturers. The Department grouped this taxpayer with desktop publishers, copy businesses, drapery makers, custom tailors, custom boot makers, and T-shirt printers — all of which "do not operate an integrated production operation" and so do not qualify under K.S.A. 79-3606(kk). They do not run what is "commonly regarded by the general public as an industrial production operation … 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)). The statute expressly says manufacturing/processing does not include "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)).

What that means in practice. Because the business is not an industrial manufacturer:

• Its equipment, and repair parts and services for that equipment, are taxable (no manufacturing exemption).
• But it fabricates items to custom order, so it must collect sales tax on the total amount charged to customers.
• It can buy exempt the materials, ink, and other items that become part of the finished product it transfers to customers — the ingredient or component part exemption.
• Exempt ingredients do not include cleaning supplies, oil, or other items used to maintain equipment.
• If it buys taxable items from out of state with no use tax billed, it must accrue consumers' use tax on the cost, including shipping.

The ruling also restated Kansas sourcing rules: shipping to a Kansas address is taxable (tax base includes 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, even if billed to an in-state customer.

What this means for you

Reprographics, copy shops, and custom-order producers

If you make items to a customer's order — copies, prints, drapes, garments, signs, shirts — you are a retailer, not a manufacturer. Your machinery, equipment, and its repair parts/labor are taxable. Don't claim the 79-3606(kk) manufacturing exemption on presses, plotters, copiers, or laminators.

Where you can save tax

Use a resale/ingredient exemption certificate to buy the paper, ink, toner, laminate, and other materials that physically become part of the product you hand to the customer. Consumables that only run or maintain your machines (cleaners, oils, lubricants, wear parts) stay taxable.

Collect on the full charge, and watch use tax

Charge sales tax on the whole invoice for custom work (including any shipping to a Kansas destination). When you order equipment or supplies from an out-of-state vendor that doesn't bill Kansas tax, self-assess consumers' use tax on the cost plus freight.

Common questions

Q: We run a copy/print/imaging shop. Can we buy our copiers and plotters tax-exempt as manufacturing equipment?
A: No. The Department treats custom-order print/imaging businesses as retailers, not manufacturers, so the 79-3606(kk) exemption does not reach your equipment or its repair parts and labor.

Q: Is anything we buy exempt?
A: Yes — the materials that become part of the finished product (paper, ink, laminate, etc.) qualify for the ingredient/component part exemption. Maintenance items like cleaning supplies and oil do not.

Q: Do we charge tax on the labor to create a custom order?
A: Yes. Because you fabricate items to a customer's special order, you collect sales tax on the total amount charged to the customer.

Q: We bought a plotter from an out-of-state seller with no tax charged. Do we owe anything?
A: Yes. Accrue and remit Kansas consumers' use tax on the cost of the item, 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 illustrates 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. The Department held a custom reprographics business does not qualify.
• K.S.A. 79-3606(kk)(2)(D) — limits "manufacturing or processing" to operations commonly regarded by the public as industrial production; custom copy/print work is not.
• K.S.A. 79-3606(kk)(2)(D)(i) — excludes nonindustrial businesses that are primarily retail and produce property as an incidental part of the retail business.
• Ingredient/component part exemption — allows tax-free purchase of materials (paper, ink, etc.) that become part of the product sold; cited by the Department 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-2003-015

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 6, 2003

XXXX
XXXX
XXXX

RE: Your e-mail dated January 13, 2003

Dear XXXX:

Thank you for your e-mail inquiry that we received in January. I apologize for the delay in this response. You ask if the integrated plant exemption applies to your business.

Your web site describes your business:

Since 1922, XXXX has been an industry leader, providing a variety of services to the business community. First established as a blueprinter servicing architects and engineers as well as producing oil field lease maps for the petroleum industry, XXX has evolved and grown into a full service resource for a wide variety of clients. Current services include: digital color imaging, diazo and plain paper reproduction, quick copying, mapping, cad plotting, mounting and laminating, as well as drafting, plotting and diazo supplies and equipment.

XXXXXX strives to be the first to be on the cutting edge of technology with our services. this has led us in recent years to be known as the leader in the industry.

Diazo refers to a type of photocopying process. Please be advised that your business does not qualify for exemption on purchases of its equipment or purchases of repair parts and services for such equipment. It is exempt on purchases of materials, ink, and other items that become part of the product that you provide to your customers.

Service businesses like yours that produce articles to the special order of customers are considered to be retailers under the law, rather than as industrial processors or manufacturers. Your business and other similar businesses, such as desk top publishers, copy businesses, drapery makers, custom tailors, customer boot makers, T-shirt printers, etc. do not operate an integrated production operation and do not qualify for exemption under K.S.A.79-3606(kk). These business do not operate what 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). Typically, these business accept an order from a final consumer and reproduce items to fill the order. The statutes provides that "manufacturing 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).

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 are required to 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. As noted, this would include the materials, ink, and other items that become part of the product that you provide to your customers. 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 delivery.

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: 03/12/2003 Date Modified: 03/12/2003

Table 1

Table 2