Is a city's lease of pilot-study water filtration equipment exempt under the Kansas manufacturing machinery and equipment exemption?

Plain-English summary

A city asked whether leasing equipment to run pilot studies for the filtration and production of water at its water treatment plant would be exempt from sales tax. The city explained the equipment is essential to the actual process and production of water for its citizens: water passes through the filters before being distributed into service lines, and the filters are periodically replaced (a consumable part of the utility's production). Although used in a pilot study, the equipment would actually treat water the city sells to its water utility customers for six months, after which the city would decide whether to buy permanent equipment.

The Department concluded that so long as the equipment is used to treat water sold to city water utility customers, the lease of the filtering equipment appears to be exempt under the "manufacturing machinery and equipment" sales tax exemption, K.S.A. 2002 Supp. 79-3606(kk). The pilot-study framing didn't defeat the exemption, because the equipment was in fact being used to produce/treat water that the city sells.

What this means for you

Water and utility producers

Equipment integral to treating and producing water you sell to customers can qualify for the manufacturing machinery and equipment exemption — including leased equipment and consumable components like replaceable filters, so long as the equipment is used in that production.

Pilot programs and trials

Using equipment in a pilot study doesn't automatically make it taxable. What matters is whether it is actually used in exempt production — here, treating water the city sells. If it is, the exemption can apply during the trial period.

Municipal utilities

A city operating a water utility that sells treated water to customers is treated as engaged in production for this exemption; equipment central to that process can be purchased or leased exempt.

Common questions

Q: We're leasing water filtration equipment for a pilot study. Is the lease taxable?
A: If the equipment is used to treat water you sell to utility customers, the Department found the lease appears exempt under the manufacturing machinery and equipment exemption.

Q: Does it matter that it's only a six-month pilot?
A: No. The Department focused on the equipment's actual use in treating water sold to customers, not on the pilot label.

Q: Are replaceable filters covered?
A: The exemption reaches the equipment used in the water production process; the city described the filters as a consumable part of that production.

Q: Does this ruling apply to my situation?
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 applies the manufacturing exemption to water treatment equipment.

Citations and references

• K.S.A. 2002 Supp. 79-3606(kk) — the Kansas "manufacturing machinery and equipment" sales tax exemption. The Department found the lease of water filtration equipment exempt so long as the equipment is used to treat water the city sells to its water utility customers.
• 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-2003-024

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

April 24, 2003

XXXX
XXXX
XXXX

Re: Request for Private Letter Ruling

Dear Mr. XXXX:

This letter responds to your private letter ruling request dated April 16, 2003 in which you inquired whether the City of XXXX proposed lease of equipment to set up pilot studies for the filtration and production of water at the City's Water Treatment Plant would be exempt from sales tax. You indicate that "this equipment is essential for the actual process and production of water for the citizens of Parsons." You further indicate: "During the processing of water it passes through these filters before the final product being distributed into service lines. Over a period of time, these filters will be replaced, therefore, being a consumable part of this utility production." You also advised that although this equipment will be used in a pilot study, it will actually be used to treat water that the City of XXXX sells to its water utility customers for a six-month period. At the end of that period, the City will decide on whether to purchase permanent filtering equipment.

So long as this equipment is used in the treatment of water sold to City water utility customers, it appears that the lease of this filtering equipment would be exempt from sales tax under the "manufacturing machinery and equipment" sales tax exemption, K.S.A. 2002 Supp. 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. Please let me know if you have additional questions.

Very truly yours,

Richard L. Cram

Date Composed: 04/28/2003 Date Modified: 04/28/2003

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