Can a retail store buy cardboard compacting and baling equipment exempt from Kansas sales tax as manufacturing equipment?

Plain-English summary

A large retailer bought compacting and baling equipment to compress, bale, and band the cardboard boxes its stores receive from manufacturers and distributors; it then sells the baled cardboard to a recycler. The retailer asked whether that equipment could be bought exempt from Kansas sales tax.

The Department said the purchase is taxable. A retail store cannot qualify as an industrial processor or manufacturer, so it cannot claim the integrated plant exemption in K.S.A. 79-3606(kk). That exemption is limited to a business that operates "what is commonly regarded by the general public as an industrial production operation." Baling the cardboard the store happens to receive is only an incidental part of running the retail business, and the statute specifically 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." Selling the resulting bales to a recycler does not change that.

What this means for you

Retailers and other non-industrial businesses

Recycling or baling your own waste cardboard does not make you a manufacturer. Equipment you buy to compact, bale, or otherwise handle that waste is taxable, even if you sell the bales.

Manufacturers and processors

The integrated plant exemption still turns on whether you operate a genuine industrial production operation — not on whether a particular machine happens to process material.

Common questions

Q: We sell our baled cardboard — doesn't that make the baler production equipment?
A: No. The Department viewed the baling as incidental to the retail business, so the store is not a manufacturer and the baler is taxable.

Q: What kind of business does qualify for the (kk) exemption?
A: One that operates what the public regards as an industrial production operation manufacturing, processing, fabricating, finishing, or assembling items for distribution.

Citations and references

• K.S.A. 79-3606(kk) — the integrated plant (manufacturing) exemption; the Department held a retail store "cannot qualify as an industrial processor or manufacturer" and so cannot claim it.
• K.S.A. 79-3606(kk)(2)(D) — quoted requirement that the business operate "what is commonly regarded by the general public as an industrial production operation."
• K.S.A. 79-3606(kk)(2)(D)(i) — 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." The Department also noted its answer is consistent with decisions in other states (a New York determination and an Illinois general information letter).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2006-003

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 15, 2006

XXXX
XXXX
XXXX

RE: Your letter dated December 8, 2006

Dear XXXX:

Thank you for your recent letter. You work for a large retailer that is buying compacting and baling equipment. This equipment will be used to compress, bale, and band the cardboard boxes that your retail store receives from manufacturers and distributors. Your business will sell the baled cardboard to a recycler. You ask if a retail store's purchase of this equipment for use in Kansas is subject to Kansas sales tax. Please be advised that these purchases are taxable.

Under Kansas law, a retail store cannot qualify as an industrial processor or manufacturer. Retail stores do not operate integrated production operations and cannot qualify for the integrated plant exemption under K.S.A.79-3606(kk). To qualify for this exemption a business must 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). "[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 makes large capital expenditures to create something of value.

The fact that your retail store buys equipment to compress and bale the large number of boxes it receives does not transform the retail business into an industrial manufacturing or processing operation. You are baling the cardboard as a incidental part of your retail operations. Accordingly, the exemption that is extended at K.S.A. 79-3606(kk) does not exempt your purchase of compacting and baling equipment. This answer is consistent with the holdings of tax authorities in other states. See e.g. In re Petition of Lowe's Home Centers, Inc. New York Division of Tax Appeals, Determination DTA No. 819043 (March 11, 2004); Illinois General Information Letter ST 99-0111-GIL (March 25, 1999).

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: 02/17/2006 Date Modified: 02/17/2006

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