Are a manufacturer's radial fatigue testing machine and the test consumables discarded after testing exempt from Kansas sales tax?

Plain-English summary

A manufacturer of cast aluminum wheels for the small-aircraft industry pulls finished wheels from production and tests them. One test mounts a radial tire on the production wheel, which is then mounted on a radial fatigue machine; after the test, the tires, lug bolts, lug nuts, and valve stems are thrown away. The manufacturer asked whether its purchases of the machine and of those disposable items are exempt.

The Department said both are exempt:

• The radial fatigue machine is exempt integrated-production equipment under K.S.A. 79-3606(kk)(3)(E), which treats machinery used "to test or measure ... the finished product, as a necessary part of the manufacturer's integrated production operation" as an integral part of production. The machine tests and assures the quality of the finished wheels.
• The disposable tires, lug bolts, lug nuts, and valve stems qualify as property "consumed in production" under K.S.A. 79-3606(n). Because they are essential to and used in the testing that is part of the integrated production operation, and are used up (not reusable) within a year, they meet the definition of "property which is consumed" in K.S.A. 79-3602(dd). The manufacturer can buy them exempt by giving vendors consumed-in-production exemption certificates.

What this means for you

Manufacturers with in-house testing

Equipment that tests or measures your finished product as a necessary part of production can qualify for the integrated plant exemption — quality-assurance testing counts as production. Items that are attached and used up in that testing can qualify as consumed in production.

Vendors selling to manufacturers

A manufacturer may present a consumed-in-production exemption certificate for items like test tires and hardware that are destroyed in the testing process; honor it as documented.

Common questions

Q: Is testing equipment "production" equipment?
A: Yes, when it tests or measures the finished product as a necessary part of the integrated production operation — K.S.A. 79-3606(kk)(3)(E).

Q: Why are the discarded tires and bolts exempt?
A: They are consumed (used up and not reusable) in the production/testing process, so they meet the "property which is consumed" definition in K.S.A. 79-3602(dd) and are exempt under K.S.A. 79-3606(n).

Citations and references

• K.S.A. 79-3606(kk)(3)(E) — machinery is used as an integral part of an integrated production operation when used "to test or measure ... the finished product, as a necessary part of the manufacturer's integrated production operation"; the Department applied this to the radial fatigue machine.
• K.S.A. 79-3606(n) — exempts tangible personal property "consumed in the production, manufacture, [or] processing ... of tangible personal property."
• K.S.A. 79-3602(dd) — defines "property which is consumed" as property "essential or necessary to and ... used in the actual process of and consumed, depleted or dissipated within one year" in production and "not reusable"; the discarded test tires and hardware met this definition.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2006-006

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 27, 2006

XXXX
XXXX
XXXX

RE: Your letter dated November 22, 2005

Dear XXXX:

I have been asked to answer your letter that the department received in November. I apologize for the inordinate delay in this response. XXXX manufactures cast aluminum wheels as original equipment for the small aircraft industry. Wheels are pulled from finished production and tested.

One of the tests involve mounting a radial tire on the production wheel and performing a wheel fatigue test. The tire is mounted on a wheel which, in turn, is mounted on a radial fatigue machine. The tire, lug bolts, and nuts all meet the aircraft manufacturer's specifications. After the wheel fatigue tests are completed, the tires, lug bolts, lug nuts and valve stems are disposed of. You ask if the purchase of your purchase of these items is exempt from sales tax. The answer is yes, these purchases are exempt.

K.S.A. 2004 Supp. 79-3606(kk)(3)(E) explains that your business's purchase of the radial fatigue machine is exempt. It states:

(3) For purposes of this subsection, machinery and equipment shall be deemed to be used as an integral or essential part of an integrated production operation when used: . . .
(E) to test or measure raw materials, the property undergoing manufacturing or processing or the finished product, as a necessary part of the manufacturer's integrated production operation . . . . (underlining added).

The radial fatigue machine is being used to test and assure the quality of the finished product. Accordingly, your purchase of the radial fatigue machine qualifies for a sales tax exemption as being the purchase of integrated production equipment.

The next issue is whether or not the tires, lug bolts, lug nuts and valve stems, which are disposed of after the wheel testing, qualify as being consumed in production pursuant to K.S.A. 2004 Supp. 79-3606(n). This subsection exempts, in parts relevant here:

(n) all sales of tangible personal property which is consumed in the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, the treating of by-products or wastes derived from any such production process. . . .

K.S.A. 2004 Supp. 79-3602(dd) defines the term "property which is consumed," for purposes of K.S.A. 2004 Supp.79-3606(n). It reads in parts relevant here:

(dd) "Property which is consumed" means tangible personal property which is essential or necessary to and which is used in the actual process of and consumed, depleted or dissipated within one year in (1) the production, manufacture, processing, mining, drilling, refining or compounding of tangible personal property, (2) the providing of services, (3) the irrigation of crops, for sale in the regular course of business, or (4) the storage or processing of grain by a public grain warehouse or other grain storage facility, and which is not reusable for such purpose. . . . .

Since a radial fatigue machine qualifies as equipment that is being "used as an integral or essential part of an integrated production operation," the tires, lug bolts, lug nuts and valve stems that are attached to the machine qualify as "tangible personal property which is essential or necessary to and which is used in the actual process of and consumed, depleted or dissipated within one year in . . . the production [or] manufacture . . . of tangible personal property. . . . Accordingly, you can claim exemption on these purchases by providing consumed-in-production exemption certificates to the vendors who sell you the tires and other items.

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.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 03/30/2006 Date Modified: 03/31/2006

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