Sales Tax Exemptions for Kansas Manufacturing
If you are a Kansas manufacturer, there are a few sales tax exemptions you should know about. This article outlines the Kansas manufacturing sales tax exemptions available and shows you how to capitalize on them. It is important to remember that these exemptions only apply to Kansas manufacturers. Before pursuing any of these exemptions we recommend consulting with your accountant or tax professional.
Kansas Manufacturing Sales Tax Exemptions on Purchases
Utilities Used for Production
All electricity, gas, and water that a manufacturer uses in its production process is eligible for the Utility Sales Tax Exemption (USTE). Out of all the Kansas manufacturing sales tax exemptions available, the USTE is the most underutilized because of its complexity. Kansas requires that an energy study be performed on the manufacturing facility to identify the exact percentage of utility that qualifies for the exemption. The energy study component is what makes this exemption difficult to qualify for – but not to worry! SmartSave specializes in helping manufacturers qualify for this tax exemption. For additional information on this exemption you can visit our page Utility Sales Tax Exemptions for Kansas Businesses. If you would like to find out how much you could be saving with the USTE, visit our Savings Estimator!
To claim this exemption on utility purchases, the manufacturer will need to have a detailed utility study performed on its facility to determine the percentage of utility that qualifies for the exemption. After the utility study has been completed and the data has been analyzed and put into a report, the manufacturer will send the detailed report along with a ST-28B Exemption Certificate to their utility provider. It is common practice for the utility provider to send the detailed report into the Kansas Department of Revenue to be audited before the manufacturer receives the exemption.
Integrated Production Machinery
Integrated production equipment that a manufacturer purchases is exempt from sales tax. For machinery to be considered for use in “integrated production” the machinery must be an integral or essential part of a process to manufacture process, fabricate, finish, or assemble items for wholesale or retail distribution. For examples of qualifying and non-qualifying uses, see below.
Qualifying Examples: Machinery and equipment used to: (1) Receive, transport, convey, handle, treat or store raw materials; (2) Transport or handle the property undergoing manufacture at any point during the production process; (3) Effect, promote or otherwise facilitate a physical change to the property undergoing manufacturing; (4) Control or direct the movement of property undergoing manufacturing; (5) Test or measure raw materials or finished product; (6) Plan, manage, control, or record the inventories of raw materials and finished product; (7) Produce energy for, lubricate, control, or otherwise enable function of other production equipment; (8) Package the product; (9) Transmit or transport electricity, gas or water used in production from the point of generation to the production operation; (10) Cool, heat, filter, refine or otherwise treat water, steam, acid, oil, solvents or other substances used in production operations; (11) Provide and control an environment required to maintain certain levels of air quality; (12) Treat, transport or store waste or other by products of the production process; or (13) Control pollution produced by the manufacturing operation.
Non-Qualifying Examples: (1) Machinery and equipment used for non-production purposes, such as accounting, administrative, communication, or other related activities; (2) Machinery and equipment used primarily to maintain or repair other machinery; (3) Transportation, transmission and distribution equipment not primarily used in production; (4) Machinery and equipment used for heating or cooling; or (5) Machinery and equipment used in mining, gas, and petroleum drilling, water drilling, quarrying, sand and gravel extraction operations, and other similar activities.
To claim this exemption on machinery or equipment purchases, the manufacturer will need to file a ST-201 Exemption Certificate with their vendor.
Repair and Replacement Parts and Labor for Exempt Equipment
All labor services to install, repair or maintain manufacturing machinery and equipment, and all repair parts, replacement parts, and accessories for equipment that qualifies for the Integrated Production Machinery and Equipment exemption are exempt from sales tax.
To claim this exemption on machinery or equipment purchases, the manufacturer will need to file a ST-201 Exemption Certificate with their vendor.
Ingredient or Component Part
Whether or not an item qualifies for this exemption depends on how it is used in production or processing. The general rule for this exemption is that sales tax is not assessed upon purchases of personal property which becomes an ingredient or component part of tangible personal property for ultimate sale at retail. “Ingredient or component part” means tangible personal property which is necessary or essential to, and which is actually used in and becomes an integral and material part of tangible personal property manufactured or compounded for sale by the producer. See below for uses that qualify for this exemption.
Qualifying Examples: (1) Containers, labels and shipping cases used in the distribution of property produced for sale which are not to be reused by the producer; (2) Seeds and seedlings for the production of plants and plant products produced for resale; (3) Paper and ink used in the publication of newspapers; or (5) Fertilizer used in the production of plants and plant products for resale.
To claim this exemption on purchases, the manufacturer will need to file a ST-28D Exemption Certificate with their vendor.
Consumed in Production
Whether or not an item qualifies for this exemption depends on how it is used in production or processing. For an item to qualify for this exemption, it must be essential and necessary to the process, used in the actual process, not reusable and be consumed, depleted or dissipated within one year. The fact that property may be used for only one production activity and then discarded is not the determining factor. Items that break depreciate, wear out or become obsolete, even in a very short time, may not qualify. See below for uses that qualify for this exemption.
Qualifying Examples: (1) Liquid oxygen used in the production of fiberglass; (2) Diesel fuel and oil, drilling fluids, and chemicals that are consumed in drilling wells; (3) Coal used to generate electricity; (4) Graphite, E.D.M. oil, and abrasives consumed in manufacturing die impressions, forge dies and forgings; or (5) Refrigerant used in the production of aircraft.
To claim this exemption on purchases, the manufacturer will need to file a ST-28C Exemption Certificate with their vendor.
Labor Services on Original Construction of New Building
Labor services are not taxable when performed in connection with the “original construction” of a building. “Original Construction” as defined by the Kansas Department of Revenue is the: (1) first or initial construction of a new building; (2) addition of an entire room or floor to an existing building; (3) restoration, reconstruction, or replacement of a building damaged or destroyed by fire, flood, tornado, lightning, explosion, windstorm, ice loading and attendant winds, terrorism, or earthquake; or (4) completion of any unfinished portion of an existing building.
Obtaining a Refund on Overpaid Sales Tax
If the manufacturer would like to pursue a refund for overpaid sales tax, then they may complete a ST-21 Sales and Use Tax Refund Application. The ST-21 application can be used for most of the Kansas manufacturing sales tax exemptions listed above. For the Utility Sales Tax Exemption, a Form ST-33 must be completed for a refund. All sales tax refunds are limited to Kansas’s Statute of Limitations of 36 months.
The information provided in this article regarding Kansas manufacturing sales tax exemptions has been obtained from the following publications produced by the Kansas Department of Revenue:
Exemption Certificates Pub. KS-1520 (Rev. 11-15)
Manufacturing Machinery and Equipment Tax Exemption
Kansas Manufacturing Sales Tax Exemptions – Blog