Lights, Fans and Electricity Purchased for Manufacturing Plants and Warehouses Subject to Tax in Kansas

Friday, August 24th, 2012


The Kansas Department of Revenue (DOR) recently issued a private letter ruling discussing the taxability of interior lighting, fans, and electricity purchased for use in a Kansas manufacturing plant and warehouse. Kan. Priv. Ltr. Rul. No. P-2012-005 (Dept. of Revenue Aug. 16, 2012).

The ruling was requested on behalf of a manufacturer of skylights and skylight systems. In its plant, the skylight manufacturer installs metal halide lights used for interior lighting and fans that are used to exhaust interior air. Kansas taxes sales of tangible personal property but exempts sales of "machinery and equipment . . . used . . . as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility." Kan. Stat. Ann. secs. 79-3603(a), 79-3606(kk). The manufacturer wanted to know whether purchases of these items, as well as the electricity used to power them, would be subject to tax or exempt under the manufacturing exemption.

The DOR relied on a 2006 opinion from the Kansas Board of Tax Appeals (BOTA) to provide the rationale for its conclusion. See In re: Ward Kraft Forms, Inc., Dkt. No. 2005-786-DT (Kan. Bd. of Tax Apps. Feb. 3, 2006), aff'd, 176 P.3d 250 (Kan. App. 2008). In that case, the taxpayer, Ward Kraft Inc., had appealed the assessment of unreported sales tax the DOR claimed it owed on the purchase of electricity used for heat and air conditioners in one of its buildings. Ward Kraft contended regulating the interior temperature was essential to make sure that their other machines functioned properly, so Ward Kraft argued that its purchases of electricity consumed in production should qualify for the exemption as it was integral to the manufacturing process. However, the BOTA explained that it does not consider machinery or equipment used for general plant heating and cooling machinery to be equipment used as an integral or essential part of an integrated production operation does not include. See also Kan. Stat. Ann. sec. 79-3606(kk)(5). The BOTA also pointed out that Kansas sales tax regulations state that the exemption is not allowed for the electricity used for heating, cooling, and lighting buildings or business premises. Thus, the BOTA ruled that Ward Kraft's purchases of electricity were subject to tax. Accordlingly, the DOR concluded that the skylight manufacturer's purchases of electricity, like Ward Kraft's purchases, are not used as an integral part of the manufacturing process and are, therefore, subject to tax.

The DOR also relied on the decision in Ward Kraft to conclude that the skylight manufacturer's purchases of lighting and air quality equipment are not essential to the manufacturing process. Therefore, purchases of those items, like the electricity consumed when powering them, are subject tax.

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