Leases of Shipping Pallets May Qualify for Manufacturing Equipment Exemption in Kansas

Monday, August 26th, 2013


The Kansas Department of Revenue recently issued a letter ruling on leases of returnable shipping pallets to manufacturers. These leases are not subject to tax as long as the manufacturer uses the pallets more than 50% of the time for exempt manufacturing activities.

Sales of returnable pallets are taxable unless they qualify for the manufacturing equipment exemption. Note that sales of nonreturnable pallets are exempt. The manufacturing exemption applies to equipment used to transport, convey, handle, or store the manufactured product at any point from the beginning of the production line through any warehousing or distribution operation of the product that happens at the manufacturing facility. A pallet must be used for these exempt activities more than 50% of the time to qualify for this exemption. If a returnable pallet does not qualify for this exemption, its sale is taxable.

The lease of a pallet is not taxable if the sale of the pallet would not be taxable. Therefore, if the manufacturer will use the pallet for exempt activities more than 50% of the time, the lease is exempt. To claim this exemption, the manufacturer must provide the lessor with a completed Integrated Production Machinery and Equipment Exemption Certificate (form ST-201). If the manufacturer does not use the returnable pallet for exempt activities, the lease is subject to tax.

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