SALT Report 2929 – The Kansas Department of Revenue issued a private letter ruling regarding the application of sales tax to leases of wooden and plastic pallets that are used to store and ship manufactured products.
The Taxpayer leases pallets to manufacturers rather than selling them outright. Under the terms of the lease agreement the Taxpayer charges the manufacturer an initial fee when the pallets are delivered; a daily lease charge based on the number of days the manufacturer has the pallet in its possession; and a transfer fee when the manufacturer ships a loaded pallet to the distributor.
Once the items are delivered to the distributor, the lease agreement between the Taxpayer and the manufacturer is terminated. At this point, the Taxpayer hires a pooling manager to collect the pallets from the distributors. If the pallets are damaged, then the pooling manager will make the necessary repairs before returning them to the Taxpayer.
In the letter ruling, the Department stated that generally, charges to manufacturers for sales or leases of reusable, returnable pallets are subject to tax, while charges for non-returnable pallets are exempt. This is because K.S.A. 79-3602(p) provides that certain packing materials used by manufacturers meet the definition of “ingredient or component part” as required by the exemption.
Further, the Department stated that under KSA 79-3606(kk)(3)(B) purchases of equipment that are used “to transport, convey, handle or store property undergoing manufacturing or processing at any point from the beginning of the production line through any warehousing or distribution operation of the final product that occurs at the plant or facility…” are exempt.
While pallets are not specifically mentioned in KSA 79-3606(kk)(3)(B) the Department noted that they have adopted the policy that returnable pallets qualify for this exemption so long as the returnable pallets are used for “exempt purposes more than 50% of the time.”
As a result, the Department stated that the manufacturer in this case, is eligible to claim the exemption when it leases returnable pallets from the Taxpayer. This is because the manufacturer has no additional payment obligations after the distributor takes delivery of the loaded pallets. Additionally, the time the pallets are in transit from the manufacturer to the distributor is inconsequential as it is a relatively short period compared to the time the manufacturer has the pallets in its possession and is using them in an exempt manner. To claim this exemption the manufacturer must provide the Taxpayer with Form ST-201, Integrated Production Machinery and Equipment Exemption Certificate.
Lastly, because the Department determined that the lease agreement between the Taxpayer and the manufacturer is exempt, the Taxpayer’s lost equipment charges and fees for collecting the pallets are considered part of the Taxpayer’s receipts from a non-taxable retail transaction, rather than as separate receipts from a new retail sale. As a result, none of the charges under the lease agreement are subject to sales or use tax.
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