Brief ⁽¹⁾

HB 2011, as amended, would amend KSA 1999 Supp. 79-3606(kk) to provide a modified "integrated plant" theory relative to the manufacturing machinery and equipment sales tax exemption contained therein.

Specifically, all sales of machinery and equipment used in the state as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility would be exempt, as would sales of installation, maintenance, and repair services performed on such machinery and equipment and repair and replacement parts and accessories for such machinery and equipment.

Machinery and equipment would be deemed to qualify for the exemption when used:

• to receive, transport, convey, handle, treat, or store raw materials in preparation for placement on a production line;



• 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 of the final product occurring at the plant or facility;



• to act upon, effect, promote, or otherwise facilitate a physical change to the property undergoing manufacturing or processing;



• to guide, control, or direct the movement of the property undergoing manufacturing or processing;



• to test or measure, when a necessary part of the integrated production operation, raw materials, the property undergoing manufacturing or processing, or the physical product;



• to plan, manage, control, or record the receipt and flow of inventories of raw materials, consumables and component parts, the flow of property undergoing manufacturing or processing, and the management of inventories of the finished product;



• to produce energy for, lubricate, control the operating of, or otherwise enable the functioning of other production machinery and equipment, and the continuation of production operations;



• to package the property being manufactured or processed in a container or wrapping in which such property is normally sold or transported;



• to transmit or transport electricity, coke, gas, water, steam, or similar substances used in production operations from the point of generation, if produced at the plant site, to the production operation (or, if purchased or delivered from offsite, from the point where such substance enters the plant to the actual production operation);



• to cool, heat, filter, refine, or otherwise treat water, steam, acid, oil, solvents, or other substances used in production operations;



• to provide environmental controls essential to the production process;



• to treat, transport, and store waste or other byproducts of production operations; and



• to control pollution at the plant or facility.

However, certain kinds of machinery and equipment would be deemed to be exempt even though it may not otherwise qualify under the integral or essential part text, including:

• computers and related equipment utilized for engineering of the finished product or for research and development or product design;



• machinery and equipment utilized to manufacture or rebuild tangible personal property used in manufacturing or processing operations;



• portable plants for aggregate concrete, bulk cement, and asphalt, including mobile cement mixer trucks;



• industrial fixtures, devices, support facilities, and special foundations necessary for manufacturing and production operations, as well as materials and other tangible personal property sold for the purpose of fabricating such fixtures, devices, facilities, and foundations; and



• laboratory equipment not located at the plant or facility which would otherwise qualify for the exemption.

Machinery and equipment would NOT qualify for the exemption when used:

• for nonproduction purposes such as plant security, fire prevention, first aid, accounting, administration, record-keeping, advertising, marketing, sales, cleaning, communications, and employee work-scheduling;



• primarily in maintaining and repairing any type of machinery and equipment or the building or plant; and



• for general plant heating, cooling, and lighting.

Additional types of machinery and equipment which would be excluded from the exemption would include:

• certain transportation equipment not primarily used in a production, warehousing, or material-handling operation;



• office machines and equipment (including computers) not used directly and primarily to measure or control the manufacturing process;



• furniture and other furnishings;



• buildings and any other part of real estate that is not otherwise exempt;



• building fixtures not integral to the manufacturing operation;



• motor vehicles registered for operation on public highways; and



• employee apparel, with the exception of safety and protective apparel purchased by employers and furnished gratuitously to employees involved in research or production.

Sales tax exemptions also would be provided for all sales of material-handling equipment, racking systems, and other related machinery and equipment used for handling, movement, or storage of tangible personal property in a warehouse or distribution facility in the state; for sales of installation, repair, and maintenance services performed on such machinery and equipment; and for sales of repair and replacement parts for such machinery and equipment.

Another provision would eliminate sales and use tax refunds based upon the provisions of KSA 1999 Supp. 79-3606(kk) in existence prior to the effective date of the bill.

A similar provision would eliminate sales and use tax refunds based upon the provisions of KSA 1999 Supp. 79-3606(n) pursuant to its interpretation by the Kansas Court of Appeals in the In re Appeal of Water District No. 1 of Johnson County case for tax paid prior to the effective date of the bill.

Background

The original bill approved by the House during the 1999 Session would have exempted purchases of various water districts, including indirect purchases made on behalf of such districts by contractors.

The Senate Committee amended the bill to remove those provisions and insert all other provisions hereinbefore described.

Fiscal information provided by the Kansas Department of Revenue indicated that the modified integrated plant provisions would be expected to reduce receipts relative to current law on an ongoing basis, but that the elimination of refunds relative to subsection (kk) would be expected to increase receipts for several fiscal years.

As it currently stands, the Consensus Estimating Group would be expected to reduce further the overall sales tax estimate by an additional $3 million beginning in FY 2001 because of the prospective application of the court decision to subsection (n). The provision eliminating subsection (n) refunds does not have a fiscal note relative to the current estimate, since payment of those refunds was not contemplated when such estimate was made in November. But if those refunds are NOT eliminated, the Consensus group would be expected to reduce the overall estimate for sales tax receipts by an additional $9 million in April (for a total of $12 million).

1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html