Kansas Retailers' Sales Tax
Ingredient or Component Part
April 26, 1978 Ruling 19-78-3
SALES TAX—LEASE; RENTAL; INGREDIENT OR COMPONENT PART EXEMPTION. THE LEASE OR RENTAL OF TANGIBLE PERSONAL PROPERTY, WHERE THE PROPERTY LEASED OR RENTED IS USED TO OTHERS, IS NOT EXEMPT FROM THE SALES TAX AS AN INGREDIENT OR COMPONENT PART OF THE SERVICE.
Advice has been requested concerning whether or not the ingredient or component part exemption (KSA 79-3606(m) ) applies to the lease or rental of tangible personal property where the property leased or rented is used by the lessee in the performance of a taxable service to others.
In the case of Southwestern Bell Tel. Co. v. State Commission of Revenue and Taxation, 168 Kan. 227, the Kansas Supreme Court ruled that in order for an item of tangible personal property to qualify as an "ingredient or component part" of a service, title to such tangible personal property must actually pass to the consumer as a constituent part of the final product. The court indicated that the terms "ingredient" and "component" are the be given their ordinary and generally accepted meaning of actual, physical incorporation. Thus, property which is leased for use by the lessee in rendering of a taxable service cannot be exempt form the sales tax as an "ingredient or component part," because title to the leased property does not pass to the consumer of the service,
For example, the rental of towels and linens by motels is taxable and is not an ingredient or component part of the service of renting rooms because title to towels and linens does not pass to motel guests.
Another example is the rental of films by cable television companies. Although these films are exhibited as part of the taxable service to cable subscribers, these films are not physically incorporated into the service rendered, nor dies title to the films pass to subscribers. Therefore, the ingredient or component part does not apply to the rental of films for use by cable television companies.
F. KENT KALB
SECRETARY OF REVENUE
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