Sales Tax Articles
Sales Tax State Activity Update - January 2005
Kansas State High Court Debates Refunds on Telecommunication Equipment
The Kansas Supreme Court has upheld an earlier ruling from the Kansas Board of Tax Appeals (BOTA) that denied sales tax refunds on telecommunications equipment to five telecommunications companies on the claim that they were not entitled to the reimbursement. The refunds were originally denied by the DOR, and upheld by a majority on the BOTA in March 2003 on the basis that telecommunications companies do not manufacture tangible personal property for resale.
The five companies filed refund claims for sales tax paid on telecommunications equipment that was "utilized either in engineering a finished telecommunications product or in controlling or measuring the process of manufacturing such a product." The equipment consisted of switches, computers, related peripheral equipment including repair and replacement parts and accessories. The refund claims were based on the sales tax manufacturing exemption contained in K.S.A. 79-3606(kk). The section provides an exemption for sales of machinery and equipment used directly and primarily for manufacturing, assembling, processing, finishing, storing, warehousing, or distributing articles of tangible personal property for resale. The carriers claimed the machinery and equipment qualified for the exemption because it was used in the process of manufacturing telecommunications, which were comprised entirely of tangible personal propertyâ€"namely electricity. Because electricity was tangible personal property for sales tax purposes, telecommunications must also be tangible personal property.
Delivering the Court's opinion, Justice Marla Luckert echoed the assertions previously made by both the DOR and the BOTA that the plain and unambiguous language of the Kansas Retailers' Sales Tax Act defines telecommunications as a service and not tangible personal property. The company's machinery was not eligible for the exemption.
The Court also dismissed an argument made by the companies that the denial of the exemption violated the Equal Protection Clauses of the United States and Kansas Constitutions, by treating similarly situated taxpayers differently. Specifically, they argued that the Department provides exemptions for electric companies to manufacture electricity. The Department countered that argument by saying they do grant an exemption for machinery and equipment which generates electricity, but not for machinery and equipment which transmits or distributes electricity. The Court held that the companies had failed to demonstrate that they are similarly situated to electric companies nor had they been a victim of any "deliberately adopted system" resulting in intentional unequal treatment.
(Appeal of Sprint Communications Co., L.P. From an Order of the Division of Taxation for a Refund of Sales and Use Tax, Kansas Supreme Court, Nos. 90,663, 90,664, 90,665, 90,666, 90,667, 12/17/2004)
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