Opinion Letter

Letter Number:O-2004-006
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Refund claims.
Approval Date:07/16/2004

Office of Policy & Research

July 16, 2004


Thank you for your recent letter. You work for a construction contractor that does a variety of work, including laying foundations. Your letter to the department was accompanied by a copy of a letter to you from Allen, Gibbs & Houlik, L.C. ("AGH"). The AGH letter states:

Accompanying the AGH letter to you was a completed Integrated Production Machinery and Equipment Exemption Certificate that identifies XXXX Electric Cooperative, Inc. ("XXXX") as the purchaser. It is signed by XXXX's Manager of Accounting and dated February 9, 2004. The certificate claims exemption for a "concrete foundation" that "supports the electrical equipment at the Bison Substation." The AGH work-up submitted with the letter describes the work done on "4/2/2002" as "Labor and materials to build a concrete foundation for the electrical equipment at the Bison substation." During a telephone conversation, your owner indicated that your company had installed concrete foundations at the substation, and paid sales tax on its purchases of concrete from a third party. The company also collected and remitted sales tax on the services that it performed for XXXX.

Please be advised that you should not issue the requested refund nor should you exempt labor services or materials for projects such as this in the future. Labor services and materials used to build substations are taxable. This is clearly stated in Revenue Ruling 19-2003-2:

It should be noted that AGH seeks a refund of the taxes that you paid on materials. A contractor cannot refund taxes that it paid to a third party on its material purchases.

The claim submitted to you is likely based on the Board of Tax Appeals' ("BOTA") order in In re the Tax Appeal of Western Resources, Inc., Docket No. 2001-802-DT (October 15, 2003). The department appealed the ruling and the appeal is pending before the Kansas Appellate Courts. The department believes that the BOTA's decision will be reversed on appeal. Even if it is not reversed, the BOTA's holding in Western Resources does not control this refund request because any refund entitlement here must be determined under the Integrated Production Machinery and Equipment statute that took effect on July 1, 2000.

The Western Resources decision construed an exemption statute that was repealed on July 1, 2000. The BOTA construed (or misconstrued) this exemption as it applied to purchases that Western Resources made from August 1996 though September 1999. Because the BOTA decision was based on the earlier law, Western Resources does not control the refund request at issue here. K.S.A. 2003 Supp. 79-3606(kk) --- the statute that has been in place since July 1, 2000 --- controls whether or not XXXX is entitle to a refund on the purchases made on or after July 1, 2000.

K.S.A. 2003 Supp. 79-3606(kk) contains numerous provisions that show it does not apply to substations operated by electric companies, gas companies, water companies or pipeline companies. These provisions include:

K.S.A. 2003 Supp. 79-3606(kk)(2)(C), which defines "manufacturing or processing plant or facility" and specifically excludes facilities that are operated to convey or assist in conveying natural gas, electricity, oil or water: K.S.A. 2003 Supp. 79-3606(kk)(2)(D), which provides examples of industrial manufacturing or processing operations. These examples include water treatment plants, electric generation plants, and petroleum refineries. None of the examples can be read as extending to electric substations, water pressurization stations, or to pipeline pumping stations:
K.S.A. 2003 Supp. 79-3606(kk)(3), which lists machinery and equipment that is deemed to be an integral or essential part of an integrated production operation. The descriptions provided clearly limit the exemption to machinery or equipment located at a qualifying plant or facility. As noted above, manufacturing or processing plant or facility, by definition, does not include any facility primarily operated for the purpose of conveying or assisting in the conveyance of natural gas, electricity, oil or water:

K.S.A. 2003 Supp. 79-3606(kk)(5)(C), which provides that machinery and equipment used as an integral or essential part of an integrated production operation "shall not include transportation and distribution equipment . . . located outside the plant or facility": These statutory provisions are redundant for a reason. The Kansas legislature did not intend to exempt purchases of materials or services for substations owned by electric distribution companies, gas utilities, telephone companies, water utilities that are not registered under the clean drinking water act, and pipelines. Accordingly, these entities, including XXXX, are not entitled to claim exemption for services, equipment, or materials purchased to build and repair their substations.

There is no basis in law for the refunds or exemption that XXXX is claiming for the periods in question. You should not honor these claims.

Date Composed: 07/19/2004 Date Modified: 07/19/2004