Private Letter Ruling
Kansas Retailers' Sales Tax
Decorating center's transfer and installation of Venetian blinds and other window treatments.
March 30, 2010
RE: Your letter dated October 21, 2008
Thank you for your letter. You represent a decorating center that is located in Johnson County, Kansas. It does business in Kansas and Missouri. You request a letter ruling that explains how Kansas sales and use tax applies to the center's transfer and installation of Venetian blinds and other window treatments.
You assert that the decorating center should be treated as a contractor when it installs Venetian blinds in building in Kansas. Your argument runs:
Blinds, once installed, become an integral part of real property:
a. The blinds are solidly affixed to the real property and any attempt to remove the blinds would significantly damage and impair that property.
b. If the homeowner sells the property he is not allowed to remove the blinds because the blinds have become a part of the residence.
c. The blinds are custom designed to be installed in a particular home on a particular window. They would not normally fit on any other application.
It is our opinion that the labor to install the blinds in a personal residence under the circumstances described above would not be subject to sales tax.
The essence of your argument is that a transaction that calls for the acquisition and installation of a fixture --- in this case Venetian blinds --- should be treated as a construction contract that calls for improvements to real property rather than as a retail sale of the blinds with installation.
If your analysis were to control the application of Kansas sales tax to the installation of Venetian blinds, the decorating center would be treated as the consumer or final user of the blinds that it installs rather than as a retailer that is selling the blinds to the building owner. Under your analysis, the decorating center would be required to either: (1) pay sales tax when it purchased the blinds; or (2) if the center does business as a contractor-retailer and maintains an inventory of blinds for resale, to collect sales tax on its over-the-counter sales to walk-in customers, and accrue and report tax on the purchase price of the blinds that employees remove from its resale inventory to install in customers' buildings.
See K.S.A. 79-3603(l)(2).
Under your analysis, the decorating center would
be required to collect sales tax from the building owner on the marked-up price charged for the blinds or on installation charges, if the building is a residence or a newly constructed commercial building. The taxable event would be either the retail sale to the center or the center's withdrawal of the blinds from its untaxed resale inventory. Under the Kansas destination sourcing rules, the vendor would charge local sales based on where it delivers the blinds to the decorating center or, if the center is acting as a contractor-retailer, local tax would be sourced to the location of the center's resale inventory.
State sales tax laws generally treat contractors that improve real property as consumers or final users of the materials and fixtures they buy and use to improve real property. When a contractor builds and sells a spec house, sales tax is imposed on the contractor's purchases of the materials, fixtures, and other tangible personal property that it uses to construct the spec house. The contractor's sale of the spec house is not subject to sales tax because real property is being sold rather than tangible personal property.
This sales tax treatment of contractors as consumers is appropriate since the last transfer of building materials and fixtures
as tangible personal property
is the sale of the materials and fixtures to the contractor. The contractor's purchases are subject to sales tax since: (1) the materials and fixtures are transformed into real property by the contractor's application of its skills and labor; and (2) sales tax applies to sales of tangible personal property and not to sales of real property. This treatment is consistent with the ordinary meaning of "retail" sale, which is: "The sale of goods or commodities to ultimate consumers, as opposed to the sale for further distribution or processing."
Black's Law Dictionary, "retail," p. 1341 (8th Ed. 2004).
Because of these things, most states that impose sales taxes treat contractors as consumers or end users when they buy building materials, such as lumber, brick, concrete, floor covering, drywall, interior and exterior doors, pipe, wiring, baseboard and trim, and other items. However, some of these same states treat the same contractors as retailers of fixtures, which can include furnaces, water heaters, built-in air conditioners, built-in appliances, toilets, entertainment systems, and so forth.
States that treat a contractor's transfer and installation of a fixture as a taxable retail sale generally have a statute that lists certain fixtures and then deems the fixtures to be sold at retail when installed by a contractor. Contractors are allowed to claim a resale exemption when they buy the fixtures since they will collect the appropriate sales tax from the property owner when the fixtures are installed. The contractor is required to collect sales tax on either: (1) the marked-up price of the fixture that it bills to the property owner if the installation services are not subject to sales tax; or (2) the total amount billed to the property owner when installation services are subject to tax. Many states currently do not impose sales tax on repair, installation, or other labor services.
When the listed fixtures are repaired, the repairman is required to collect sales tax on the marked-up price charged for repair and replacement parts, in states when the repair services are not subject to sales tax. Repairmen are required to collect sales tax on the total amount charged for parts and services, when repair services are taxed
Historic treatment of contractors and taxable installation services under Kansas law.
K.S.A. 2008 Supp. 79-3603(l) requires contractors and repairmen to pay sales tax on their purchases of materials, supplies, and other tangible personal property that they use "in erecting structures, or building on, or otherwise improving, altering, or repairing real or personal property."
K.S.A. 2008 Supp. 79-3603(l).
This requirement has been a part of the Kansas sales tax statutes since 1947.
See 1947 Kan. Sess. Laws ch. 463, sec. 1(m).
Before that, it is believed that department's policy had also treated contractors and repairmen as consumers who were required to pay sales tax on their purchases. Sales tax was not imposed or collected on any mark-up that a contractor charged to the property owner or on any charges for the installation, application, or repair services that were being billed.
In 1970, the Kansas legislature broadened the scope of the Kansas sales tax act to tax more services based on recommendations made by the Hodge committee. As amended by 1970 Senate Bill 423, K.S.A. 79-3603(p) imposed sales tax on:
. . . the gross receipts received from the installation, maintenance, servicing and repairing of tangible personal property . . . whether or not any tangible personal property is transferred in conjunction therewith, except services rendered in installing property in connection with the original construction of a building or structure, which when installed will become a part of such building or structure . . . .
1970 Kan. Sess. Laws, Ch. 389, Sec. 2; 1970 Senate Bill 423.
Under this provision, a contractor's charges for services that involved installing, maintaining, repairing, or servicing tangible personal property were taxable, except for installation services that were performed as part of the "original construction" of a "building or structure." This
in K.S.A. 79-3603(p), which is an imposition statute, is commonly referred to as the
original construction exemption
As enacted in 1970, K.S.A. 79-3603(p) offered little guidance about when tangible personal property that is attached to or installed in a building or structure was considered to become "a part of such building or structure" during its "original construction." The statute's wording would have allowed the department to exempt all of the labor services performed during the original construction of a building or structure. However, the department rejected this construction, and choose instead to construe the statute as imposing sales tax on installation services performed during the original construction of a building or structure if the tangible property being installed did not become a "part of such building or structure."
This required the department to develop a test that could be used to determine when property that is attached or affixed to a building or structure (hereinafter "attached or affixed TPP") would be treated as having become part of real property or as having remained tangible personal property. To make this distinction, the department fashioned a kind of fixtures test, which it explained in the following statement:
Generally, tangible personal property would be considered part of the building or structure if the removal of such property from such building or structure would cause material damage to the building or structure. If the tangible personal property does not become a part of the building or structure in this manner, then the installation charges are subject to the sales tax.
Department of Revenue Bulletin, Vol. III, No. 8 (August 1, 1970); Kansas City Millwright, 221 Kan. 658.
When this test determined that the attached or affixed TPP was installed a way that its removal would "cause material damage to the building or structure," the attached or affixed TPP was considered to be part of real property. If the installation services were performed during original construction of a building or fixture, the services were not subject to sales tax. When the test determined that the attached or affixed TPP could be removed without "material damage to the building," the installation services were taxable even when the services were performed during the original construction of a building or structure.
For existing buildings or structures, the department utilized the same fixtures test to determine whether attached or affixed TPP that was being maintained, serviced, or repaired had become a part of real property or remained tangible personal property. If the test determined that the attached or affixed TPP had become part of real property, the repair, maintenance, or servicing of the attached or affixed TPP was not taxable since K.S.A. 79-3603 did not tax services done to real property. If the test determined that the attached or affixed TPP remained tangible personal property, the repair, maintenance, or servicing of the attached or affixed TPP was taxable since services to repair, service, or maintain tangible personal property were taxed by K.S.A. 79-3603(p).
The department's fixtures test was not used to determine the taxability of labor services when attached or affixed TPP was removed and replaced with another unit or substitute property. If attached or affixed TPP was removed and replaced, the department held that the services were taxable because replacement property was being installed. This rule applied regardless of the outcome of the department's fixtures test.
To implement SB 423, the department asked taxpayers to submit questions about how the new tax on services would effect their payment and collection of sales tax. The department published the taxpayer's questions and its answers in the department's monthly Revenue Bulletins beginning in July, 1970. By the end of the year, the department had published over five hundred Q & A's to explain how K.S.A. 79-3603(p) applied to contractors, their vendors, and to property owners. The department applied its "fixtures test" when answering the questions.
A serious problem arose because many of the department's answers could not be reconciled with its answers to other similar questions. The inconsistencies in the Q & A's resulted in litigation that culminated in
Kansas City Millwright Co., Inc. v. F. Kent Kalb, Director of Taxation, 221 Kan. 658, 562 P. 2d 65 (1977).
the Kansas Supreme Court reviewed the department's use of its fixtures test to implementK.S.A. 79-3603(p) and ruled that the statute was unconstitutionally vague. The court found that K.S.A. 79-3603(p) denied taxpayer's due process of law because it was so vague that taxpayers had to guess about how it applied to their business activities, and provided for fines and penalties if a taxpayer guessed wrong.
The Shawnee District Court that had heard the
case on appeal from the Board of Tax Appeals also held that K.S.A. 79-3603(p) was void for vagueness and therefore unconstitutional. The district court explained its decision in a journal entry:
In reading the pertinent statute, on the face of it, the language seems clear that a sales tax incident is present at any time that one installs, maintains, services or repairs tangible personal property not held for sale in the regular course of business, except services rendered in installing this tangible personal property in connection with the original construction of a building or structure, which will become a part of such.
Thus, it would appear that an independent contractor or subcontractor who installs tangible personal property or who may repair, maintain or service tangible personal property, is liable for the sales tax unless he is installing tangible personal property as part of the original construction of a building or structure.
If this same person installs tangible personal property on an existing building or structure the incident would be subject to sales tax. This latter principle would seem obvious from the reading of the statute. But, this is not the case, as interpreted by the Director of Taxation.
It appears that the Director has interpreted 79-3603(p) to mean that there is no tax incident so long as the services are done on real estate or fixtures so attached to real estate that they were part of the real estate, regardless whether the tangible personal property is installed in the original construction of a building or structure. This may be a fair delineation except determining what is, and when, personal property becomes real estate is not that simple a matter. The intent of the parties is one of the controlling factors. In addition, there is nothing in the statute exempting the installation of tangible personal property in real estate or as part of the real estate except in cases of original construction of the building or structure.
The Director admits that the statute is subject to more than one interpretation, and as is permitted by statute, the Director has issued administrative rulings regarding the taxability of certain services under the pertinent statute. But in doing so, and to strengthen the point of vagueness, the Director has failed to be consistent in determining the taxable incident.
Rulings by the Department of Revenue
, as cited in KANSAS DEPARTMENT OF REVENUE BULLETIN,
state that charges for labor incurred in painting a building are not subject to sales tax as painting constitutes a repair of real estate rather than the installation of tangible personal property. Likewise, an electrician's labor in rewiring a building is not subject to the Retailer's Sales Tax since that labor constitutes the repair of real estate. However, labor performed by a plumber in re-plumbing a building is subject to a sales tax as his labor represents the installation of tangible personal property. Labor performed in replacing [or] installing guttering on a building is taxable as [the] Department determined this act constituted the installation of personal property. Labor attributable to re-roofing a building is not taxable as the Department determined this act constituted the repair of real estate. In addition repairs done to a garage are not subject to a sales tax as the labor constitutes repair of real estate, whereas, replacing a garage door is considered installation of tangible personal property and thus a taxable incident. These are some examples of inconsistency in interpreting 79-3603(p)
In reading the pertinent statute and the various rulings, a taxpayer would have no definitiveness in determining a taxable incident by a mere reading of the statute and rulings. In this case even the Department of Revenue staff has difficulty in interpreting the statute, as reflected by the transcript of hearing before the Director of Taxation on August 16, 1973.
The Court finds that the pertinent statute is void and unconstitutional in that it is so vague and ambiguous that any penalty prescribed for its violation constitutes a denial of due process of law. A reading of the statute requires the doing of an act in terms so vague that men of reasonable intelligence must necessarily guess at its meaning and differ as to its application.
Millwright, p. 660-1. (Underlining added).
The underlined parts of the district court's discussion identify some of the inconsistencies that resulted from the department's application of it fixtures test. The Kansas Supreme Court identified more inconsistencies in the department's Q & A's and noted the difficulties that are inherent in fashioning a fixtures test to determine when attached or affixed TPP is considered a fixture (and therefore part of real property) or tangible personal property. The Supreme Court explained:
Regarding “tangible personal property,” the Department of Revenue states that it was the obvious intention of the legislature not to tax the maintenance, servicing and repairing of real property. This is a reasonable interpretation and we agree, but it presents serious problems for the contractor. One problem arises in determining what is “tangible personal property,” the maintenance, servicing and repairing of which is taxable, and what is real estate, the maintenance, servicing and repairing of which is not taxable. In this connection a determination must be made as to what is the installation of tangible personal property and what is the maintenance, servicing and repairing of real estate. The distinction between tangible personal property and real estate is material in two areas, installation involved in original construction on the one hand, and maintenance, servicing and repairing on the other.
The problem is complicated by the Kansas test for determining whether or not personal property has become a fixture and, as such, a part of the real estate. In Water Co. v. Irrigation Co., 64 Kan. 247, 67 Pac. 462, it was stated:
“The tests to be applied in determining whether or not personal property becomes a fixture are: (1) Annexation to the realty; (2) adaptation to the use of that part of the realty with which it is connected; (3) the intention of the party making the annexation to make the article a permanent annexation to the freehold. . . .” (p. 252-253.)
(See also Bromich v. Burkholder, 98 Kan. 261, 158 Pac. 63, and 35 Am. Jur. 2d, Fixtures, § 4, p. 702.)
Where an intention to permanently annex tangible personal property to real estate on the part of the party making the annexation is required before tangible personal property becomes a fixture, there appears to be no single statement in our law defining fixtures which is capable of application in all situations. Most modern authorities recognize the practical difficulties in formulating a comprehensive principle for determining what are fixtures, and hold that the determination can only be made from a consideration of all the individual facts and circumstances attending the particular case.(35 Am. Jur. 2d, Fixtures, § 1, p. 700.)
Clearly, it would be impossible for a layman to apply the tests set forth in Water Co. v. Irrigation Co., supra, with any degree of certainty. This is especially true when we consider that one portion of the test is concerned with the intention of the parties.
court criticized the department's assumption that a fixtures test could be fashioned and applied to determine whether attached or affixed TPP was a fixture, and thus part of real property, or remained tangible personal property. The court reviewed the fixtures test that had evolved in Kansas case law and reasoned that it is impossible to consistently apply the Kansas fixtures test to determine when K.S.A. 79-3603(p) imposed sales tax on labor services done to attached or affixed TPP. This criticism clearly suggested that it would be a waste of the department's and legislature's time and resources to attempt to fashion a fixture's test that would decide the taxability of labor services based on whether attached or affixed TPP became a fixture or remained tangible personal property.
court's comments about fixture tests were not new observations. In 1897, a Kansas Court of Appeals reviewed the law on fixtures and cautioned that there is no single rule of law that can be called upon to establish whether something is or is not a fixture:
We come now to the consideration of the principal question in the case, viz.: Was the property in controversy real or personal property? We find it difficult, if not impossible, to state an entirely satisfactory rule which will apply to all cases involving questions of this character. The term “fixtures” has been used by so many writers in such various senses, and this ambiguity so often followed in adjudicated cases, that there is inextricable confusion both in the text-books and adjudged cases as to what is such an annexation of chattels to realty as to make them part of, and pass by transfer of, the realty. The only clear thing in the midst of the darkness is that each particular case must depend for solution upon its peculiar facts, and not upon an unrelaxing rule of law.
An attempt to reconcile the authorities on the subject would be futile, and to review them would be an endless task
. (Underlining added).
Cook v. Condon,
6 Kan. App. 574, 51 P. 587 (1897)
The Kansas legislature quickly responded to the Supreme Court's holding in
by amending K.S.A. 79-3603(p) to define the terms "building," "structure," and "original construction."
1977 Kan. Sess. Laws ch. 337, Sec. 2; 1977 Senate Bill 49.
SB 49 contained separate subsections that imposed tax on the services of "repairing, servicing, altering or maintaining tangible personal property,"
and on service and maintenance contracts for such property.
The enactment became law on April 12, 1977, which was only five weeks after the
case was handed down.
The Constitutionality of the new imposition on labor services was upheld in
In re Black
, 9 Kan. App. 2d 666, 684 P.2d 1036 (1984). In
, the taxpayer challenged the revised statute by raising the same constitutional due process arguments that had succeeded in
. The court considered and rejected the challenge and upheld the constitutionality of K.S.A. 79-3603(p), K.S.A. 79-3603(q), and K.S.A. 79-3603(r), which among other things taxed installation and application services to both tangible personal property and real property, except when done in connection with the original construction of a building or facility. The terms "building" and "facility" were defined in SB 49.
The criticism of the use of the fixtures test in
serves as the court's rejection your argument that since Venetian blinds are fixtures according to some fixtures laws, Kansas sales tax law is required to treat the decorating center as a contractor that is improving real property when it installs Venetian blinds.
teach that, at least in Kansas, the law of fixtures cannot be relied on to determine how Kansas sales tax applies to the acquisition, installation, and repair of fixtures like Venetian blinds and built-in appliances.
1998 Senate Bill 493's expansion of K.S.A. 79-3603(p) to exempt residential repair and remodel work.
The remedial provisions in K.S.A. 79-3603(p), K.S.A. 79-3603(q), and K.S.A. 79-3603(r) that took effect five weeks after
was handed down remained in place from 1977 until 1998, when the Kansas legislature enacted Senate Bill No. 493. SB 493 provided a new exception (i.e. exemption) for installation or application services performed in connection with
"the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence."
"Residence" was defined to mean "only those enclosures within which individuals customarily live.
Under SB 493, K.S.A. 79-3603(p) continued to exempt the original construction of a commercial building or facility, while K.S.A. 79-3603(q) continued to exempt:
the gross receipts received for the service of repairing, servicing, altering or maintaining tangible personal property which when such services are rendered is not being held for sale in the regular course of business, and whether or not any tangible personal property is transferred in connection therewith.
The tax imposed by this subsection shall be applicable to the services of repairing, servicing, altering or maintaining an item of tangible personal property which has been and is fastened to, connected with or built into real property
(Underlining added) 1998 Kansas SB 493; 1998 Kansas Sess. Laws Ch. 330, sec. 30.
SB 493 exempted the services that were identified in K.S.A. 79-3603(p) and K.S.A. 79-3603(q) when preformed in connection with "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement" of a residence. The services taxed under these two subsections were: (1) "the service of installing or applying tangible personal property" regardless of whether the tangible personal "remains tangible personal property or becomes a part of real estate"; and (2) "the services of repairing, servicing, altering or maintaining an item of tangible personal property" whether or not that property "has been and is fastened to, connected with or built into real property."
SB 493's exemption of labor services performed in connection with "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence" contained the same conceptual problems for its application as the ones that resulted in the 1970 statute being declared unconstitutional. While subsection (q) taxed repairs done to tangible personal property, including tangible personal property that is "built into real property," subsection (p) exempted "repairs" that are done to a "residence." Therefore, it could be assumed that subsection (p) was intended to exempt repairs done to residential fixtures. However, when installation and repair services were done to attached or affixed TPP that did not become a residential fixture, it could be assumed that the services were taxable under both K.S.A. 79-3603(p) and K.S.A. 79-3603(q) because the attached or affixed TPP had not become a residential fixture, and remained tangible personal property.
These conflicting provisions raised the
dilemma of trying to apply sales tax to residential services based on whether the attached or affixed TPP being serviced had become a residential fixture or remained tangible personal property. As has been discussed, under SB 493, services done to a residence (including residential fixtures) were exempt while services done to tangible personal property (including attached or affixed TPP that had not become a part of a residence) were taxable.
Similarly, it was difficult to determine when services are done in connection with "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement" of a residence. Did the repair of a single residential fixture repair qualify as repair services that were being performed in connection with the "reconstruction, restoration, remodeling, renovation, [or] repair" of the residence? Was the installation of a single replacement fixture considered to be installation services that were being performed in connection with "reconstruction, restoration, remodeling, renovation, [or] repair" of the residence? Were the words "restoration, remodeling, renovation" intended to have different meanings?
As was the case with 1970 SB 423, the ability to determine whether attached or affixed TPP had become a residential fixture (i.e. residential real property and therefore part of the residence) appeared to be an essential requirement for implementing 1998 SB 493. Under SB 493, it appeared that services to install or affix tangible personal property at a residence would be taxable if it was determined that the attached or affixed property did not become a fixture. Services performed in a residence to repair, service, alter, or maintain the attached or affixed TPP would also be taxable if the attached or affixed TPP had not become a fixture. Such services would not be taxable if the attached or affixed TPP had become a fixture, which would be considered part of the residential real property.
Some of practical day-to-day questions about SB 493's application when services are performed in a residence are:
Would repairs to a freestanding stove in a residence be taxable while repairs to a built-in oven or cook top are exempt?
Are repairs to a window air conditioner taxable, while repairs to a built central air conditioning unit are exempt?
Are repairs to a freestanding television and audio equipment taxable, while repairs were exempt if done to a home theater that was built in or affixed to the residence?
How must an appliance be affixed to a residence to be considered a residential fixture, and therefore part of the residence? What if an appliance can be removed without material damage to the residence? What if the free-standing appliance is something that is considered to be sold as part of the residence?
Is the servicing, altering, or maintenance of a single residential fixture, by itself, considered to be the "reconstruction, restoration, remodeling, renovation, repair" of a residence?
If the servicing, altering, or maintenance of a single residential fixture, by itself, is not considered to be the "reconstruction, restoration, remodeling, renovation, repair" of a residence, how many fixtures need to be serviced, repaired, or maintained to qualify?
Does the replacement of a water heater or furnace in a residence constitute the restoration, renovation, or repair of the residence? Should the replacement of a furnace, water heater, and central air conditioning unit, when done at one time, be treated as the restoration or renovation of the residence?
What amount of services need to be done to built in appliances or other fixtures to qualify as the restoration, renovation, or repair of a residence?
Why did the legislature include the "replacement of a residence" in SB 493, when the original construction exemption appears to apply to such a replacement? Does this imply that "replacement" mean the replacement of part of a residence, such as the replacement of a built-in appliance or other residential fixture?
Did the legislature intend to tax repair and replacement parts for a furnace on the marked-up amount charged for the parts or did the legislature intend to tax parts at the repairman's cost since the repairman was repairing a residential fixture?
See K.S.A. 79-3603(l)(2).
Is a contractor-retailer required to charge sales tax on the total amount billed to a homeowner for a replacement furnace, less installation charges, or is a contractor-retailer only required to remit tax on its cost because, by installing a furnace, the contractor-retailer was improving residential property?
See K.S.A. 79-3603(l)(2).
(NOTE: Furnaces installed during the original construction of a residence have always been taxed based on the contractor's cost.)
See. K.S.A. 79-3603(l)
SB 493 appeared to require the department to establish a test that can be consistently applied to determine whether installed or affixed TPP became a residential fixture or was considered to have remained tangible personal property. This was the same thing that the department attempted to do when it implemented K.S.A. 1970 Supp. 79-3703(p) by use of its unconstitutional fixtures test. In 1970, the fixtures test was used to determine the taxability of repair, service, and maintenance services, and the taxability of installation services performed during original construction. Under SB 493, it appeared that some kind of a modified fixtures test was needed to determine when residential services would be treated as having been preformed in connection with "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement" of a residence.
To sidestep the
-type problems created by SB 493, the department created a presumption that all appliances were considered to be part of a residence, regardless of how they were attached to a residence or hooked up to its utilities. It also implemented SB 493 as exempting all service work done to residential property, regardless of how much other work was being done at the residence, or whether the property being serviced was considered a fixture. Notice 98-02 provided:
To become part of a building, components and fixtures must be connected to the building by physical means, such as by bolts, nails, screws, cement, piping, or wire. Components and fixtures are intended to be permanent improvements to the building and make the building complete or habitable. Removal of a component or fixture would often damage the component or fixture or require the alteration or repair of the structure to which component or fixture is affixed.
For purposes of proper administration of the exemption for repair services, the following appliances shall be presumed have become part of the real property regardless of how they are connected or affixed to a residence: dishwashers, cooking stoves, ovens, refrigerators, freezers, trash compactors, clothes washers, and clothes dryers. These appliances are often built into real property, or, if free standing, may be affixed by water hook ups, gas connections, or hard wiring. The variety of ways in which these appliances may be affixed to real property makes it impossible for persons who repair them to consistently determine whether the repair services should be taxed as the repair of tangible personal property, or exempted as the repair of a fixture that is part of the residence.
Accordingly, the department has determined that these appliances shall be presumed to be part of real property and that repair services done to them at the residence shall be exemp
Generally, any repair service performed to an appliance or other property that is built into a residence shall be presumed to be exempt when the service is performed there. Appliances, building components, fixtures, and their component parts may be temporarily detached from real property for on-site repairs without losing their status as part of the residence
. However, when such an item is detached from a residence and taken from the residential site for repair, the item is considered to revert to tangible personal property. The new exemption does not extend to off-site repair services done to tangible personal property.
Adopting the presumption that appliances are part of a residence meant that repairmen who serviced an appliance were not required to determine whether the appliance was sufficiently affixed to real property to be considered a residential fixture, or whether an appliance remained tangible personal property. Any services done to residential appliances were not subject to sales tax. Similarly, repair and replacement parts were taxed based on the amount that the repairman had paid for the parts rather than the marked-up amount charged to the owner of the residence.
This approach drastically reduced revenues that the State of Kansas received from HVAC and appliance repairmen, and from other service providers. Rather than charging sales tax on the marked-up price of a replacement furnace and the services performed to install it, a business that installed a furnace was only required to remit sales tax on the amount it paid for the furnace.
See K.S.A. 79-3603(l).
Similarly, if a repairman billed a homeowner for service repairs, sales tax was no longer remitted on the total amount billed to the homeowner for repair services and replacement or repair part. Instead, the repairman was only required to remit sales tax on the amount it paid for the repair and replacement parts. This approach resolved the conflicts in SB 493 while achieving the goal of the Kansas legislature, which was to reduce the amount of sales taxes paid by homeowners. Nevertheless, legislative employees who had helped draft the residential exemption in SB 493 expressed surprise at how broadly the department had implemented the new residential exemption.
New definition of "sales or selling price" enacted in 2003 House Bill 2005.
In 2003, the Kansas legislature enacted House Bill 2005.
2003 Kan. Sess. Law Ch. 147, Sec. 5.
Among other things, HB 2005 provided new definitions that were needed to bring Kansas into compliance with the requirements of the Streamlined Sales Tax Project (Project). The Project is a joint effort by states and the business community to simplify sales taxes by making state sales tax laws more uniform. One of the Project's goals is the passage of a federal law that allows states to required remote vendors to collect their sales or use taxes. Currently, court-developed nexus standards prohibit states from taxing these vendors unless a vendor has made certain business contacts with the state.
Among other things, HB 2005 redefined the term "sales or selling price." Under the new definition, installation services were, for the first time in Kansas, taxed as part of a retail sale. In addition to the new definition that made installation services part of the tax base for a retail sale, K.S.A. 79-3603(p) continued to impose sales tax on installation services. As amended by HB 2005, the definition of "sales or selling price" provides, in parts relevant here:
"Sales or selling price" applies to the measure subject to sales tax and means the total amount of consideration
, including cash, credit, property and services,
for which personal property or services are sold
, leased or rented, valued in money, whether received in money or otherwise,
without any deduction for the following
(A) The seller's cost of the property sold;
(B) the cost of materials used, labor or service cost, interest, losses, all costs of transportation to the seller, all taxes imposed on the seller and any other expense of the seller;
(C) charges by the seller for any services necessary to complete the sale, other than delivery and installation charges;
(D) delivery charges; and
(2) "Sales or selling price" includes consideration received by the seller from third parties if:
(A) The seller actually receives consideration from a party other than the purchaser and the consideration is directly related to a price reduction or discount on the sale;
(B) the seller has an obligation to pass the price reduction or discount through to the purchaser;
(C) the amount of the consideration attributable to the sale is fixed and determinable by the seller at the time of the sale of the item to the purchaser; and
(D) one of the following criteria is met:
See K.S.A. 2008 Supp. 79-3602(ll)(1)(E).
As mentioned, K.S.A. 2008 Supp. 79-3603(p) continued to tax charges for installation services. Subsection (p) taxes:
the gross receipts received for the service of installing or applying tangible personal property
which when installed or applied is not being held for sale in the regular course of business, and
whether or not such tangible personal property when installed or applied remains tangible personal property or becomes a part of real estate
, except that no tax shall be imposed upon the service of installing or applying tangible personal property in connection with the original construction of a building or facility, the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence or the construction, reconstruction, restoration, replacement or repair of a bridge or highway. . . .
The underlined language in K.S.A. 2008 Supp. 79-3602(ll)(1)(E) and K.S.A. 2008 Supp. 79-3603(p) shows that, after July 1, 2003, the Kansas sales tax act taxed installation services either as part of a retail sale, or as labor services that may or may not be part of a retail sale. Contractor perform labor services that are not part of a retail sale when they buy materials and install them for a property owner. When K.S.A. 79-3603(p) applied, charges for installation services continued to be exempt when the services were performed "in connection with the original construction of a building or facility," or in connection with "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence."
The original construction and residential exemptions did not change the definitions of "sales and selling price" and its inclusion of installation services as part of the sales or selling price of tangible personal property. This meant that installation services that were billed as part of a retail sale were not necessarily exempt because the goods being sold were installed in connection with either the original construction of a building or facility or "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence."
HB 2005 allowed the department, which the new administrators in charge of it, to reconsider Notice 98-02 and how the residential exemption was being applied. The new definition of "sales or selling price" meant that installation services done within a residence did not have to be exempted when the owner contracted to buy goods and have them delivered and installed in the residence.
In 2005, the department issued a series of information guides that discussed how contractors and contractor-retailer were required to pay or accrue tax on their purchases of materials and how they were required to collect sales tax on their charges for taxable labor services and retail sales. The information guides identified goods that were considered to be sold at retail with installation. It also identified the type of "installation charges" that were taxable as part of a retail sale. These installation services were referred to as "set-up services."
The department explained set up services that were taxable as installation services that were part of the "sales or selling price" as follows:
include placing an appliance or electronic product in working order by assembling it, sliding it into an existing opening, locating and fixing it in place, connecting it to existing water or gas services, plugging or wiring it into existing electrical services, connecting it to existing discharge pipes or vents, programming its controls, and so forth. Charges for set-up services are considered to be part of the selling price and are taxed whenever the sale of the property is taxed.
Charges for retail sales and set-up services were fully taxable if the sale of the goods were taxable. Charges for set-up services would not be allowed to be backed out of the tax base, even when the goods were installed in a residence or during original construction.
Installation services performed in a residence that went beyond set-up services would be exempt if they were separately stated on the bill given to the property owner. EDU-28 explained:
Overview: Tax base.
When the sale of an appliance or electronic product is being negotiated, a retailer may agree to deliver and place the item being sold in working order in the buyer's home or business. This is a common retail practice for sales of appliances and electronic products. Placing an appliance or electronic product in working order can require assembling it, sliding it into an existing opening, locating and fixing it in place, connecting it to existing water or gas services, plugging or hard wiring it into existing electrical services, connecting it to existing discharge pipes or vents, connecting it to other electronic products, programming its controls, adjusting its operation, and so forth. These services are referred to collectively as "set-up services."
Charges for set-up services are part of the "sales or selling price" of appliances and electronic products sold at retail and are taxable whenever the sale of the goods is taxable.
K.S.A. 2004 Supp. 79-3602(ll).
The tax base for these sales is the total amount charged to the buyer, including the cost of the goods, delivery charges, and set-up charges. The set-up charges shall be included in the tax base regardless of whether: (1) the set-up services are performed by the retailer's employees or by a third party hired by the retailer; (2) the item being set-up becomes a fixture for real property or Uniform Commercial Code purposes; or (3) the set-up services are performed at a residence or at the same time as the original construction of a building or facility.
K.S.A. 2004 Supp. 79-3602(ll).
As with other taxable retail sales, local sales tax is sourced to the location where delivery is made.
Set-up charges are taxed as part of the retail sale of the appliance or electronic product --- not as separate services. Because set-up charges are taxed as part of the sale, they do not become exempt when delivery and set-up occur during the original construction of a building or during the reconstruction, restoration, remodeling, renovation, repair, or replacement of a residence. A retailer that hires a third-party to deliver and set up appliances or electronic products may provide the third-party installer with a resale exemption certificate for the services. A retail exemption certificate is appropriate here because appliances and electronic products are treated as tangible personal property however installed. In addition, the customer previously paid sales tax on the article's selling price, which includes the agreed upon delivery and set-up services.
Repairs of appliances and electronic products.
The repair and servicing of appliances and electronic products are treated as being done to tangible personal property and are taxable, whether the appliances or electronic products are built-in or free standing. This includes stovetops, ovens, refrigerators, and other appliances that are installed in cut outs or cabinet compartments built to accommodate the particular appliance. Typically, these appliances are removed from their compartment or cut out, disconnected from utility services, and repaired or serviced as tangible personal property. The residential exemption does not apply to these services because the appliances and electronic products are treated as tangible personal property.
A contractor-retailer that repairs appliances or electronic products is treated as a retailer that is servicing tangible personal property and not as a contractor that is providing construction services. Any repair or replacement parts that the contractor-retailer provides shall be treated as being sold to the customer. This means that a service provider is required to charge sales tax on the total amount billed to the customer. This is the same treatment that is accorded to automobile repair shops, jewelers, shoe repair shops, and other businesses that repair tangible personal property. The contractor-retailer should not accrue sales tax on withdrawals from inventory as it would do when acting as a contractor.
Local tax is sourced to the place where the repair services are first used. This is the customer's home or business in Kansas where the repairs are performed or the Kansas location where the customer takes possession of the repaired item. Special sourcing rules apply when motor vehicle electronics are serviced or installed. See
Notice 03-10, Section V, I(b)(1): Special rules for repair services performed on motor vehicles.
Because Kansas taxes "servicing, altering, or maintaining" property, any charges for work done on appliances or electronic products are taxable, even if the work may not technically constitute repair service.
See K.S.A. 2004 Supp. 79-3603(q . . . .
A contractor-retailer enters into a mixed contract by agreeing to perform construction services and to sell furniture, appliances, electronic products, or other articles of tangible personal property as part of a single contract. When a mixed contract is entered into, the contractor-retailer is required to treat its transfer of tangible personal property to its customer as a retail sale. When billing the customer, the invoice shall clearly reflect the parts of the transaction that are retail sales and that the customer is being billed sales tax on the full selling price of the property, including any delivery and set-up charges.
To account for taxes on construction services under a mixed contract, the contractor-retailer should subtract the selling price of the tangible personal property and the tax paid on it from the total amount being charged to the customer. This subtraction leaves the amount being charged for the construction contract part of the mixed contract. The contractor-retailer should then apply the guidelines for contractor-retailers who are performing construction contracts to the construction contract amount. See
Contractor-Retailer Guidelines: Taxing construction contracts performed by contractor-retailers.
Rather than entering into a mixed contract, a contractor-retailer and its customer may choose to enter into two separate contracts, with one being a retail sales contract and the other being a construction contract. Each contract must reasonably reflect the value of the services or property being provided.
Mixed contracts for home theaters.
Often, electronic equipment is sold as part of a complete package that requires the home theater components to be delivered and set-up and construction services be performed, such as running wires behind walls, cutting holes in walls for speakers, installing cabinetry, etc. This kind of contract is a mixed contract that calls for the retail sale of electronic products and for the performance of construction services.
Under these contracts, set-up services can involve locating or affixing the equipment in place, attaching and positioning a satellite dish, and attaching equipment to existing electrical and cable services, connecting components to other components, programming controls, adjusting the system's operation, and so forth. These set-up services are paid for as part of the sale of the electronic components and are taxed whenever the sale of the components are taxed.
When billing for a home theater, the billing shall clearly reflect that the sale, delivery, and set up of the electronic components are being treated as part of the retail sale of the components. These sales are fully taxed regardless of whether the equipment is delivered and set up during the original construction of a building or during the reconstruction, restoration, remodeling, renovation, repair, or replacement of a residence. Local sales tax on the equipment sale is sourced to the location where delivery occurs.
If the customer billing does not show the selling price of the electronic components as a separate line item charge, the business must collect sales tax on the entire amount that is charged to the customer. When a customer billing contains separate line item charges for the components, the home theater business should subtract the selling price of the electronic components and the associated sales tax from the total amount being charged to the customer. This subtraction leaves the amount being charged for the construction part of the mixed contract.
When the construction services are exempt, such as for residential or original construction, the home theater business does not charge the customer any additional sales tax on the separately-stated construction charges. The business is required to accrue tax on any material taken from its resale inventory for the project, such as wire and electrical outlet boxes.
When construction services are taxed, the home theater business should apply the guidelines for contractor-retailers who are performing a construction contract to the construction charge amount. See
Contractor-Retailer Guidelines: Taxing construction contracts performed by contractor-retailers.
The separately stated construction charge must be reasonable in light of the overall contract for the sale, delivery, and set up of the electronic equipment and for the construction services being performed.
Some home theater businesses sell and set up the electronic components and hire third-party contractors to provide the needed construction services. When this is done, the business should charge the property owner sales tax on the line item charges for the sale and set up on the electronic components. The third-party contractor should account for sales tax as a contractor and charge the business accordingly. When the business re-bills the customer to recover the third-party contractor charges, the customer billing should show the contractor charges and any associated tax as a separate, untaxed, lump-sum amount, whether the contractor charge to the business is being marked-up or not.
EDU-28, Sales tax Guidelines for Businesses that Sell and Service Appliances.
In addition to these discussions, the Information Guides contained specific instructions that applied to many businesses that are often seen as installing or repairing residential fixtures. EDU-27 provides:
Drapery and drapery hardware.
Businesses that contract to custom make draperies and curtains are fabricators. The value added by the fabrication services is subject to tax. Businesses that sew draperies to fulfill custom orders should claim resale exemption when they buy drapery materials and collect sales tax on the full selling price billed to the customer. When a contract for custom-made draperies requires hanging them at the buyer's residence or business, sales tax should be charged on the entire amount billed to the customer, including the charges for delivering and hanging the draperies. Local tax should be sourced to the customer's residence or business.
The department has determined that the sale and installation of drapery rods or other drapery hardware shall be treated as a retail sale plus set up and not as a construction contract. This means that sales and installation of drapery rods or other drapery hardware are fully taxable even when the hardware is installed at a residence or during the original construction of a building. Accordingly, a drapery business is required to collect sales tax on the entire amount it charges to a customer when it fabricates draperies, installs drapery hardware, and hangs the drapes that it fabricated. The drapery business should claim a resale exemption when it buys drapery hardware. . . .
Custom sign makers are treated like fabricators. The value added by the fabrication of the sign is subject to tax. Sign makers should claim resale exemption when they buy materials to fabricate a sign from and collect the sales tax on the full selling price billed to their customer for the sign, including charges for setting it in place, bolting it down, and wiring it to existing services. Many other questions that sign makers have are answered by K.A.R. 92-19-18a.
Sign makers sometimes contract to construct a base or make other improvements to real property to support the sign they are fabricating. This is a mixed contract. When a sign maker enters into a mixed contract, the sign fabricator shall charge tax on the entire amount unless the retail sale of the fabricated sign is shown as a separate line item charge that is being taxed on the customer billing. When the billing under a mixed contract contains a separate line item charge for the fabricated sign, the sign maker should determine the tax due on the construction part of the contract by applying the rules for
that are set forth in the
Sales Tax Guidelines for Businesses that Sell and Service Appliances and Electronic Products.
Sales Tax Guidelines for Fabricators.
Some Kansas businesses that custom fabricate and install awnings treat themselves like contractors and pay sales tax on their material purchases. If installation services qualify for the residential or original construction exemption, the awning fabricator's sales tax duties are complete upon paying tax on its purchases of materials. The fabricator should not charge tax on separately stated installation charges. Taxable installation services should be accounted for as discussed in the
Contractor Guidelines, Charging and reporting sales tax on your taxable labor services.
Some multi-state awning companies have local dealers who install awnings that are produced at the business's manufacturing or fabrication plant. The value added by the manufacturing or fabrication services is included in the tax base. If an awning manufacturer does not charge sales tax to the dealer, the dealer should accrue and remit Kansas sales tax on their purchase price of the awnings. Local tax is sourced to the location where delivery from the manufacturer to the dealer occurs. Taxable installation services should be accounted for as discussed in the
Contractor Guidelines, Charging and reporting sales tax on your taxable labor services.
. . .
Elevators and escalators.
Manufacturers whose employees install elevators and escalators are required to accrue and remit sales tax on the cost price of an elevator or escalator installed in Kansas, which includes the manufacturing costs. . . .
Sales Tax Guidelines for Contractors and Contractor-Retailers,
Persons engaged in the business of carpentry, as the trade is commonly known, are considered to be contractors who perform installation and application services. These services are taxable unless the work involves original construction or work on an existing residence that is undergoing reconstruction, restoration, remodeling, renovation, repair or replacement. Carpenters shall pay tax on their purchases of tools, building materials, and building supplies. When services are taxable, such as for commercial remodel work or work done on farm buildings, the carpenter shall charge and remit tax in accordance with
Kansas jobs where labor services are taxed
Carpenters, almost universally, are not contractor-retailers and shall not claim resale exemption on purchases of tools and supplies or on lumber and other materials. When carpenters work for an exempt entity, their material purchases are taxable unless the entity provides them with a copy of a project exemption certificate. See
Project exemption certificates
Carpet installation and floor covering.
When wall-to-wall carpet or other floor covering is tacked, nailed, glued or cemented to sub flooring, the transaction shall be treated as a construction contract and the tax base for the carpet shall be the selling price charged to the contractor or the contractor-retailer's cost. When a Kansas carpet or floor-installation business contracts to install carpet using its own employees or third parties, the business shall accrue sales tax on their cost when they remove carpet or floor covering from inventory for use on jobs in Kansas or outside the state. When carpeting is sold without installation, sales tax shall be collected on the full selling price charge to the buyer. . . .
Garage door installers.
Businesses that install garage doors are treated like contractors. Since garage-door installers are contractors, they should pay tax on their purchases of tools, garage doors, garage door rails, electric door openers, supplies, and other such purchases. Garage-door installation and repair services are taxable unless the work involves original construction or residential work. When these services are not taxed, such as for original construction or residential work, a garage-door installer who has paid tax on its purchases has no further sales tax reporting duties. When services are taxable, such as for commercial remodel work, the garage-door installer shall charge and remit tax in accordance with
Kansas jobs where labor services are taxed
When a garage-door installer makes an occasional over-the-counter sale, such as the sale of a repair or replacement part or a garage-door opener, the installer should collect sales tax on the taxable gross receipts from the customer sale and report the amount collected less the tax-paid inventory as the gross receipts from the sale. See
Contractors who maintain a tax-paid inventory,
. . .
"Locksmith services" means services to repair, service, or install locks and locking devices, whether the lock is installed in real property, like a front door, on tangible personal property, like a motor vehicle or boat, or whether it is separate and apart from other property, like a padlock. Locksmiths are considered retailers and are required to collect sales tax based on the total amount being charged to their customers. Locksmith charges are not exempt because they are performed at a residence or during the original construction of a building or facility. Taxable locksmith charges include charges for opening a lock or door. . . .
Businesses that sell and install venetian blinds are considered to be retailers and not contractor-retailers. These businesses shall claim resale exemption when they buy the blinds, hangers, and other parts of venetian blinds. These businesses shall collect sales tax on the full selling price charged to the customer for the blinds, including any delivery and set-up charges. Charges for installation of venetian blinds are not exempt when the installation services are performed at a residence or during the original construction of a building or facility.
This discussion of Venetian blinds informs the decorating center how it is required to collect sales tax when it delivers and installs Venetian blinds in Kansas.
The decorating center that you represent cannot elect to treat itself as a contractor or contractor-retailer that is improving real property when it installs Venetian blinds. Such treatment would give the decorating center a selling advantage over its competitors since it would charge and remit less Kansas sales tax than its competitors who were accounting for sales tax on Venetian blind installation in accordance with the directive in "(22) Venetian Blinds," which is from EDU-26 and is quoted above.
These guidelines were intended to provide Kansas businesses with directives that provide a bright-line that distinguishes contracts for the retail sale and installation of fixtures from contracts that call for improvements to real property that incidentally require materials or fixtures to be transferred and installed or affixed to a building, structure, or other part of real property. They were written to overcome the
-type problems that were reintroduced into the Kansas retailers' sales tax act by SB 493, and its exemption for services done "in connection with . . . the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence."
Statutory duties and responsibilities of the department.
The secretary of revenue is charged the duty of administering and enforcing the Kansas Retailers' Sales Tax Act.
K.S.A. 2007 Supp. 75-5155; K.S.A. 79-3618.
These duties include implementing and administering the amendments to the Act that Kansas legislators enact and the governor signs into law. Webster's Ninth New Collegiate Dictionary defines "implement" as: "to give practical effect to and ensure of actual fulfillment by concrete measures." Black's Law Dictionary, Sixth Ed. contains the following explanation of the word "administer": "To 'administer' a decree is to execute it, to enforce the provisions, to resolve conflicts as to its meaning, to construe and to interpret its language. U.S. v Hennen, D.C. Nev., 300 F. Supp. 256, 263."
These duties mean that when the Kansas legislature amends the Act, the department is responsible for:
Drafting statements that interpret and explain the new statutory language.
Drafting statements that attempt to resolve any conflicts between the new language and the existing provisions of the Act.
Explaining to taxpayers how the new statutory provisions will affect their day-to-day business operations.
Changing the sales tax returns and drafting new instructions for returns, if needed.
Providing for enforcement of the amended law.
Doing these things in ways that carry out the intent of the Kansas legislature.
The department performs these duties by: (1) publishing notices, revenue rulings, information guides, and similar material that explain why the new statutory provision was enacted, how it changes the prior law, and how the department will implement it; (2) revising and publishing tax returns and instructions, if needed, to conform to the new provision; (3) deleting material from the Policy Information Library and revoking any earlier rulings that conflicts with the new provision; (4) conducting seminars for taxpayers, where the statutory changes are discussed and explained; (5) conducting educational seminars for department associates, where statutory changes are discussed and explained; and (6) adopting new regulations, if needed.
1998 HB 493 contained a number of conflicting provisions concerning the installation and repair of residential fixtures and the exemption for "the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence." 2003 HB 2005 contained conflicting provisions since it included installation services in the tax base for the sale of goods, while taxing installation services unless they were performed in connection with original or residential construction. The department attempted to resolve these conflicts in the information guides that it published. This includes that provision that businesses should treat the sale and installation of Venetian blinds as a retail sale rather than as the transfer of tangible personal property under a construction contract.
Thomas E. Hatten
Attorney/Policy & Research
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