Questions and Answers

Identifying Information:Clean Drinking Water Fee
Tax Type:Clean Drinking Water Fee; Kansas Retailers' Sales Tax
Brief Description:Sales Tax and the Clean Drinking Water Fee
Keywords:
Effective Date:02/27/2002



Body:
SALES TAX & THE CLEAN DRINKING WATER FEE

I. CLEAN DRINKING WATER FEE
1. EFFECTIVE JANUARY 1, 2002 – Public water supply systems (cities, rural water districts, etc.) that pay the Clean Drinking Water Fee on their sales of water at retail are exempt from paying sales tax on their direct and indirect purchases of tangible personal property and taxable services. 2. FEE IMPOSED ON – The Clean Drinking Water Fee is paid by city water departments, rural water districts and any other organization that is selling water at retail. Collectively, all of these organizations are called “public water supply systems.” The Fee is not due on sales of water at wholesale. The Fee is only due on water that is delivered through mains, lines or pipes. No Clean Drinking Water Fee is due on bottled water, for example, or on water delivered by truck(s) – (these sales are subject to sales tax). Exhibit “A”

3. PAYING THE FEE - Those public water supply systems that choose to “pay” the Clean Drinking Water Fee are paying this Fee to KDOR at the rate of $0.03/1,000 gallons of water sold at retail. The law specifically forbids the public water supply systems from adding this Fee to their water customers’ bill (like sales tax is added to the bill). However, many public water supply systems have increased the selling price of their water in order to recoup the Clean Drinking Water Fee.

4. REPORTING THE FEE – The Clean Drinking Water Fee is reported quarterly on the same form (Form WP-1) as the Water Protection Fee. The Clean Drinking Water Fee on water sold at retail during the months January, February and March is due May 15. The Fee for April, May and June is due August 15. The Fee for July, August and September is due November 15, and the Fee for October, November and December is due the following February 15. The return requires two entries – one for the Water Protection Fee and one for the Clean Drinking Water Fee – since not all public water supply systems will be paying the Clean Drinking Water Fee. All public water supply systems are required to collect and remit the Water Protection Fee. Exhibit “B”

5. OPT-OUT - Prior to October 1, 2001 existing public water supply systems chose whether to pay the Clean Drinking Water Fee or to “opt-out,” i.e., continue to pay sales tax on all of their purchases of materials and labor needed to operate. Approximately 750 public water supply systems chose to pay the Fee on their retail water sales on or after January 1, 2002 and approximately 80 chose to continue to pay sales tax on their taxable purchases. Legacy indicates if the public water supply system opted-out or are paying the Clean Drinking Water Fee.

6. NEW WATER DISTRICTS – All new public water supply systems established after January 1, 2002 must pay the Clean Drinking Water Fee. Licensing Segment registers all new water accounts and is responsible for mailing exemption letters and certificates.

7. SALES TAX EXEMPTION – A public water supply system that pays the Clean Drinking Water Fee is exempt from sales tax on all of its direct and indirect purchases of tangible personal property and/or taxable labor services used to construct, operate or maintain the water utility. This includes indirect purchases by contractors working on the public water supply system’s facilities. (An indirect purchase is a purchase paid for by someone other than the public water supply system – such as a contractor.) Also exempt are all direct purchases (purchases paid for by the public water supply system) by the public water supply system for the operation of its facilities, including (but not limited to) its purchase of phone service, utilities, office supplies, motor vehicles, etc.

8. EXEMPTION LETTER - In December 2001, KDOR sent an Exemption Letter to approximately 750 public water supply systems that chose to pay the Clean Drinking Water Fee. This Exemption Letter is used by the named public water supply system to claim the sales tax exemption on their direct purchases. It also advises them to give their suppliers a copy of the exemption letter when making direct purchases. Exhibit “C”

9. EXEMPTION CERTIFICATE – KDOR also sent a Clean Drinking Water Fee Exemption Certificate (Form ST-28EE) to approximately 750 public water supply systems that chose to pay the Clean Drinking Water Fee. Public water supply systems are to give the exemption certificate to their agents who make indirect purchases on behalf of the public water supply system. An indirect purchase is a purchase paid for by someone other than the public water supply system – such as a contractor. Under the law, said indirect purchases are exempt from sales tax. A contractor using the exemption certificate will complete it and give a photocopy to the supplier of the materials/labor. It is the contractor’s authority to purchase sales tax exempt on behalf of a public water supply system. Exhibit “D”

10. PROJECT EXEMPTION CERTIFICATE – Kansas cities and counties that are accustomed to issuing Project Exemption Certificates may use a Project Exemption Certificate in place of the above-described Exemption Certificate (Form ST-28EE). Cities and counties would complete Form PR-76 and submit it to Policy & Research (3rd Floor, DSOB), FAX: 785-296-7928, phone: 785-296-3498. Exhibit “E.” Cities and counties with “Agent Status” may now issue their own Project Exemption Certificates for their water utility projects.
II. THE RETAIL SALE OF WATER
1. Every public water supply system making retail sales of water MUST continue to collect, report and remit Kansas Retailers’ Sales Tax on their retail sales of water regardless of whether or not they are paying the Clean Drinking Water Fee. Sales tax is due in addition to the Water Protection Fee. 2. SITUS – The sales tax rate to be collected is the rate in effect at the CUSTOMER’S place of business. KAR 92-21-9. 3. Both the State and local (city and/or county) sales tax is due on the gross receipts received except:
A. Water sold for residential and/or agricultural use – local (city and/or county) sales tax only.
B. Water sold under the “consumed in production” exemption. Purchaser must provide the seller with a completed Form ST-28B. For example:
1. Water for irrigation of crops.
2. Water sold to restaurants, manufacturers and hotels that is “consumed in producing” an article of tangible personal property or providing a taxable service.
C. Water sold to exempt entities such as schools; nonprofit hospitals; blood, organ or tissue banks; state and federal governments; political subdivisions of the state of Kansas; etc. Purchaser must provide the seller with a completed Form ST-28B.
4. Effective January 1, 2002 – no sales tax on the gross receipts received from: 1) the sale of a water benefit unit, AKA “water meter”. (This is a one-time fee that many rural water districts charge for the privilege of purchasing water. For example, a new homeowner in a rural area may have to pay the local water district $1,500 for the right to purchase water.) 2) Water system impact fee, system enhancement fee or similar fee collected by a water supplier as a condition for establishing service, 3) connection or reconnection fee collected by a water supplier.


III. PURCHASES BY PUBLIC WATER SUPPLY SYSTEMS THAT “OPTED-OUT”
1. Purchases of tangible personal property and/or taxable labor services by a public water supply system that “opted-out” of the Clean Drinking Water Fee for the construction, operation or maintenance of their water operations are taxable - unless the specific purchase qualifies for a specific sales tax exemption:
A. Taxable – The purchase of water towers, pipes, valves, concrete, building materials, tools, vehicles, office equipment/supplies.
B. Ingredient/Component Part Exemption – Example: chlorine, water purification chemicals.
C. Integrated Production Machinery & Equipment Exemption - can be claimed on the purchase, repair & installation labor for mixing pumps and telemetry systems. This exemption does not apply to pumps used to extract water out of the ground or to transport the water to its customers. It does not apply to equipment used in the distribution system such as pipes, valves and pumps.
D. Consumed in Production Exemption – Can be claimed only on that amount of electricity used to power pumps that extract water from its source (such as a water well or lake) and the pumps used to “produce” the water (such as mixing water purification chemicals with the water). The consumed in production exception can also be claimed on electricity used to transport water from the water production facility to out-laying pump stations (which in turn further pressurize the water for ultimate delivery to customers). NO exemption can be claimed on the electricity used to power pumps at out-laying pumping stations. Furthermore, if no pump stations are present between the water production facility and the customer – the consumed in production exemption can not be claimed for pumps that transport water from the production facility to the customer.
E. “Original Construction” - No tax on LABOR to install or apply tangible personal property on the first or initial construction of a building or facility (water well & water tower are a “facility”). Thus, the labor services of installing and applying tangible personal property performed to drill a new water well are considered “original construction” – not subject to sales tax on the labor. Likewise, installing new water transmission lines are considered “original construction” – not subject to sales tax. Sales tax is due on the labor services to repair existing water wells, water towers, pumps, equipment, mains, lines or pipes.
F. No sales tax on the labor services associated with excavation.
G. Policy Information Library – check the Policy Library for specific information on impositions/exemptions – there are many Private Letter Rulings on the database. www.ksrevenue.org

2. A Public Water Supply System that opted-out of paying the Clean Drinking Water Fee must pay sales tax on all of their purchases unless a specific exemption applies to that purchase and the public water supply system must provide the seller with the appropriate Exemption Certificate – see Publication KS-1527, “Kansas Sales & Use Tax for Political Subdivisions.”


IV. OTHER WATER FEES
1. Water Protection Fee - $0.03/1,000 gallons of water sold at retail by a public water supply system and delivered through mains, lines, pipes. KSA 79-82a-954.
2. Public Water Supply Fee - $0.002/1,000 gallons of water sold at retail. KSA 65-163. **These two Fees are collected together as the Water Protection Fee for a total rate of $0.032/1,000 gallons of water sold at retail, and are reported on Form WP-1. The Clean Drinking Water Fee is also reported on Form WP-1.



Date Composed: 02/27/2002 Date Modified: 03/16/2005