Questions and Answers
Tax base for taxable construction services.
Kansas Retailers' Sales Tax
Tax base for taxable construction services.
What authority supports K.A.R. 92-19-66b and its application of sales tax to taxable construction services?
Kansas sales tax is levied on retail sales of tangible personal property ("TPP" or "goods") and on retail sales of the services listed in K.S.A. 79-3603. "Retail sale" means a sale to the final user or consumer.
See K.S.A. 79-3602(jj) ("Retail sale" or "sale at retail" means any sale, lease or rental for any purpose other than for resale, sublease or subrent.")
One important rule for the construction industry is a construction contractor that improves real property is considered the final consumer of the construction materials, supplies, and equipment it buys. Since sales to a contractor are sales to the final consumer, such sales are taxable.
A construction contractor is considered the final consumer of the materials and supplies it buys because a contractor's job is to apply its labor and skill to transform construction materials into buildings, structures, and other real property improvements. The last transfer of construction materials as tangible personal property (TPP) is the sale to the contractor. This is reflected in Black's definition of "general contractor" as "[o]ne who contracts for the completion of an entire project, including purchasing all materials, hiring and paying subcontractors, and coordinating all the work."
Blacks Law Dictionary, p. 351, Eighth Ed. 2004.
Once construction material becomes part of a building or structure, it is no longer TPP but is part of real property. Kansas sales tax is not imposed on the sale or transfer of real property. Accordingly, acceptance of a completed construction project by a property owner or property buyer's is not subject to sales tax. The taxable transfer of TPP occurs when the materials are sold to the contractor/purchaser.
Forty-five states and the District of Columbia impose sales tax. These laws tax sales of materials to contractors with remarkably few exceptions. This is because the final sale of the materials
is the sale to a contractor. Acceptance of this principle by courts early in the development of state sales tax laws is reflected in the following discussion in
Duhame v. State Tax Commission,
65 Ariz. 268, 179 P.2d 252, 171 A.L.R. 684 (1947)(reversed on other grounds):
[W]e hold that when the contractor buys materials and supplies for use in fulfilling his contract, he does not purchase them for resale as tangible personal property, but for use in producing the completed job. He is not a trader or dealer.
Acorn Iron Works v. State Board of Tax Administration,
295 Mich. 143, 294 N.W. 126, 139 A.L.R. 368;
City of St. Louis v. Smith,
342 Mo. 317, 114 S.W.2d 1017;
Wood Preserving Corp. v. State Tax Commission,
235 Ala. 438, 179 So. 254;
State Board of Equalization v. Stanolind Oil & Gas Co.
, supra, [54 Wyo. 521, 94 P.2d 147];
Atlas Supply Co. v. Maxwell,
212 N.C. 624, 194 S.E. 117;
Albuquerque Lumber Co. v. Bureau of Revenue,
42 N.M. 58, 75 P.2d 334;
Utah Concrete Products Corp. v. State Tax Comm.,
supra [101 Utah 513, 125 P.2d 408]; S
tate v. Christhilf,
170 Md. 586, 185 A. 456;
State v. J. Watts Kearny & Sons,
181 La. 554, 160 So. 77; and see 98 A.L.R. 837;
Blome Co. v. Ames,
365 Ill. 456, 6 N.E.2d 841, 111 A.L.R. 943;
Herlihy Mid-Continent Co. v. Nudelman,
367 Ill. 600, 12 N.E.2d 638, 115 A.L.R. 491; 139 A.L.R. 373.
This legal principle runs as a firm thread through many allied fields of the law. For example, after a contractor has fabricated personalty into realty, his statutory lien is not against the personalty he fabricated or installed, but against the realty, sec. 62-201, A.C.A.1939. Again, when by conditional sale, fixtures sold are affixed to realty, reservation of property rights in these fixtures are lost by the seller unless there is filing of the conditional sales agreement and/or consent by the property owner. Sec. 52-604, A.C.A.1939. See also 13 A.L.R. 448;
Abramson v. Penn,
156 Md. 186, 143 A. 795, 73 A.L.R. 748;
People's Sav. & Trust Co. v. Munsert,
212 Wis. 449, 249 N.W. 527, 250 N.W. 385, 88 A.L.R. 1318;
Smyth Sales Corp. v. Norfolk Bldg. & Loan Ass'n,
116 N.J.L. 293, 184 A. 204, 111 A.L.R. 362; See also
J. W. Meadors & Co. v. State,
89 Ga.App. 583, 80 S.E.2d 86 (1954), which quotes from
The treatment of contractors as final consumers is codified by K.S.A. 79-3603(l) and its imposition on:
the gross receipts received from the sales of tangible personal property to all contractors, subcontractors or repairmen for use by them in erecting structures, or building on, or otherwise improving, altering, or repairing real or personal property. . . .
The next important sales tax concept is codified in the definition of "sales or selling price" in K.S.A. 79-3602(ll). It provides:
(ll) (1) "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 seller's cost
of the property sold;
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
(E) installation charges.
(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:
(i) The purchaser presents a coupon, certificate or other documentation to the seller to claim a price reduction or discount where the coupon, certificate or documentation is authorized, distributed or granted by a third party with the understanding that the third party will reimburse any seller to whom the coupon, certificate or documentation is presented;
(ii) the purchaser identifies to the seller that the purchaser is a member of a group or organization entitled to a price reduction or discount. A preferred customer card that is available to any patron does not constitute membership in such a group; or
(iii) the price reduction or discount is identified as a third party price reduction or discount on the invoice received by the purchaser or on a coupon, certificate or other documentation presented by the purchaser.
(3) "Sales or selling price" shall not include:
(A) Discounts, including cash, term or coupons that are not reimbursed by a third party that are allowed by a seller and taken by a purchaser on a sale;
(B) interest, financing and carrying charges from credit extended on the sale of personal property or services, if the amount is separately stated on the invoice, bill of sale or similar document given to the purchaser;
(C) any taxes legally imposed directly on the consumer that are separately stated on the invoice, bill of sale or similar document given to the purchaser;
(D) the amount equal to the allowance given for the trade-in of property, if separately stated on the invoice, billing or similar document given to the purchaser; and
(E) commencing on July 1, 2006, and ending on June 30, 2009, cash rebates granted by a manufacturer to a purchaser or lessee of a new motor vehicle if paid directly to the retailer as a result of the original sale.
For sales tax purposes, the "measure of tax" or "tax base" is the amount multiplied by the sales tax rate that results in the amount of tax charged to the consumer. When several goods are sold as part of a single retail transaction, such as at a grocery store or a fast-food restaurant, the tax base is the sum of the taxable charges. The sales tax rate is the sum of the Kansas state rate and all applicable local sales tax rates.
The definition of "sales or selling price" in K.S.A. 79-3602(ll) requires a Kansas retailer to charge sales tax on the total amount it bills to a customer for taxable goods or services. A retailer may not reduce that amount by deducting its expenses, which can include its material and labor costs, the interest it pays on borrowed operating capital, its tax and insurance expenses, delivery and installation charges, and any other cost or expense born by the retailer.
The requirements in this definition apply to merchants that sell goods and to service providers that provide taxable services.
K.S.A. 79-3602(ll) ("'Sales or selling price' . . . means the total amount . . . for which . . . services are sold. . . .")
When a service provider seeks reimbursement of its expenses from a customer, the reimbursement is part of the "sales or selling price" the provider is billing for its services. A service provider may seek reimbursement of its travel expenses, meal costs, lengthy telephone calls made to a manufacturer's service experts, a surcharge billed for service work performed on weekends or holidays, a surcharge billed as a mileage or zone charge, additional wages assigned as a job cost because addition employees are called in, and so forth. The definition of "sales or selling price" makes all charges for reimbursement billed by a service provider to its customer part of the tax base for the provider's taxable services.
For example, assume a computer technician travels from Chicago, Illinois to Johnson County, Kansas to service and repair a large business computer. The work takes several days. Computer service and repair charges billed to the business are taxable under K.S.A. 79-3603(p) and (q). When the Chicago service technician bills the business, the technician will seek reimbursement for its travel expenses, room charges, and meal costs.
The technician may seek reimbursement of its expenses by charging services at a higher rate for work done outside the Chicago area, by billing the travel, meal, and room costs as separate line-item charges, or by billing them on a separate invoice. The technician may seek reimbursement of its expenses based on its cost or by marking up its cost. Regardless of how the service technician recovers its job expenses from its customer, the expenses incurred by the technician and reimbursed by the customer are part of "sales or selling price" charged by the technician for its services and are part of the tax base.
These amounts are taxable since the repair services performed by the technician are taxable.
The department recommends that when a service provider seeks reimbursement of an expense, the provider invoice the expense (or a marked-up amount) as a lump sum amount rather than as one line-item charge for the cost of the goods or service and a second line-item charge for the sales tax paid by the provider on the charges listed for the goods or services.
See EDU-27, Sales Tax Guidelines for Contractors and Contractor-Retailers; Recovering your expenses from your customer.
A service provider's erroneous bifurcation of its costs into one charge for goods or services and a second charge for the sale tax paid on that charge does not mean the service provider is charging and remitting the sales tax being invoiced as separate line-item charge. This erroneous billing practice only shows the provider is seeking reimbursement of its costs and expenses, which include the sales taxes it paid on taxable goods or services. Such erroneous billings practices are neither double taxation nor an unlawful tax on a tax.
Double taxation exists “only where there is the imposition of the same tax by the same taxing power upon the same subject matter.”
Waterbury Motor Lease, Inc. v. Tax Com'r,
174 Conn. 51, 381 A.2d 552 (1977);
Spencer v. Snedeker,
361 Pa. 234, 238, 64 A.2d 771, 772,
Ramco, Inc. v. Director, Department of Revenue,
248 N.W.2d 122, 124 (Iowa). Where there are two separate taxpayers and two separate transactions, even though a single subject matter is involved, any taint of double taxation is removed.
Boise Bowling Center v. State,
93 Idaho 367, 370, 461 P.2d 262;
Lakewood Lanes, Inc. v. State,
61 Wash.2d 751, 380 P.2d 466;
Gandy v. State,
57 Wash.2d 690, 359 P.2d 302.
Under Kansas sales tax law, a retailer is considered the "taxpayer" because the law requires the retailer to collect sales tax on its taxable retail charges, and report and remit that tax to the State of Kansas. When the Chicago technician bills the Johnson Country business for the computer services it provides, the technician is the "taxpayer" and is required to collect, remit, and report Kansas sales tax on the services it performs in Johnson County.
When the restaurant bills the technician for meals, the restaurant is the taxpayer and collects, reports and remits sales tax on the meal charges billed to the technician. There are two separate and distinct transactions
(the providing of computer service to the business and the sale of meals to the technician)
and two separate and distinct taxpayers
(the service technician and the restaurant).
Therefore, there is no double taxation even when the technician itemizes the taxes it paid on its meals as separate line-item amounts on the invoice it issues to the Johnson County business for computer services.
The separate and distinct nature of the two transactions is highlighted if the technician paid Missouri sales tax on meals it purchased. If this happened, there were two separate and distinct taxpayers, two separate and distinct transactions, and two separate and distinct taxes involved.
(Missouri sales tax and Kansas sales tax).
This example helps to show there are no concerns with double taxation when a service provider seeks reimbursement of its costs and erroneously lists the taxes it paid on a customer invoice.
Another important concept is how contractors calculate tax on their taxable services. Kansas sales tax was first imposed in 1937. Sales of tangible personal property were taxed as well as four services: intrastate telephone and telegraph services; utility services (gas, water, electricity, and heat); meals and drinks furnished at restaurants and establishments open to the public, and admissions to places of amusement, recreation, or entertainment. See Michael Lennen,
The Kansas Retailers' Sales Tax: An Overview,
The Journal of the Kansas Bar Association, p. 24 (December 1993).
1970 Kansas Senate Bill No. 423 enacted the first Kansas sales tax imposition on a service provider's charges for installing, servicing, or repairing property. SB 423 imposed sales tax on gross receipts from "the installation, maintenance, servicing and repairing of tangible personal property" except when the services are "rendered in installing [tangible personal] 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 Chap. 389, Sec. 2(p); Senate Bill No. 423.
This statutory language taxed construction services because contractors affix TPP to buildings or structures that becomes part of the building or structure and, as a result, becomes part of real property. Construction services were not taxed when done in connection with "new" construction. SB 423 did not tax repair and other services performed on property held for resale by a retailer or wholesaler.
Before SB 423 became law, repairmen who serviced and repaired TPP, such as motor vehicles or outboard motors, were required to charge and collect sales tax on repair or replacement parts and on lubricants, oil, filters or other articles of TPP supplied with their services. These repairmen found it easy to implement SB 423 because they simply began charging sales tax on the total amount invoiced to customers for services and TPP, instead of totaling the line-item charges for TPP and applying sales tax to that total.
Construction contractors that improved real property found it difficult to compute sales tax on their taxable services when the same Kansas sales tax law that required them to collect and remit sales tax on their service charges required them to pay sales tax on their purchases of construction materials and supplies. Despite the sales tax law's treatment of contractors as final consumers, some contractors claimed a resale exemption on their purchases and charged sales tax on the total amount billed to their customers. Others who entered into time-and-materials contracts, paid sales tax when they purchased materials and charged customers sales tax based on the time they billed.
The department addressed this compliance issue by issuing the following Bulletin to explain how construction contracts would be taxed:
Bulletin Vol. V, No. 1, Kansas Department of Revenue, January 01, 1972
Sales and Use: Basis of Tax: Computation of Sales Tax on Construction Contracts
.– The Department of Revenue has issued the statement, reproduced below, illustrating how sales tax should be computed in figuring the total cost of a taxable contract.
A certain amount of confusion has arisen as to how the sales tax should be handled in figuring the total cost of a taxable contract. The following is an explanation of the applicable Kansas sales tax statutes and an example of how they should be applied.
Pursuant to K. S. A. 1971 Supp. 79-3603 (1), the contractor, subcontractor or repairman is considered to be the ultimate consumer of the materials and supplies used by them in erecting structures for others or building on or otherwise improving, altering or repairing real or personal property of others. Therefore, unless said contractors are performing a tax exempt project for which they should have a project exemption number issued by the Department of Revenue to the exempt organization, they should be paying sales tax on their supplies at the time of purchase. Secondly, pursuant to K. S. A. 1971 Supp. 79-3603(p) any services performed in the installation, maintenance, servicing and repairing of tangible personal property except services performed 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 are services subject to the Kansas sales tax.
As an example “A” is a municipal water company, “B” is a contractor and “A” is asking for bids for the installation of new water lines. “B” submits a bid in the amount of $50,000.00 which includes materials, supplies, labor, overhead, profit, etc. In order to figure the appropriate sales tax “B” will have to take the cost of his materials which would include the amount of sales tax which he pays at the time of purchase which in this example is $14,935.00. “B” would then subtract this cost from the total bid price of $50,000.00 leaving a total of $35,065.00 for the service of installing said water lines. The contractor will then figure sales tax at the rate of 3% on $35,065.00 which is $1,051.95. Therefore, the total bid would be $50,000.00 plus 3% sales tax in the amount of $1,051.95 or a total bid price of $51,051.95.
Sales tax paid on those materials $435.00
Total cost of materials (at time of purchase) $14,935.00
Total contract bid . $50,000.00
total cost of materials . Less $14,935.00
Total cost for the service . $35,065.00 (includes labor, overhead, profit, etc.)
3% state sales tax . $1,051.95
Total cost of service plus sales tax . $36,116.95
Plus total cost of materials. $4,935.00
Total bid for contract includes appropriate $51,051.95
Should the contractor be located within a local taxing jurisdiction pursuant to K. S. A. 79-4424 he will be required to collect an additional 1/2% for the local sales tax. As of this date local taxing jurisdictions include Topeka, Lawrence and Manhattan. Only those businesses which are located within these cities are subject to the local sales tax.
When quoting prices or bidding on contracts, it should always be kept in mind that pursuant to K. S. A. 79-3605 it shall be unlawful for anyone to advertise or hold out, or state to the public, or to any consumer, directly or indirectly, that the tax, or any part thereof, imposed by the Sales Tax Act will be assumed or absorbed by them, or that it will not be considered as an element in the price to the consumer, or if added, that it, or any part thereof, will be refunded.
This same approach is used today. K.A.R. 92-19-66b provides:
92-19-66b. Labor services. (a) Each contractor, subcontractor, and repairman shall be responsible for collecting and remitting sales tax on taxable services performed for others, including taxable services performed for other contractors. A contractor, subcontractor, or repairman shall not issue or accept a resale exemption certificate that claims an exemption from sales tax for services being purchased from or sold to another contractor, subcontractor, or repairman.
(b) The taxable base for all contracts involving the application or installation of tangible personal property shall be the difference between the contract price and the cost of material, supplies, and payments to subcontractors, including sales or compensating tax paid by the contractor on the materials, supplies, and subcontractor charges purchased by the contractor to complete the contract.
(c) Each contractor, subcontractor, or repairman who does not separately state the amount of sales tax for services performed in that person’s contract, bid estimates, customer billings, or other evidence of the transaction shall state in the document that all applicable sales taxes are included in the selling price. If the statement does not appear in the contract, bid estimate, billing, or other evidence of the transaction, it shall be presumed that the sales tax was not charged to the consumer. Each retailer shall carry the burden of proving that the sales tax was charged to the consumer and properly remitted to the state. . . . (Authorized by K.S.A. 79-3618, implementing K.S.A. 79-3603; effective May 1, 1988; June 26, 1998.)
The only material difference between the directives in the 1972 bulletin and those in the current regulation stems from K.S.A. 79-3648. This statute allows a construction contractor to forgo issuing invoices that state the amount of taxes charged on services and instead issue invoices that state: "All applicable sales tax is included." K.S.A. 79-3648 was enacted after contractors complained that invoicing the sales tax amount allowed a customer to determine how much the contactor was charging for services. This sometimes resulted in conflicts between contractors and their customers. This perceived shortcoming was remedied by enacting K.S.A. 79-3648.
The approach taken in the 1972 bulletin for taxing construction services has been followed ever since, except for K.S.A. 79-3648. The directives in the 1972 bulletin have been followed and applied in spite of the fact the Kansas Supreme Court struck down the 1970 imposition on construction services as being so vague in its meaning and application it denied contractors due process of law.
Kansas City Millwright, Inc. v. Kalb,
221 Kan. 658, 562 P.2d 65 (1977). The Kansas legislature quickly addressed the due process shortcomings noted in
by enacting 1977 Senate Bill 49.
See In re Black dba Black's Welding Service,
9 Kan.App.2d 666, 684 P.2d 1036 (1984);
1977 Kan. Sess. Laws, Chap. 337, Sec. 3.
1977 Senate Bill 49 rewrote the problematic sections of K.S.A. 79-3603(p) by taxing gross receipts from "the service of installing or applying tangible personal property" except when the services were done in connection with the "original construction of a building or facility or the reconstruction, restoration, replacement or repair of a bridge or highway." New section K.S.A. 79-3603(q) was added and taxed gross receipt from "the service of repairing, servicing, altering, or maintaining tangible personal property," including "tangible personal property which has been and is fastened to, connected with or built into real property." New section K.S.A. 79-3603(r) taxed gross receipts from maintenance agreements for services taxable under (p) or (q). None of the impositions applied when goods held for resale were serviced or repaired or to the "original construction" of a building or "facility." The terms "original construction" and "facility" were defined in K.S.A. 79-3603(p). In
In re R & R Janitor Service,
9 Kan.App.2d 500, 683 P.2d 909 (1984), the Kansas Court of Appeals rejected the taxpayer's argument that K.S.A. 79-3603(p), (q), and (r) were unconstitutionally vague despite the enactment of SB 49.
After SB 49 was enacted, K.SA. 79-3603(p), (q), and (r) have been amended a number of times. In 1988, the words "windstorm, hailstorm, rainstorm, [and] snowstorm" were stricken and the word "tornado" was added to the definition of "original construction."
1988 Kan. Sess. Laws, Chap. 386, Sec. 1.
In 1992, original construction labor services were taxed at 2.5%.
1992 Kan. Sess. Laws Chap. 280, Sec. 58.
This 2.5% imposition was repealed in 1995. In 1998, "residential construction" services were exempted. The law continued to exempt "original construction" services.
1998 Ks. Sess. Laws, Chap. 130, Sec. 30.
In 2007, labor services performed to install or repair "utility structures" damaged by a "windstorm" was added to non-taxable original construction and residential construction services.
2007 Kan. Sess. Laws 195, Sec. 58.
When the state sales tax rate was increased, the Kansas legislature sometimes enacted provisions to allow contractors, who had entered into written construction contracts well before the effective date of the rate increase, to pay sales tax on materials and supplies and to charge sale tax to customers, at the lower rate in place when the contract was signed by the parties.
See e.g. 1986 Kan. Sess. Laws, Chap. 386, Sec. 1; 1992 Kan. Sess. Laws Chap. 280, Sec. 58.
Other tax rate increases were enacted without provisions for pre-existing, written construction contracts.
See e.g the 1967, 1989 and 2002 Kansas session laws.
The amendments to K.SA. 79-3603(p), (q), and (r) over the years, including the treatment of pre-existing construction contracts, show the Kansas legislature has been immersed with issues that involve application of sales tax to construction contracts. While the Kansas legislature expanded and contracted the scope of the imposition on construction services, it has never changed the requirements for how sales tax is calculated on taxable construction services, other than enacting K.S.A. 79-3648. These requirements remained in place after remedial legislation was passed in 1977 to correct the unconstitutional version of K.S.A. 79-3603(p) enacted in 1970.
If the Kansas legislature wanted to change how contractors determine the tax base for taxable construction services, it had numerous opportunities to do so after the department published Bulletin Vol. V, No. 1 on January 1, 1972. The Kansas legislature has not changed the department's policy announced in the bulletin other than to allow contractors to bill customers "All applicable sales tax included." Today, the department policy is codified in K.A.R. 92-19-66b and discussed at length in a number of information guides and other publications. See
Pub. KS-1525 (Rev, 10/10), Kansas Sales Tax for Contractors, Subcontractors, & Repairmen; Taxable labor Services; EDU-26, Sales Tax Guidelines for Contractors and Contractor-Retailers; Recovering your expenses from your customer; EDU-27, Sales Tax Guidelines for Fabricators; EDU-28, Sales Tax Guidelines for Businesses that Sell and Service Appliances and Electronic Products; EDU-29, Sales Tax Guidelines for Contractor-Fabricators and Contractor-Manufacturers; EDU-30, Sales Tax Guidelines for Lawn Care, Pest Control, Fertilizer Application and Landscaping.
"Operative construction" is "the doctrine that the interpretation of a statute by an administrative agency charged with enforcing it is entitled to judicial deference unless it is arbitrary and capricious."
Black's Law Dictionary, p. 1125, Eighth Ed. (2004).
The Kansas supreme court discussed this doctrine in
In re Tax Appeal of Harbour Brothers Constr. Co.,
256 Kan. 216, 221-22, 883 P.2d 1194 (1994):
Interpretation of a statute is a question of law.
Todd v. Kelly, 251 Kan. 512, 515, 837 P.2d 381 (1992).
Special rules apply, however, when considering whether an administrative agency “erroneously interpreted or applied the law”:
“The interpretation of a statute by an administrative agency charged with the responsibility of enforcing that statute is entitled to judicial deference. This deference is sometimes called the doctrine of operative construction.... [I]f there is a rational basis for the agency's interpretation, it should be upheld on judicial review.... [However,] [t]he determination of an administrative body as to questions of law is not conclusive and, while persuasive, is not binding on the courts.”
State Dept. of SRS v. Public Employee Relations Board, 249 Kan. 163, 166, 815 P.2d 66 (1991).
Deference to an agency's interpretation is especially appropriate when “the agency is one of special competence and experience.”
Boatright v. Kansas Racing Comm'n, 251 Kan. 240, 246, 834 P.2d 368 (1992).
An agency's construction of a statute it implements is entitled to additional weight when the agency's construction has been endorsed by the legislature by implication. Endorsement by implication happens when the legislature reenacts a statute in the same or substantially same terms without changing the construction applied by the agency.
82 C.J.S. Statutes, Sec 359, p. 769; Gorup v. Kansas Public Emp. Retirement System,
3 Kan.App.2d 676, 600 P.2d 1161 (1979). Here, the policy announced in the department's 1972 bulletin for taxing construction services has remained in place unchanged ever since, except for K.S.A. 79-3648.
See K.A.R. 92-19-66b, quoted above.
K.S.A. 79-3648, which allows contractor to issue invoices that state: "All applicable sales tax is included," could only have been enacted if the Kansas legislature understood how the department applies Kansas sales tax to construction contracts.
Legislative endorsement by implication has added force when the legislature reenacts a statute and changes requirements in the statute without changing other requirements to force an agency to change its policy.
Gorup, supra; Hamby v. McDaniel, 559 S.W.2d 774 (Tenn. 1977).
K.S.A. 79-3603(p) has been amended a number of times since 1972 since the department published the bulletin in 1972. Some of the statutory changes broadened the scope of the imposition on construction services, while others restricted it. KS.A. 79-3603(p) was amended by adding the residential exemption and the exemption for repair of utility structures damaged by windstorms. While these amendments changed what services K.S.A. 79-3603(p) taxed, nothing was enacted to change the way tax is computed under K.S.A. 79-3603(p) on construction services.
Legislative endorsement of an agency policy by implication is more clearly shown if the legislature makes detailed changes to a statute but does not change it in a way that forces the agency to revise its construction of the statute and its policy statements.
Palmore v. Superior Court of District of Columbia,
169 U.S.App.D.C. 323, 515 F.2d 1294 (D.C.Cir.1975). Several times when the sales tax rate was increased, the Kansas legislature enacted provisions that allowed contractors with written contracts to pay and collect sales tax at the earlier lower rate after the effective date of the rate increase. These amendments enacted for pre-existing contracts are "detailed changes" that were made to K.S.A. 79-3603(p) without changing how sales tax is computed on taxable construction services. The detailed and complex amendments for preexisting contracts suggest Kansas legislators understand how sales tax has been computed on taxable construction contracts and have chosen not to change the policy first announced in a department bulletin published on January 1, 1972.
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