Opinion Letter

Letter Number:O-2010-002
Tax Type:Kansas Retailers' Sales Tax
Brief Description:Rental charges for temporary scaffolding at a refinery.
Keywords:
Approval Date:04/20/2010



Body:
Office of Policy & Research


April 20, 2010

XXXX
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XXXX Dear XXXX:

Thank you for your recent letter. You seek clarification of my earlier letter that discussed the taxability of charges for temporary scaffolding. Your company is a refinery that uses the temporary scaffolding during turnarounds, capital project work, catalyst change outs, ongoing operations, the expansion of operations, and for other similar needs. You ask if rental charges for the scaffolding, and any separately-stated charges to erect and dismantle the rented scaffolding, are taxable.

Many labor services that third-party contractors perform at a refinery are exempt under K.S.A. 2009 Supp. 79-3606(kk). It exempts, in parts relevant here: K.S.A. 2009 Supp. 79-3606(kk)(5) identifies property that does not qualify for exemption as manufacturing machinery and equipment:
K.S.A. 2009 Supp. 79-3606(kk)(5) means that maintenance equipment and tools that a manufacturer buys or leases to maintain and repair its production machinery and equipment are subject to Kansas sales tax. This is consistent with the legislative intent for (kk), which was to exempt equipment that is used as an "integral or essential part of an integrated production operation," but not other equipment purchased by a manufacturer. Thus, (kk) exempts only machinery and equipment used in: "an integrated series of operations engaged in at a manufacturing or processing plant or facility to process, transform or convert tangible personal property by physical, chemical or other means into a different form, composition or character from that in which it originally existed." K.S.A. 2009 Supp. 79-3606(kk)(2)(A); K.S.A. 2009 Supp. 79-3606(kk)(3).

Machinery and equipment located at a refinery that qualifies for exemption under this provision are atmospheric distillation units, vacuum distillation units, fluid catalytic cracker units, coking units, coking units, isomerization units, and similar equipment that touches and transforms raw oil or gas into different products. Equipment and tools purchased and used to maintain and repair this production machinery and equipment are not exempt because they are not used as part of "an integrated series of operations engaged in at a manufacturing . . . facility to process, transform or convert tangible personal property by physical, chemical or other means into a different form. . . ."

K.A.R. 92-19-66c explains how tools, equipment, and machinery that a contractor or repairman purchases or leases are taxed in Kansas:
K.A.R. 92-19-66c means that a contractor's or repairman's rental of temporary scaffolding for use in performing construction services or servicing production machinery at a refinery is subject to Kansas sales tax. This treatment is consistent with the treatment that K.S.A. 2009 Supp. 79-3606(kk)(5) provides to manufacturers who rent temporary scaffolding to work on their production machinery or equipment or to do other work at a refinery. That treatment is to tax rental charges for temporary scaffolding that are billed to a manufacturer.

Charges for temporary scaffolding are taxed as charges for the rental of tangible personal property by nearly all, if not all, of the states that impose sales tax. See e.g. Louisiana Department of Revenue, Revenue Ruling No. 07-005 (Sept. 19, 2007); Combs v. Chevron USA. Inc. Texas Court of Appeals, Third District at Austin, No. 03-07-00127-CV (Feb. 5, 2010); Giorgi Interior Systems, Inc. v. Limbach, Ohio Board of Tax Appeal, No. 87-G-276 (Nov. 8, 1991); New Jersey Sales and Use Tax Reg. 18:24-5.5(b)(2); West Virginia State Tax Department Administrative Decision No. 01-381 U, 01-382 C (March 24, 2002); Vermont Sales Tax Regulation 226-7.VI; Utah State Tax Commission Advisory Opinion 96119, (Aug. 12, 1996); Massachusetts Department of Revenue, Letter Ruling 1981-44 (June 4, 1981); Missouri Department of Revenue Letter Ruling No. LR6105, (February 5, 2010). As an employee of the Texas Comptroller of Public Accounts explained in Letter No. 200112688L, which was sent to a scaffolding company in 2001:

The Texas Court of Appeals agreed that scaffolding should be treated as a rental of property rather than as the providing of a service:

While states uniformly treat charges for temporary scaffolding that is erected and left for use at a job site as rental charges, there is no uniformity about how sales tax applies to separately-stated charges for delivering, erecting, and dismantling the scaffolding. For example, some states do not tax separately-stated charges for the delivery and set up of rented scaffolding. Others tax both delivery and set up charges, as well as any other charges that are recovered by the scaffolding company under the rental contract. These can include charges to reimburse the rental company for per diem travel expenses, meals, motel rooms, and mileage, among other things. If the rental charge is subject to sales tax in these states, these charges are taxed even if the charges are separately stated on the invoice given to the customer.

The different sales tax treatment that states accord to rental charges comes about because state sales tax laws differ on whether the tax is imposed on an amount that includes delivery charges, installation charges, and set up charges. The amount that sales tax is imposed on is the "tax base," which for Kansas and many other states is the "sales or selling price." This is the amount that is multiplied by the tax rate to determines amount of sales tax owed by the customer.

In states that do not include delivery, installation, or set up charges in the sales tax base, the charges are not taxed if the charges are separately listed on the customer's invoice. In these states, the charges are taxed when they are lumped together with the rental charge. In states that include deliver, installation, and set up charges in the tax base, the charges are taxable even when they are separately listed on the customer's invoice.

The tax base for Kansas sales tax is found in K.S.A. 2009 Supp. 79-3602(ll)(1):

This definition shows that the Kansas tax base for rental of temporary scaffolding includes any separately-stated charges to deliver, set up, or dismantle the scaffolding. The tax base also includes any separately stated charges that are billed by the scaffold rental company to recover per diem travel expenses, meal costs, motel costs, mileage costs and other costs that the scaffold company recovers to pay for the expenses involved in renting the scaffolding. See e.g. Missouri Dept. of Revenue Letter Ruling No. LR6105 (Feb. 5, 2010). These are expenses of the seller, and are taxable under K.S.A. 2009 Supp. 79-3602(ll)(1)(B) even if the expense is re-billed to the customer at cost.

The "service" charges for delivering, erecting, and disassembling the temporary scaffolding are part of the taxable rental charge, and are taxed or exempted based on whether the scaffolding rental is taxed or exempted. Examples of scaffolding rentals that are not subject to sales tax are direct rentals to schools, hospitals, and Kansas governmental subdivisions. As used here, a "direct rental" means that the rental charge is billed to and paid by the schools, hospitals, and Kansas governmental subdivisions, rather than by a contractor hired by one of the exempt entities.

In Kansas, charges to deliver, erect, and disassemble temporary scaffolding are part of the rental charge for the scaffolding. These charges are taxable whether they are separately stated or lumped together as part of a single charge for the rental. The taxation of these services is not affected by the fact that the temporary scaffolding being rented is used on a project that qualifies for the original construction exception for labor services extended in K.S.A. 79-3603(p), or on a project that involves installation or repair services done to manufacturing machinery or equipment that are exempt under K.S.A. 79-3606(kk).

Date Composed: 04/26/2010 Date Modified: 04/26/2010