How does Kansas sales and use tax apply to a quarry operator that also uses its rock to perform construction contracts?

Plain-English summary

A representative asked how Kansas sales and use tax applies to a client that operates a quarry in Kansas, sells the quarried materials at retail, and also uses those materials to perform its own construction contracts. The Department ruled the client is a "contractor-retailer" and explained three controlling concepts.

1. Severed rock is tangible personal property. "[S]ales of sand and gravel are sales of tangible personal property. When sand, rock, minerals, trees, crops, trees, sod, and other items that are affixed to or part of real property are severed from real property, they become tangible personal property," and the sale is subject to the retailers' sales tax act. "This means that you client is operating as a retailer when it sells rock from the quarry."

2. Contractors are the final consumers of their materials. "[C]ontractors are the final consumers of the tangible personal property used to perform a construction contract. K.S.A. 79-3603(l). Contractors are viewed as consumers because they convert materials into real property --- they do not resell them as tangible personal property."

3. Two reporting paths on the operator's own jobs. "When labor services are taxed, you client simply needs to charge tax on the entire amount billed to the customer, less any tax paid subcontractors or tax paid materials. See K.A.R. 92-19-66b(b)." But "[w]here the contract involves labor services that are not taxed or rock is used in another state, your client will be viewed as a consumer and will have to determine his costs for quarrying the rock. It is on this amount that tax must be remitted." That cost is figured using "the same accounting mechanism that is used to determine the retail selling price, but excluding the mark-up taken as a profit on retail sales." Out-of-state job materials are taxed because the operator "is withdrawing the rock from the Kansas inventory for use outside Kansas."

The Department invited the client to have the Tax Compliance Section review how it accrues materials costs.

What this means for you

Quarry operators who also do construction

You wear two hats. When you sell rock, sand, or gravel to others, you are a retailer and charge sales tax. When you use your own quarried material on a construction job, you are a contractor and the material is treated as consumed by you.

Taxable-labor jobs vs. exempt-labor and out-of-state jobs

On a Kansas job with taxable labor, charge tax on the whole bill less tax-paid subcontractors and materials (K.A.R. 92-19-66b(b)). On a job where the labor is not taxed, or where you haul the rock out of state, you owe tax on your cost of quarrying the rock, not the retail price.

Use a cost basis, not the retail price, for consumed rock

Figure the taxable cost of self-used rock with your normal retail-price accounting but strip out your profit markup. Consider asking the Department's Tax Compliance Section to review your accrual method.

Common questions

Q: Is a quarry operator a retailer or a contractor?
A: Both — a "contractor-retailer." It is a retailer when it sells rock, and a contractor (final consumer of the material) when it uses its own rock on a construction job.

Q: How is tax handled on the operator's own construction jobs?
A: If the labor is taxable, charge tax on the full amount billed less tax-paid subcontractors and materials. If the labor is exempt, or the rock is used out of state, accrue tax on the operator's cost of quarrying the rock.

Q: What is the "cost" of the self-used rock?
A: The operator's own cost to quarry it — computed with the same accounting used to set the retail selling price, but excluding the profit markup.

Citations and references

• K.S.A. 79-3603(l) — the imposition provision under which contractors are treated as the final consumers of the tangible personal property they build into real property (they do not resell it as tangible personal property).
• K.A.R. 92-19-66b(b) — for a taxable-labor construction job, allows the contractor-retailer to charge tax on the entire amount billed to the customer less tax-paid subcontractors and tax-paid materials.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2000-018

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

October 2, 2000

XXXXX
XXXXX
XXXXX

RE: Your letter of September 11, 2000

Dear XXXXX:

I have been asked to answer your letter that we received last month. In it, you ask what the sales tax consequences are for a business that operates a quarry in Kansas and performs construction contracts with rock and other materials removed from the quarry. The quarried materials are sold at retail to others and are used by the quarry operator when it performs construction contracts. These two activities make your client a contractor-retailer for Kansas purposes. I believe that it may make them dual operators, under Missouri laws.

There are three basic concepts that control how Kansas sales and use tax applies to your client. The first is that sales of sand and gravel are sales of tangible personal property. When sand, rock, minerals, trees, crops, trees, sod, and other items that are affixed to or part of real property are severed from real property, they become tangible personal property. Once something has become tangible personal property, its sale or use in Kansas is subject to the Kansas retailers’ sales tax act. This means that you client is operating as a retailer when it sells rock from the quarry.

The second controlling concept is that contractors are the final consumers of the tangible personal property used to perform a construction contract. K.S.A. 79-3603(l). Contractors are viewed as consumers because they convert materials into real property --- they do not resell them as tangible personal property.

When your client performs a job using rock and other quarried materials in Kansas, they can have two different reporting obligations depending on whether their labor services are taxed or exempt. When labor services are taxed, you client simply needs to charge tax on the entire amount billed to the customer, less any tax paid subcontractors or tax paid materials. See K.A.R. 92-19-66b(b). This will produce the correct amount of tax for the state since no tax has been paid on the quarried rock and other materials. This is can be viewed as the taxable sale of the materials and the taxable sale of the labor services.

Where the contract involves labor services that are not taxed or rock is used in another state, your client will be viewed as a consumer and will have to determine his costs for quarrying the rock. It is on this amount that tax must be remitted to the state. If your client is selling quarried rock to the public, your client already has an accounting mechanism in place to determine their costs for quarried materials. This is a requirement for any quarry that intends to stay in business.

Your client should use the same accounting mechanism to determine their cost of materials they use on a job. Essentially, this means using the same accounting mechanism that is used to determine the retail selling price, but excluding the mark-up taken as a profit on retail sales. It is on this basis that your client would be required to accrue tax for Kansas jobs that involve non-taxable labor services, and out-of-state jobs. The materials for the out-of-state job are taxed because your client is acting as a contractor-retailer who is withdrawing the rock from the Kansas inventory for use outside Kansas.

Please note that when this issue has come up in the past, businesses have asked our auditors to review the way in which they accrue materials costs. If you would like to do this, please contact Bob Lewis in our Tax Compliance Section at (785) 296-7487.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

cc: Bob Lewis

Date Composed: 10/03/2000 Date Modified: 10/10/2001

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