Must an out-of-state oil-well service company register for Kansas sales and withholding taxes when its employees perform work at Kansas wells?

Plain-English summary

An out-of-state company claimed it had no physical presence in Kansas even though it sent employees into Kansas to service oil and gas wells. The Department said that was incorrect: the employees' Kansas work created physical presence and tax nexus under the letter's reliance on General Trading Co. v. State Tax Commissioner of Iowa, 322 U.S. 335 (1944).

The company therefore had to register with the Kansas Department of Revenue as a retailer doing business in Kansas and complete the Kansas business-tax application so the Department could register it for the applicable taxes, including the sales and withholding taxes the company asked about.

The Department also gave the substantive sales-tax rule: labor services performed at oil or gas wells are taxable, but services performed during the first or initial construction of a well are exempt. It referred the company to Revenue Ruling 19-2002-2 and the Department's companion questions and answers for the detailed treatment of drilling contractors, well-service providers, and producers.

What this means for you

Out-of-state well-service companies

Employees who enter Kansas to perform well services create a Kansas presence under this opinion. Register before performing the work and determine the required sales and withholding accounts through the business-tax application.

Oil and gas operators

Expect Kansas sales tax on well-service labor unless the work qualifies as first or initial construction of the oil or gas well. Repair, servicing, or later work is not brought within that stated exemption merely because it occurs at a well.

Payroll and tax teams

The letter answers registration for both sales and withholding tax. Coordinate the company's job records and Kansas employee workdays with the accounts established through the registration process.

Common questions

Q: Does sending employees to Kansas create nexus even without an office or property there?
A: Yes. The Department treated employees physically servicing Kansas wells as sufficient physical presence.

Q: Must the company register for Kansas sales tax?
A: Yes. The Department said it must register as a retailer doing business in Kansas.

Q: What about Kansas withholding tax?
A: The company also had to register through the Kansas business-tax application, whose answers determine the tax accounts it must report, including withholding.

Q: Are all oil- and gas-well labor services taxable?
A: The letter says they are taxable except when performed during the first or initial construction of the well.

Citations and references

• General Trading Co. v. State Tax Commissioner of Iowa, 322 U.S. 335 (1944) — employee presence and state tax jurisdiction, as cited by the Department
• Kansas Publication KS-1216 — Kansas Business Tax Application Booklet
• Form CT-16 — Kansas Business Tax Application Form cited in the letter
• Kansas Revenue Ruling 19-2002-2 — Sales taxation of drilling contractors, well service providers, and oil and gas producers

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2011-002

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

January 24, 2011

XXXXX
XXXXX
XXXXX

RE: Your e-mail received January 18, 2011

Dear XXXXX:

I have been asked to answer your recent e-mail. Your company occasionally performs oil well services in Kansas. You ask if your company is required to register with the Kansas Department of Revenue for sales tax and withholding tax purposes. The answer is yes.

You state that your company has no physical presence in Kansas. This is incorrect. Your company sends its employees into Kansas to service oil and gas wells here. For nexus purposes, the physical presence of employees in Kansas servicing oil and gas wells shows your company is subject to the jurisdiction of the State of Kansas. See General Trading Co. v. State Tax Commissioner of the State of Iowa, 322 US 335 (1944). Your company must abide by Kansas tax laws when it does business here just as its employees must abide by Kansas traffic and criminal laws during their stay here. Your company has nexus with Kansas for tax purposes and must register as a retailer doing business here.

To register, please download Publication KS-1216, Kansas Business Tax Application Booklet, from our web site, www.ksrevenue.org. Your company must follow the booklet's instructions, complete the CT-16, Kansas Business Tax Application Form in the KS-1216, and submit the completed form to the department. The answers given in the application form determine the different taxes a business will be registered to report.

Kansas sales tax is imposed on labor services performed at oil or gas wells. It exempts these services when they are performed during the first or initial construction of an oil or gas well. I have enclosed a copies of Revenue Ruling 19-2002-2, Sales taxation of drilling contractors, well service providers, and oil and gas producers, (10/21/2002), and Questions and Answers, Drilling contractors, well service providers, and oil and gas producers (10/21/2002). These publications explain how Kansas sales tax applies to a business like yours.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Enclosures

Date Composed: 01/24/2011 Date Modified: 01/24/2011

Table 1

Table 2