How is the taxable base figured for a taxable installation/application contract, and can a contractor deduct overhead and profit?

Plain-English summary

A contractor asked how Kansas sales tax applies to installation and remodeling work. The Department quoted the statute imposing tax on "the service of installing or applying tangible personal property," then explained how to compute the taxable amount.

The taxable base for all contracts involving the application or installation of tangible personal property is the difference between the contract price and the cost of materials, supplies, and payments to subcontractors — including any sales or compensating tax the contractor paid on those materials, supplies, and subcontractor charges — plus any excavation charges the contractor purchased to complete the contract.

Importantly, a contractor may not deduct overhead. Like any retail business, the contractor's profit (including markup on materials) and overhead are figured into the total charged the customer and are therefore subject to sales tax. The Department listed non-deductible items:

• building permits
• consumable supplies, such as form lumber and sandpaper
• employee labor costs
• lease payments for tools, equipment, and machinery
• office supplies
• per diem and travel expenses
• sewer hook-up fees
• utilities

When the labor services are subject to Kansas sales tax, the overhead and profit associated with the job are likewise subject to sales tax.

What this means for you

If your installation or remodeling labor is taxable in Kansas, you can back out the materials/supplies/subcontractor costs you already paid tax on — but not your overhead or profit.

• Deduct from the contract price: material and supply costs, subcontractor payments (with tax the contractor paid on them), and excavation charges purchased to complete the contract.
• Do not deduct overhead or profit. Markup on materials, profit, and overhead are baked into the customer's total and stay in the taxable base.
• Non-deductible costs specifically include building permits, consumable supplies (form lumber, sandpaper), employee labor, tool/equipment/machinery leases, office supplies, per diem/travel, sewer hook-up fees, and utilities.
• Tie it to taxability of the labor. This computation matters when the labor service is taxable; overhead and profit follow the taxability of the underlying job.

Common questions

How do I compute the taxable base for an installation contract?
Start with the contract price and subtract the cost of materials, supplies, and subcontractor payments (including tax already paid on them) and excavation charges. The remainder is the taxable base.

Can I deduct my overhead or profit?
No. Overhead, markup on materials, and profit are part of the total charged the customer and remain taxable.

What are examples of non-deductible items?
Building permits, consumable supplies (form lumber, sandpaper), employee labor, tool/equipment leases, office supplies, per diem and travel, sewer hook-up fees, and utilities.

When does this apply?
When the labor service itself is subject to Kansas sales tax; then the associated overhead and profit are taxable as well.

Citations and references

• The ruling quotes the Kansas statute imposing tax on the service of installing or applying tangible personal property and explains the taxable-base computation (contract price less materials/supplies/subcontractor costs and excavation, with overhead and profit non-deductible).

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1998-07.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

January 27, 1998

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RE: XXXXXXXXXXXXX

Dear XXXXXXXXX:

We wish to acknowledge receipt of your letter dated December 3, 1997, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3606(p) imposes a sales tax upon: “the gross receipts received for the service of installing or applying tangible personal property. . .”

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 subcontractors charges, and any excavation charges purchased by the contractor to complete the contract.

Like any other retail business, your profit (including the mark-up on materials) and overhead costs are figured into the total charged the customer and are therefore subject to sales tax. A contractor may not deduct overhead expenses when figuring the taxable amount of a given contract, that would be subject to sales tax in the state of Kansas.

Non-deductible items include:

building permits
consumable supplies, such as form lumber and sand paper
employee labor costs
lease payments for tools, equipment and machinery
office supplies
per diem and travel expenses
sewer hook-up fees
utilities

In closing, when the labor services are subject to sales tax in the state of Kansas, the overhead and profit associated with the particular job would likewise be subject to sales tax in this state.

If I may be of further assistance, please contact me at your earliest convenience at (913) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 02/04/1998 Date Modified: 10/10/2001

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