Does a company owe Kansas sales tax when it only supervises subcontractors versus when its own employees perform the taxable labor?

Plain-English summary

A company that "operates a joint interest salt water disposal system and also performs geological consulting services" asked which of its services are taxable. It owns none of the heavy equipment (tank trucks, backhoes, trenchers, dozers, workover units, acid trucks, winch trucks) needed for the work. Instead, it subcontracts the equipment-intensive jobs and "provides an employee to oversee and supervise" them — about 85% of the jobs — while its own employees physically perform the remaining 15%.

The taxable-service statute. The Department quoted K.S.A. 79-3603 subsection (p), which taxes gross receipts for "repairing, servicing, altering or maintaining tangible personal property … whether or not any tangible personal property is transferred," including property "fastened to, connected with or built into real property."

Supervision-only contracts: no tax on the company's receipts. "No Kansas retailers' sales tax would be imposed on the gross receipts received by [the company] for contracts for which [it] merely provides an employee to supervise the work performed by subcontractors." In that situation, "[t]he subcontractors performing taxable services … would be required to charge and collect sales tax from [the company]."

Company-performed labor: the company collects tax and deducts already-taxed sub work. "On contracts for which [the company's] employees physically perform taxable labor services, [it] would be required to collect and remit sales tax on their gross receipts." Its subcontractors still "charge and collect sales tax from" the company, and the company "would take a deduction on their sales tax return for these already taxed services."

Bottom line: the tax treatment turns on who actually performs the taxable labor. When the company only supplies a supervisor over subcontractors, it owes no tax on those receipts (the subs tax it). When its own crews do the taxable work, it must collect and remit on its gross receipts, deducting the portions already taxed by its subcontractors to avoid double taxation.

What this means for you

Who performs the taxable labor drives the tax

If a company merely supervises subcontractors who do the taxable repairing/servicing/altering/maintaining, its own charge is not taxed — the subcontractors collect tax from it. If the company's own employees perform the taxable labor, the company must charge and remit tax on its receipts.

Taxable labor is defined by K.S.A. 79-3603(p)

The statute taxes services of repairing, servicing, altering, or maintaining tangible personal property, including property fastened to or built into real property. Whether a given job is taxable depends on whether it fits that description.

Avoid double tax with the resale-style deduction

When the company collects tax on a job its own crews perform but also paid its subcontractors sales tax on taxable services within that job, it deducts those already-taxed subcontractor services on its return, so the same service is not taxed twice.

Keep subcontractor tax documentation

Because the deduction depends on the subcontractors having charged the company tax on their taxable services, the company should keep records showing tax was already paid on those subcontracted services.

Common questions

Does the company owe tax when it only supervises subcontractors?
No. On contracts where the company merely provides an employee to supervise the subcontractors' work, no Kansas sales tax is imposed on the company's receipts; the subcontractors charge the company tax.

What about jobs the company's own employees perform?
The company must collect and remit sales tax on its gross receipts for those taxable labor services.

How does the company avoid paying tax twice?
It takes a deduction on its sales tax return for the subcontractor services that were already taxed when the subs charged the company.

Which services are taxable?
Those described in K.S.A. 79-3603(p) — repairing, servicing, altering, or maintaining tangible personal property, including property fastened to or built into real property.

Citations and references

• K.S.A. 79-3603(p) (quoted as "K.S.A. 79-3603 subsection (p)") — imposes Kansas sales tax on gross receipts for repairing, servicing, altering, or maintaining tangible personal property, including property fastened to, connected with, or built into real property.
• The ruling also applies the general rule that a supervisor-only arrangement leaves the taxable service (and its tax collection) with the subcontractors, and allows a deduction for already-taxed subcontracted services.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued August 28, 1998 by Mark D. Ciardullo, Tax Specialist, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-112

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 28, 1998

XXXXXXXXXXXXXXXXXXXXXXXXXXX
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Dear XXXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated June 18, 1998. This is a private letter ruling pursuant to Kansas Administrative Regulation 92-19-59.

You generally stated in your letter that XXXXXXXXXXXXXXXXXXXXXXXXXX
operates a joint interest salt water disposal system and also performs geological consulting services. Among your customers there is confusion determining which services are taxable.

You stated that your company does not own any tank trucks, backhoes, trenchers, doziers, work over units, acid trucks and winch trucks necessary to complete listed services. Contracts for services performed that require heavy equipment are subcontracted out from numerous vendors and service companies. XXXXXXX provides an employee to oversee and supervise the jobs which require a contractor. This accounts for approximately 85 percent of the jobs. The remaining 15 percent is actually physically performed by your employees.

K.S.A. 79-3603 subsection (p) imposes tax on gross receipts received for the service “of repairing, servicing, altering or maintaining tangible personal property. . .which when such services are rendered is not being held for sale in the regular course of business, and whether or not any tangible personal property is transferred in connection therewith. The tax imposed by this section shall be applicable to the services of repairing, servicing, altering or maintaining an item of tangible personal property which has been and is fastened to, connected with or built into real property.”

No Kansas retailers’ sales tax would be imposed on the gross receipts received by XXXXXX for contracts for which XXXXXXXXX merely provides an employee to supervise the work performed by subcontractors. The subcontractors performing taxable services in this scenario would be required to charge and collect sales tax from XXXXXX.

On contracts for which XXXXXXXXXXX employees physically perform taxable labor services, XXXXX would be required to collect and remit sales tax on their gross receipts. The subcontractors performing taxable services in this scenario would be required to charge and collect sales tax from XXXXXXXXX. XXXXXXXXXXX would take a deduction on their sales tax return for these already taxed services.

This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially effects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 09/14/1998 Date Modified: 10/10/2001

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