How does Kansas tax an out-of-state dealer that builds fabric-covered steel farm shelters in Kansas?

Plain-English summary

A dealer that operates in Iowa, Missouri, Nebraska, and Kansas sells and erects fabric-covered steel shelters that "have the appearances of Quonset huts" — tubular or trussed steel arches on pilings or foundations, covered by strapped-on fabric, "normally built for farm use." It asked what its Kansas sales tax reporting duties are.

The shelters are buildings, so the dealer is a contractor-consumer. "These shelters are considered to be building for purposes of Kansas sales tax law. In Kansas contractors are considered to be consumers of the tangible personal property that they purchase to construct buildings or otherwise improve real property. K.S.A. 79-3603(l)." That makes the company "liable for use tax on the cost of the materials that you use in Kansas to construct or repair the shelters."

Materials pulled from untaxed Iowa inventory owe Kansas compensating use tax. The Department noted that Iowa law exempts materials a contractor-retailer withdraws from inventory for use in another state. So if the company is not paying Iowa tax on materials it uses in Kansas, it "should accrue and remit compensating tax to Kansas on the cost of materials that are removed from Iowa inventory and incorporated into shelters built here," including lumber.

Materials bought locally, and rate differences. When performing a Kansas job, the company must pay sales tax on additional materials bought from Kansas vendors. If it buys materials in another state at a lower rate than Kansas, it must "accrue Kansas use tax on the difference between the two state tax rates. K.S.A. 79-3705."

Original construction labor is exempt; repair/maintenance labor is taxable. "Kansas taxes labor services when they are done to repair or maintain a building or other structure. Construction services that involve the first or initial construction of a building are exempt from sales tax. K.S.A. 79-3603(p)." For original construction, the company's duties are complete once it remits compensating tax on the materials; for repair or maintenance, it must follow K.A.R. 92-19-66b.

Farm equipment vs. materials. Kansas exempts sales of farm machinery and equipment — "such things as feeders, waterers, bulk bins, and livestock panels" — but "[t]his exemption does not extend to materials that you buy to fabricate equipment."

Bottom line: because these farm shelters are buildings, the dealer is treated as a contractor that consumes its own materials and owes Kansas compensating use tax on them (including materials drawn from untaxed Iowa inventory). Its first-time construction labor is exempt, while repair and maintenance labor is taxable.

What this means for you

A contractor is the consumer of its building materials

When a dealer erects a building, Kansas treats it as a contractor, not a retailer of the materials. Under K.S.A. 79-3603(l), the contractor is the final consumer of the materials and owes tax on their cost — it does not collect sales tax from the farm customer on the materials.

Untaxed inventory from another state triggers Kansas compensating (use) tax

Materials a contractor draws from out-of-state inventory that were never taxed must be reported for Kansas compensating use tax when used on a Kansas job. Here, materials withdrawn tax-free from Iowa inventory and built into Kansas shelters owe Kansas use tax on their cost.

Watch the rate-difference rule on cross-border purchases

If the contractor buys materials in another state and pays a lower sales tax rate than Kansas, it owes Kansas use tax on the difference under K.S.A. 79-3705. Paying some tax elsewhere does not fully clear the Kansas obligation.

Original construction labor is exempt; repair and maintenance labor is not

Labor to build a structure for the first time is exempt under K.S.A. 79-3603(p). Labor to repair or maintain an existing structure is taxable, and the contractor must follow the reporting rules in K.A.R. 92-19-66b for that work.

Farm machinery is exempt, but fabrication materials are not

Sales of farm machinery and equipment (feeders, waterers, bulk bins, livestock panels) are exempt, but that exemption does not reach materials the company buys to fabricate its own equipment.

Common questions

Is a fabric-covered steel farm shelter a "building" in Kansas?
Yes. The Department treated these Quonset-style, steel-arch fabric shelters as buildings for Kansas sales tax purposes, which makes the person erecting them a contractor.

Does the builder charge the farmer sales tax on the materials?
No. As a contractor, the builder is the consumer of the materials and owes tax on their cost itself, rather than collecting sales tax from the customer on the materials.

Why does the builder owe Kansas compensating use tax?
Because it withdraws materials from Iowa inventory without paying Iowa tax (Iowa exempts inventory used out of state), so Kansas compensating use tax is due on the cost of those materials when they are built into Kansas shelters.

Is the labor taxable?
Original, first-time construction labor is exempt under K.S.A. 79-3603(p). Labor to repair or maintain an existing structure is taxable, and must be reported under K.A.R. 92-19-66b.

Is farm equipment exempt?
Sales of farm machinery and equipment such as feeders, waterers, bulk bins, and livestock panels are exempt, but materials bought to fabricate equipment are not covered by that exemption.

Citations and references

• K.S.A. 79-3603(l) — Kansas treats contractors as the consumers of the tangible personal property they buy to construct buildings or improve real property, making the builder liable for tax on the cost of its materials.
• K.S.A. 79-3705 — requires accruing Kansas compensating use tax on the difference when materials are bought in another state at a lower rate than Kansas.
• K.S.A. 79-3603(p) — exempts labor services for the original (first or initial) construction of a building, while repair and maintenance labor remains taxable.
• K.A.R. 92-19-66b — reporting requirements the contractor must follow for taxable repair or maintenance services (enclosed with the ruling); the Kansas farm machinery and equipment exemption is described in prose.
• 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 October 2, 1998 by Thomas E. Hatten, Attorney, Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-139

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 2, 1998

XXXXXXX
XXXXXXX
XXXXXXX
XXXXXXX

RE: Your letter inquiry

Dear XXXXXXX:

Thank you for providing me with a brochure that describes the XXXX. Your company is a dealer for these shelters and operates in Iowa, Missouri, Nebraska and Kansas. You ask what your sales tax reporting duties are for Kansas.

The XXXX have the appearances of Quonset huts, but are constructed of tubular steel arches or trussed steel arches that are placed on pilings or other supporting foundations. The arches are covered by fabric, which is strapped to the supports. XXXX are normally built for farm use.

These shelters are considered to be building for purposes of Kansas sales tax law. In Kansas contractors are considered to be consumers of the tangible personal property that they purchase to construct buildings or otherwise improve real property. K.S.A. 79-3603(l). This makes your company liable for use tax on the cost of the materials that you use in Kansas to construct or repair the shelters.

I believe that Iowa law exempts materials that a contractor/retailer or contractor/manufacturer removes from inventory for use in another state. Iowa Code Sec. 422.42(15) provides, in relevant part:

Sales of building materials, supplies and equipment to owners, contractors, subcontractors or builders, for the erection of buildings or the alteration, repair or improvement of real property, are retail sales in whatever quantity sold. . . The tax shall not be due when materials are withdrawn from inventory for use in construction outside of Iowa and the tax shall not apply to tangible personal property purchased and consumed by the manufacturer as building materials in the performance by the manufacturer or its subcontractor of construction outside of Iowa.

Iowa Rule 701-19.4(4) provides:

Contractor-retailers do not pay tax on materials withdrawn from inventory for use in construction projects performed outside Iowa. See Iowa Code Supplement section 422.42(15).

Because of these laws, I believe that XXXX is not paying tax to Iowa on materials that it uses in Kansas to construct the shelters. If this is true, XXXX should accrue and remit compensating tax to Kansas on the cost of materials that are removed from Iowa inventory and incorporated into shelters built here. This includes lumber and other materials that you withdraw from Iowa inventory. If Iowa classifies you as something other than a contractor/retailer or contractor/manufacturer, please advise me and describe how you are paying tax to Iowa on materials that you use in other states.

When you perform a job in Kansas, you are required to pay sales tax on any additional materials that you purchase from Kansas vendors for use on the project. If you purchase materials in another state for use on a project here and pay sales tax at a rate that is less than the Kansas rate, you are required to accrue Kansas use tax on the difference between the two state tax rates. K.S.A. 79-3705.

Kansas taxes labor services when they are done to repair or maintain a building or other structure. Construction services that involve the first or initial construction of a building are exempt from sales tax. K.S.A. 79-3603(p). This means that for the original construction of one of your shelters, your tax reporting duties for Kansas are complete when you accrue compensating tax on the cost of the materials and remit it to Kansas, unless incidental taxes are due as described in the preceding paragraph. For repair or maintenance services, you must comply with the reporting requirements set out in K.A.R. 92-19-66b. I have enclosed a copy of the regulation for your use.

Kansas exempts sales of farm machinery and equipment. Farm equipment includes such things as feeders, waterers, bulk bins, and livestock panels. This exemption does not extend to materials that you buy to fabricate equipment. I hope that this answers all of your questions. Please call me at (785) 296-4008, if you have any additional questions that you wish to discuss.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It 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 ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Enclosure

Date Composed: 10/05/1998 Date Modified: 10/10/2001

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