Is a city's charge to install a new residential water line, water meter, or electrical meter subject to Kansas sales tax?

Plain-English summary

A city installs a water line and meter, and separately an electrical meter and service, at newly built residential properties. The city owns the piping and meters, charges the property owner for the installation, and pays sales tax on all the materials when it buys them. It asked whether it must charge sales tax on the installation charges.

The installation charges are not taxable. Kansas exempts certain construction labor. As the Department explained, "Services performed to install or apply tangible personal property are exempt from sales tax when the services involve the original construction of a building or facility or, the reconstruction, restoration, remodeling, renovation, repair or replacement of a residence. K.S.A. 79-3603(p)."

Connecting utilities is original construction. The Department reasoned that "the first or initial construction of a residence is within the meaning of 'original construction of a building,'" that original construction "also includes the improvements immediately surrounding the building," and that "the connection of utilities is considered to be an improvement immediately surrounding the building."

Bottom line: the Department concluded "the service performed in both situations are not subject to Kansas retailers' sales tax," and that "sales tax was properly paid on the materials by the city." The labor to connect the new home's water and electric service is exempt original-construction service; the tax was correctly paid on the pipe, meters, and other materials.

What this means for you

Original-construction labor is exempt

Kansas does not tax installation or application of tangible personal property when the work is part of the original construction of a building or the reconstruction, restoration, remodeling, renovation, repair, or replacement of a residence. Connecting utilities to a brand-new home falls inside "original construction."

The materials are still taxed

The exemption is for the service, not the goods. The city correctly paid sales tax on the pipe, water meters, electrical meters, and other materials when it purchased them. The party doing exempt construction labor is generally the consumer of the materials it installs and pays tax on them.

Who bears the tax

Because the labor is exempt and tax is paid up front on materials, the property owner is not charged sales tax on the installation invoice. The tax has already been collected at the materials-purchase stage.

"Immediately surrounding" improvements count

The ruling treats improvements immediately surrounding the building — including the utility connections that make a new house usable — as part of original construction. That is why the water and electrical hookups qualify even though they are outside the walls of the house.

Common questions

Does the city charge the homeowner sales tax on the hookup fee?
No. The installation service for connecting a new home's water and electrical service is exempt as original-construction labor under K.S.A. 79-3603(p).

Did the city handle the materials correctly?
Yes. The Department confirmed "sales tax was properly paid on the materials by the city." The party performing exempt construction labor pays tax on the materials it installs.

Would this apply to a repair or a hookup at an existing home?
The exemption also covers "reconstruction, restoration, remodeling, renovation, repair or replacement of a residence." This particular ruling addresses new residential construction; other situations turn on their own facts.

Is a commercial building treated the same way?
The statute covers "original construction of a building or facility" generally, but this ruling addresses residential utility connections. Commercial or non-original work should be analyzed under the specific terms of K.S.A. 79-3603(p).

Citations and references

• K.S.A. 79-3603(p) — exempts services to install or apply tangible personal property when they involve the original construction of a building or facility, or the reconstruction, restoration, remodeling, renovation, repair, or replacement of a residence.
• 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 November 5, 1998 by Mark D. Ciardullo, Tax Specialist, Office of Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-182

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

November 5, 1998

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Dear XXXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated November 2, 1998. You seek a private letter ruling based on the following facts:

The city installs a water line and meter at a new residential property. The city owns all piping and water meter. The city charges the property owner for this installation. The city pays sales tax on all materials at the time of purchase.

The city installs electrical service at a new residential property. The city owns the electrical meter. The city charges the property owner for this installation. The city pays sales tax on all materials at the time of purchase.

Kansas law exempts from retailers’ sales tax certain construction services. Services performed to install or apply tangible personal property are exempt from sales tax when the services involve the original construction of a building or facility or, the reconstruction, restoration, remodeling, renovation, repair or replacement of a residence. K.S.A. 79-3603(p). The first or initial construction of a residence is within the meaning of “original construction of a building.” The “original construction of a building” also includes the improvements immediately surrounding the building. The connection of utilities is considered to be an improvement immediately surrounding the building.

It is the opinion of the Kansas Department of Revenue that the service performed in both situations are not subject to Kansas retailers’ sales tax. Sales tax was properly paid on the materials by the city.

This is a private letter ruling pursuant to Kansas Administrative Regulation 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 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 affects this ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 11/06/1998 Date Modified: 10/10/2001

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