On a project that adds a new addition to an existing grocery store and remodels the old space, which labor is exempt and which is taxable?

Plain-English summary

A general contractor described a two-part project on an existing grocery store: (1) building "a new addition that will be occupied by a new front entry, deli, bakery, and seating area," and (2) a "remodeling phase" that relocates the existing checkouts, reworks the customer-service area, and changes "the original deli/bakery into an office and retail sales area." The contractor asked the Department to confirm how Kansas sales tax applies to each part.

The statute. K.S.A. 79-3603(p) taxes "the service of installing or applying tangible personal property," but with an exception: "no tax shall be imposed upon the service of installing or applying tangible personal property in connection with the original construction of a building or facility." "Original construction" is "the first or initial construction of a new building or facility" and expressly "include[s] the addition of an entire room or floor to any existing building or facility."

The holding. The Department confirmed the contractor's own understanding was correct: "The labor services you provide for the portion of the project which is original construction will not be subject to Kansas sales tax. The labor services you provide for the remodeling portion of the project will be subject to Kansas sales tax at the rate of 4.9%, plus any local sales tax."

Materials. The ruling reflects the contractor's stated understanding that on the construction it pays sales tax on materials and equipment purchased or rented; the labor exemption applies only to the original-construction phase.

Bottom line: the new addition is original construction (exempt labor); the remodel of the existing space is taxable labor. The line is drawn between building something entirely new and reworking what is already there.

What this means for you

Adding an entire room or floor is exempt original construction

Building a genuinely new addition — here, a new entry, deli, bakery, and seating area — is "original construction" under K.S.A. 79-3603(p) because it adds an entire room to an existing building. The installation labor for that part is not taxed.

Remodeling existing space is taxable labor

Relocating checkouts, reworking a service area, and converting existing rooms to new uses is remodeling, not original construction. That labor is taxable at the state rate (4.9% at the time) plus any local tax.

Split the contract between the two phases

When one project mixes exempt new construction and taxable remodeling, the labor has to be allocated between the phases. Keep the original-construction work and the remodeling work clearly separated in the billing so the exempt and taxable labor are documented.

Materials are taxable either way

The contractor pays sales tax on the materials and equipment it buys or rents for the job — on both the exempt-labor and the taxable-labor phases. The exemption is for installation labor only.

Common questions

Q: Is the labor to build a new grocery-store addition taxable?
A: No. Adding an entire new room/area to an existing building is original construction under K.S.A. 79-3603(p), so that labor is exempt.

Q: Is the labor to remodel the existing store taxable?
A: Yes. The remodeling phase — relocating checkouts and converting old space to new uses — is taxable at 4.9% plus any local sales tax.

Q: Are the contractor's materials exempt on the new-addition part?
A: No. The contractor pays sales tax on materials and equipment purchased or rented for the project; only the original-construction installation labor is exempt.

Citations and references

• K.S.A. 79-3603(p) — taxes installation/application labor, with an exception for original construction of a building or facility; "original construction" includes the addition of an entire room or floor to an existing building.
• K.A.R. 92-19-66b — interprets the statute on labor services (a copy was enclosed with the ruling), distinguishing exempt original construction from taxable remodeling.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-139

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

June 28, 1999

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Sales Tax

Dear XXXXX:

Your correspondence of May 15, 1999, has been referred to me for response. Thank you for your inquiry.

Your letter indicates you are a general contractor ready to start a building project for an existing grocery store in Atchison, Kansas. The project consists of constructing a new addition that will be occupied by a new front entry, deli, bakery, and seating area. You note it will be necessary to remove the existing walls to allow for construction of the new addition.

You go on to indicate it is your understanding that all work associated with the addition is designated as original construction including: building foundations, walls, roof system, electrical feed from the existing panel, water and natural gas service from the existing, sewer extension to the existing sewer line, removal of existing walls and finishes to allow for the new construction. You note the sales tax you will need to pay on this area of construction will be for materials and equipment purchased or rented during construction. You also note you do not have to pay sales tax on your labor, owned equipment, overhead or profit.

Your letter also indicates you have a remodeling phase of construction. This work includes the relocation of the existing checkouts, remodeling of the customer service area, and changing the original deli/bakery into an office and retail sales area. You note it is your understanding that you need to pay sales tax on all your material, labor, rented or purchased equipment, owned equipment, overhead and profit.

By your letter you ask that we clarify in writing the application of sales tax to your construction project. You also ask that we clarify the rate of tax as it applies to original and remodeling construction.

The Kansas retailer’s sales tax (at the rate of 4.9%) is imposed by K.S.A. 79-3603. Subsection (p) of the statute provides for the imposition of sales tax on:

(p) the gross receipts received for the service of installing or applying tangible personal property which when installed or applied is not being held for sale in the regular course of business, and whether or not such tangible personal property when installed or applied remains tangible personal property or becomes a part of real estate, except that no tax shall be imposed upon the service of installing or applying tangible personal property in connection with the original construction of a building or facility, the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence or the construction, reconstruction, restoration, replacement or repair of a bridge or highway.
For the purposes of this subsection:
(1) “Original construction” shall mean the first or initial construction of a new building or facility. The term “original construction” shall include the addition of an entire room or floor to any existing building or facility, the completion of any unfinished portion of any existing building or facility and the restoration, reconstruction or replacement of a building or facility damaged or destroyed by fire, flood, tornado, lightning, explosion or earthquake, but such term, except with regard to a residence, shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances;
(2) “building” shall mean only those enclosures within which individuals customarily are employed, or which are customarily used to house machinery, equipment or other property, and including the land improvements immediately surrounding such building;
(3) “facility” shall mean a mill, plant, refinery, oil or gas well, water well, feedlot or any conveyance, transmission or distribution line of any cooperative, nonprofit, membership corporation organized under or subject to the provisions of K.S.A. 17-4601 et seq., and amendments thereto, or of any municipal or quasi-municipal corporation, including the land improvements immediately surrounding such facility; and
(4) “residence” shall mean only those enclosures within which individuals customarily live;

The statute is interpreted, in part, by K.A.R. 92-19-66b. This regulation deals with the topic of labor services. A copy is enclosed for your convenience.

Based on the information provided in your letter, your understanding of the application of Kansas sales tax to the construction project in question is correct. The labor services you provide for the portion of the project which is original construction will not be subject to Kansas sales tax. The labor services you provide for the remodeling portion of the project will be subject to Kansas sales tax at the rate of 4.9%, plus any local sales tax.

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 make 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 private letter ruling.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

Enclosure: K.A.R. 92-19-66b

Date Composed: 07/07/1999 Date Modified: 10/11/2001

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