Are excavation and backhoe services subject to Kansas sales tax?

Plain-English summary

An owner-operated backhoe business asked how Kansas sales tax applies to its excavation work. It described: "We own one backhoe and it is operated by the owner. We perform the digging necessary to install water lines, sewer lines and storm cellars. We also, dig ditches and smooth dirt around house and yards. We do not install any tangible property."

The taxing statute. K.S.A. 79-3603(p) imposes tax on "the gross receipts received for the service of installing or applying tangible personal property . . . 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." "Original construction" is defined in K.S.A. 79-3603(p)(1) to mean the first or initial construction of a new building (plus certain additions, completions, and disaster restorations), "but such term, except with regard to a residence . . . shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances."

Residences are treated specially. "Because of the exception for residences, backhoe services performed at a residence are not subject to tax." The Department pointed to Notice 98-02 for what qualifies as a residence and an apportionment method for mixed residential/commercial use, and noted the residential treatment "extends to apartments, nursing homes, dormitories and other similar place where people reside."

Excavation itself isn't a taxable installation service. Relying on In re Bernies' Excavating Services, Inc., 13 Kan. App. 2d 476, 772 P.2d 822 (1989) — where "the court ruled that the gross receipts from excavation services performed are not subject to Kansas retailers' sales tax imposed under K.S.A. 79-3603(p)" — the Department explained that excavation at a non-residential site "are subject to tax unless they are separately billed or separately stated as a line item on a bill." A "billing for backhoe services for excavation only, that does not involve any installation services, is considered to be separately billed and exempt."

The three exempt situations. The Department summarized when excavation escapes tax: (1) "in connection with the original construction of a building or facility"; (2) "in connection with remodeling of a residence"; and (3) "at any site, if these services are separately billed or separately stated as a line item on a bill."

Bottom line: excavation/backhoe work is broadly exempt — always for original construction and for residential work, and otherwise whenever the excavation charge is separately billed or line-itemed. It becomes taxable mainly when it is bundled into a non-residential installation service without being separately stated.

What this means for you

Excavation and earthmoving contractors

Your digging is not the taxable installation of tangible personal property. To keep it exempt on a mixed commercial job, bill the excavation separately or show it as its own line item; excavation-only invoices are treated as separately billed and exempt.

Residential jobs

Backhoe and excavation work at a residence — including apartments, nursing homes, dormitories, and similar dwellings — is not taxed, because residential remodeling falls within "original construction." Use Notice 98-02 to confirm what counts as a residence and to apportion mixed residential/commercial sites.

Where tax can attach

Excavation bundled into a taxable non-residential installation job, without being separately billed or line-itemed, can be swept into the taxable service charge. Keep your billing clean so the exempt excavation portion stands on its own.

Common questions

Q: Is backhoe/excavation work taxable in Kansas?
A: Generally no. It is exempt for original construction, for residential work, and — at any site — when the excavation is "separately billed or separately stated as a line item on a bill."

Q: Why is excavation at a home never taxed?
A: Because "original construction" includes residential remodeling under K.S.A. 79-3603(p)(1), so "backhoe services performed at a residence are not subject to tax."

Q: What makes excavation exempt on a commercial site?
A: Separately billing it or stating it as a line item. Under In re Bernies' Excavating Services, excavation-only charges are not taxable installation services under K.S.A. 79-3603(p).

Citations and references

• K.S.A. 79-3603(p) — imposes Kansas sales tax on the service of installing or applying tangible personal property, except in connection with the original construction of a building; the statute the Department analyzed.
• K.S.A. 79-3603(p)(1) — defines "original construction," including the residence exception that makes residential remodeling nontaxable.
• In re Bernies' Excavating Services, Inc., 13 Kan. App. 2d 476, 772 P.2d 822 (1989) — held excavation-service receipts are not taxable under K.S.A. 79-3603(p); the basis for exempting separately billed excavation.
• Notice 98-02 — the Department's guidance on what qualifies as a residence and how to apportion mixed residential/commercial use.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-195

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 9, 1999

XXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXX

Dear XXXXXXXXXXXXX:

I have been asked to respond to your letter dated August 3, 1999. In it, you ask for guidance pertaining to Kansas retailers’ sales tax on excavation services .

I have summarized the pertinent facts of your letter:

We own one backhoe and it is operated by the owner. We perform the digging necessary to install water lines, sewer lines and storm cellars. We also, dig ditches and smooth dirt around house and yards. We do not install any tangible property.

The Kansas retailers’ sales tax law imposes tax on “the gross receipts received for the service of installing or applying tangible personal property. . .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 . . .” K.S.A. 79-3603(p).

“Original construction” means “the first or initial construction of a new building. . .and includes 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 [emphasis added], shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances;” K.S.A 79-3603(p)(1).

Because of the exception for residences, backhoe services performed at a residence are not subject to tax. Please note that Notice 98-02 identifies what qualifies as a residence and provides an apportionment method when a residence has mixed residential and commercial use. This exemption extends to apartments, nursing homes, dormitories and other similar place where people reside.

Backhoe services performed at a site other than a residence are subject to tax unless they are separately billed or separately stated as a line item on a bill. This means that charges for backhoe work may be exempted by separately billing them or by billing them as a separate line item on a bill that involves excavation work and installation or repair services. A billing for backhoe services for excavation only, that does not involve any installation services, is considered to be separately billed and exempt. This is because of the case of In re Bernies’ Excavating Services, Inc., 13 Kan. App.2d 476, 772 P.2d 822 (1989). In that case the court ruled that the gross receipts from excavation services performed are not subject to Kansas retailers’ sales tax imposed under K.S.A. 79-3603(p).

Stated simply, there are several situations that exempt or excepted the imposition of sales tax on excavation services:

Excavation services performed in connection with the original construction of a building or facility.

Excavation services performed in connection with remodeling of a residence.

Excavation services performed at any site, if these services are separately billed or separately stated as a line item on a bill.

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.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC: mdc

Enclosure: Notice 98-02

Date Composed: 09/13/1999 Date Modified: 10/11/2001

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