How is the taxable amount figured for a contract to install tangible personal property, and can overhead and profit be deducted?

Plain-English summary

An underground-cable installer asked how to figure the taxable amount on its installation contracts. Kansas taxes "the gross receipts received for the service of installing or applying tangible personal property" (the ruling cites this to K.S.A. 79-3606(p)). The Department explained how to compute the base and what cannot be deducted.

The taxable base on a contract to apply or install tangible personal property is the contract price minus:

• the cost of materials and supplies,
• payments to subcontractors (including sales or compensating tax the contractor paid on materials, supplies, and subcontractor charges), and
• excavation charges the contractor bought to complete the contract.

Overhead and profit stay in the base. Like any retail business, the contractor's profit — including markup on materials — and overhead costs are part of the total charged the customer and are therefore subject to sales tax. A contractor may not deduct overhead when figuring the taxable amount. The Department listed non-deductible items: building permits; consumable supplies (form lumber, sandpaper); employee labor costs; lease payments for tools, equipment, and machinery; office supplies; per diem and travel; sewer hook-up fees; and utilities.

Taxable and exempt portions. When the labor services are taxable, the overhead and profit tied to that job are likewise taxable. The Department agreed the contractor will need to track the operator on the plow that is installing the tangible personal property to determine both the taxable and the exempt portions of the job.

What this means for you

If you install cable or other property under contract in Kansas, build your invoices and records around what's deductible from the taxable base.

• Start from the contract price and subtract the right costs. Deduct materials, supplies, subcontractor payments (with tax paid), and excavation charges bought for the contract — those come out of the taxable base.
• Don't subtract overhead or profit. Markup and overhead are taxed as part of the total charge. The Department's non-deductible list (permits, consumables, labor costs, equipment leases, office supplies, travel, sewer hook-up fees, utilities) can't be carved out.
• Split mixed jobs by tracking labor. If part of a job is taxable installation and part is exempt, keep records — here, tracking the plow operator's time — to allocate between the taxable and exempt portions.
• Overhead and profit follow the labor. When the underlying labor is taxable, the overhead and profit associated with that job are taxable too.

Common questions

How is the taxable amount of an installation contract calculated?
Contract price minus the cost of materials and supplies, payments to subcontractors (including tax the contractor paid on them), and excavation charges purchased to complete the contract.

Can I deduct my overhead and profit?
No. Profit (including markup on materials) and overhead are part of the total charged the customer and are subject to sales tax; a contractor may not deduct overhead when figuring the taxable amount.

What items are specifically non-deductible?
Building permits; consumable supplies such as form lumber and sandpaper; employee labor costs; lease payments for tools, equipment, and machinery; office supplies; per diem and travel expenses; sewer hook-up fees; and utilities.

How do I handle a job that's part taxable, part exempt?
Keep records that let you allocate. The Department agreed the contractor needs to track the plow operator installing the property to determine the taxable and exempt portions of the job.

Citations and references

• K.S.A. 79-3606(p) (as cited in the ruling) — quoted by the Department for the tax on "the gross receipts received for the service of installing or applying tangible personal property"; the taxable base is the contract price less materials, supplies, subcontractor payments (with tax paid) and excavation charges, and overhead and profit may not be deducted.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1999-21.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

January 22, 1999

TTTTTTTTTTT
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Dear Mr. TTTTT:

We wish to acknowledge receipt of your letter dated January 4, 1999, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3606(p) imposes a sales tax upon: “the gross receipts received for the service of installing or applying tangible personal property. . .”

The taxable base for all contracts involving the application or installation of tangible personal property shall be the difference between the contract price and the cost of material, supplies and payments to subcontractors, including sales or compensating tax paid by the contractor on the materials, supplies and subcontractors charges, and any excavation charges purchased by the contractor to complete the contract.

Like any other retail business, your profit (including the mark-up on materials) and overhead costs are figured into the total charged the customer and are therefore subject to sales tax. A contractor may not deduct overhead expenses when figuring the taxable amount of a given contract, that would be subject to sales tax in the state of Kansas.

Non-deductible items include:

building permits
consumable supplies, such as form lumber and sand paper
employee labor costs
lease payments for tools, equipment and machinery
office supplies
per diem and travel expenses
sewer hook-up fees
utilities

In closing, when the labor services are subject to sales tax in the state of Kansas, the overhead and profit associated with the particular job would likewise be subject to sales tax in this state. You are correct, in that you will need to keep track of the operator on the plow which is installing the tangible personal property, to determine both the taxable and exempt portion of the job.

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 in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially effects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 02/11/1999 Date Modified: 10/11/2001

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