Is the labor to install a central heating and air conditioning system in a commercial building exempt from Kansas sales tax?

Plain-English summary

A contractor asked whether the labor to install a complete central heating and air conditioning (HVAC) system in a commercial building is subject to Kansas sales tax. The answer depends entirely on when the installation happens.

The original-construction exemption. Kansas taxes installation labor, but K.S.A. 79-3603(p) provides 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." "Original construction" is defined in K.S.A. 79-3603(p)(1) as "the first or initial construction of a new building or facility," and includes adding an entire room or floor, completing an unfinished portion, and rebuilding a structure destroyed by fire, flood, tornado, lightning, explosion, or earthquake — "but such term shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances." K.S.A. 79-3603(p)(2) defines a "building," and K.A.R. 92-19-66b(e) and (f) spell out when work adding a room/floor or completing an unfinished portion is nontaxable.

The holding. "[T]he services to install a complete central heating and air conditioning system at the same time a commercial building is constructed would qualify for the exemption in K.S.A. 79-3603(p), as said services are in connection with the original construction of a building or facility." The exemption applies because the HVAC install is part of building the structure for the first time.

When the labor is taxable. By contrast, "labor services to install a complete central heating and air conditioning system in any other manner at said commercial building would be subject to the appropriate Kansas sales tax(es)." Installing or replacing the system later — as a remodel, renovation, or replacement rather than original construction — is taxable labor.

Materials are always taxable to the contractor. Regardless of the labor treatment, "[c]ontractors and sub-contractors would be responsible for paying the appropriate Kansas sales/use tax(es) on the materials purchased for the project." The exemption is for the installation service, not the materials.

Bottom line: HVAC installation labor rides on the original-construction exemption — exempt if done as part of first building the structure, taxable if done any other way — while the contractor always pays tax on the materials.

What this means for you

HVAC and mechanical contractors

Installation labor for a central HVAC system is exempt when it is part of the original construction of the building. If you install or replace a system in an existing building as a remodel, renovation, or replacement, charge sales tax on the labor. And in every case, pay sales or use tax on the materials you buy for the job.

General contractors and builders

On a new-build (or a genuine addition/completion that meets the K.A.R. 92-19-66b conditions), the HVAC installation labor can be exempt as original construction. Keep documentation — original plans, change orders, first-owner status — to support the exemption if questioned.

Building owners

Expect no sales tax on the HVAC installation labor when it is part of building your structure for the first time, but expect tax on the labor for later replacements or remodels. The materials cost carries tax either way.

Common questions

Q: Is HVAC installation labor taxable in Kansas?
A: It depends. Installing a central HVAC system as part of the original construction of a building is exempt under K.S.A. 79-3603(p). Installing it any other way — such as a later replacement or remodel — is taxable labor.

Q: What counts as "original construction"?
A: The first or initial construction of a new building or facility, plus adding an entire room or floor, completing an unfinished portion, or rebuilding a structure destroyed by fire, flood, tornado, lightning, explosion, or earthquake. It does not include replacement, remodeling, restoration, renovation, or reconstruction in other circumstances.

Q: Do contractors owe tax on the materials?
A: Yes. Contractors and subcontractors must pay Kansas sales or use tax on the materials purchased for the project, regardless of whether the installation labor is exempt.

Citations and references

• K.S.A. 79-3603(p) — exempts the service of installing or applying tangible personal property in connection with the original construction of a building or facility; the basis for exempting the HVAC installation done during original construction.
• K.S.A. 79-3603(p)(1) — defines "original construction," including new construction, additions, completion of unfinished portions, and disaster rebuilding, while excluding ordinary replacement, remodeling, and renovation.
• K.S.A. 79-3603(p)(2) — defines "building" for purposes of the exemption.
• K.A.R. 92-19-66b — the regulation (subsections (e) and (f)) detailing when installation labor for adding a room/floor or completing an unfinished portion of a building is not taxable.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-216

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

September 24, 1999

TTTTTTTTTTT
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Dear Mr. TTTTTTTT:

We wish to acknowledge receipt of your letter dated September 22, 1999, regarding the application of Kansas Retailers’ Sales tax.

This matter involves the interpretation and application of K.S.A. 79-3603(p) and K.A.R. 92-19-66b(e) and (f).

K.S.A. 79-3603(p) states in part: ". . . 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 defined in K.S.A. 79-3603(p)(1) as: "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 shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances."

K.S.A. 79-3603(p)(2) defines a building as follows: "'building' shall mean only those enclosures within which individuals customarily live or are employed, or which are customarily used to house machinery, equipment or other property, and including the land improvements immediately surrounding such buildings."

K.A.R. 92-19-66(b) states in part:

"(e) The service of installing or applying tangible personal property for the addition of an entire room or floor to the exterior of an existing building or facility shall not be subject to sales tax. . .

(f). . . Services performed to install or apply tangible personal property for the completion of an unfinished portion of an existing building or facility shall not be taxable when:

(1) The service being rendered was called for in the original blue print, building plan or building specification at the time original construction of the building or facility was started, including any change orders issued during the original construction of the building or facility;

(2) the completion of the unfinished portion of the building or facility is within a time reasonably requisite to the original construction of the building or facility;

(3) the service rendered would have been performed at the time of the original construction of the building of facility, except for circumstances beyond the owner's control. Those circumstances shall not include instances in which the project is essentially completed and usable for the purposes intended, but the owner merely fell short of funds, or when the owner, after taking possession or occupancy of the building or facility, contracts for additional services; and

(4) the owner or occupant is the first or initial owner or occupant of the building or facility."

It is clear from the language of the statute that the services to install a complete central heating and air conditioning system at the same time a commercial building is constructed would qualify for the exemption in K.S.A. 79-3603(p), as said services are in connection with the original construction of a building or facility. However, labor services to install a complete central heating and air conditioning system in any other manner at said commercial building would be subject to the appropriate Kansas sales tax(es). Contractors and sub-contractors would be responsible for paying the appropriate Kansas sales/use tax(es) on the materials purchased for the project.

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

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