Is construction labor exempt as 'original construction' when a building is demolished but its structural steel is left in place?

Plain-English summary

A company planned to tear down an existing building — leaving the structural steel in place — and replace everything else (concrete, walls, roof). It asked whether that project counts as "original construction," whose labor is exempt from Kansas sales tax.

Kansas taxes the gross receipts for the service of installing or applying tangible personal property, except when that labor is done "in connection with the original construction of a building," under K.S.A. 79-3603(p). "Original construction" means the first or initial construction of a new building and includes completing an unfinished building or replacing a building destroyed by fire, flood, tornado, and similar events — but, except for a residence, it does not include replacement, remodeling, restoration, or reconstruction under any other circumstances (K.S.A. 79-3603(p)(1)).

The Department's regulation, K.A.R. 92-19-66b(d), adds that erecting a building on a site previously occupied by a building that has been demolished, razed, or dismantled is original construction if the building is totally new — whether or not the old foundation was also demolished.

Applying that rule, the Department held that this project does not qualify. Although substantially all of the building is razed, the structural steel is to remain, so the new building is not "totally new." The Department concluded the project is not original construction, and Kansas retailers' sales tax applies to the gross receipts from it.

What this means for you

If you demolish and rebuild in Kansas and want the labor to be exempt original construction, how much of the old building survives is decisive.

• Original-construction labor is exempt; ordinary reconstruction labor is taxable. 79-3603(p) exempts installation/application labor only when it is part of the original construction of a building.
• "Totally new" is the test on a demolished site. Rebuilding where a building was demolished, razed, or dismantled qualifies only if the replacement building is totally new — the old foundation may be gone or may remain, but that alone isn't what decides it.
• Keeping the structural steel breaks the exemption. Here, leaving the existing structural steel in place meant the building wasn't totally new, so the project was taxable reconstruction, not original construction — even though nearly everything else was replaced.
• Full teardown to the foundation is the safer path. The Department noted that razing a building to the foundation and constructing another is original construction; retaining structural framing is what pulled this project out of the exemption.

Common questions

Is demolishing and rebuilding a building exempt "original construction" in Kansas?
It can be — if the replacement building is totally new. Erecting a totally new building where one was demolished, razed, or dismantled is original construction under K.A.R. 92-19-66b(d), whether or not the old foundation was also demolished.

Why didn't this project qualify?
Because the company planned to leave the existing structural steel in place. With the structural steel remaining, the new building isn't "totally new," so the Department held it is not original construction.

What tax applies then?
Kansas retailers' sales tax applies to the gross receipts from the project — the installation/application labor is taxable because it's reconstruction, not original construction.

Does removing the old foundation matter?
Not by itself. The regulation says rebuilding on a demolished site is original construction whether or not the old foundation was also demolished — the key is that the new building be totally new, which the retained structural steel defeated here.

Citations and references

• K.S.A. 79-3603(p) — imposes sales tax on the gross receipts for installing or applying tangible personal property, except when the service is performed in connection with the original construction of a building; 79-3603(p)(1) defines "original construction" and excludes replacement, remodeling, restoration, or reconstruction (except for a residence).
• K.A.R. 92-19-66b(d) — erecting a building on a site previously occupied by a demolished, razed, or dismantled building is original construction if the building is totally new, whether or not the old foundation was also demolished; retaining the structural steel meant this project was not totally new.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1999-35.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 19, 1999

XXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXXXX

Dear XXXXXXXXX:

The purpose of this letter is to respond to your faxed letter dated February 1, 1999.

Kansas 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, shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances;" K.S.A 79-3603(p)(1).

Per Kansas Administrative Regulation 92-19-66b subsection (d) states, "The service of installing or applying tangible personal property in connection with the original construction, which is the first or initial construction of a new building or facility, shall not be subject to sales tax. The erection of a building or facility on a site previously occupied by a building or facility that has been demolished, razed, or dismantled shall be considered to be original construction if the building or facility is totally new, whether or not the old foundation was also demolished."

In your letter you stated that your company will be demolishing an existing building leaving the structural steel in place. Everything else will be replaced including but limited to concrete, walls and roof. You asked is this will be classified as original construction?

Per the regulation, if an existing building is razed to the foundation and another building is constructed, the services to construct would be in connection with the original construction of a building. In the scenario per your letter, albeit substantially all of the building is to be razed the structural steel is to remain. It is the opinion of the Kansas Department of Revenue that this project does not qualify as original construct of a building. Kansas retailers’ sales tax applies to the gross receipts from this project.

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

Date Composed: 03/02/1999 Date Modified: 10/11/2001

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