Are the overhead and profit charged on a construction job subject to Kansas sales tax?

Plain-English summary

The question was how Kansas sales tax treats the overhead and profit components of a job's price. The Department ruled that overhead and profit are taxed the same way as the labor they are attached to.

Overhead and profit follow the taxability of the labor. "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." So if the underlying labor is taxable, the markup for overhead and profit is taxable too - you cannot carve it out of the taxable base.

Original-construction labor is exempt - and so is its overhead and profit. The Department added that "labor services rendered in connection with the original construction of a building or facility are exempt from Kansas sales tax(es)." Because the labor is exempt, the overhead and profit riding on that exempt labor are not taxed either.

Materials are always taxable. Regardless of how the labor is treated, "the cost of the materials would be subject to the appropriate Kansas sales/use tax(es)." So even on an exempt original-construction job, the contractor still bears sales or use tax on the materials it buys.

Bottom line: don't treat overhead and profit as a separate, untaxed line item. They take on the character of the labor - taxable if the labor is taxable, exempt if the labor is exempt original construction - while the materials remain taxable in every case.

What this means for you

Contractors and builders

When you price a job, overhead and profit are not a way to shelter part of the charge from tax. If the labor on the job is taxable, the overhead and profit are part of the taxable base. If the job is exempt original construction, the labor plus its overhead and profit are exempt.

Separate the labor question from the materials question

The labor's tax status controls the overhead and profit. But the materials stand on their own: you pay Kansas sales or use tax on materials even when the labor (and its overhead and profit) is exempt.

Know whether your labor is taxable

Because everything turns on the labor, the threshold issue is whether your labor service is taxable installation/repair labor or exempt original-construction (or residential) labor. Classify the labor correctly and the overhead-and-profit treatment follows.

Common questions

Q: Can I exclude overhead and profit from the taxable amount?
A: No. When the labor is taxable, the overhead and profit associated with the job are taxable as well.

Q: What if the job is original construction?
A: Labor for the original construction of a building or facility is exempt, so the overhead and profit on that labor are not taxed either.

Q: Are materials exempt on an original-construction job?
A: No. The cost of the materials is subject to the appropriate Kansas sales or use tax regardless of how the labor is treated.

Citations and references

• The ruling applies the general Kansas rule that overhead and profit take on the tax character of the labor to which they relate: taxable when the labor is taxable, and exempt when the labor is exempt original construction of a building or facility. It also restates that materials remain subject to Kansas sales or use tax in all cases. No specific K.S.A. section was cited in the ruling for the holding.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-016

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 1, 2001

TTTTTTTTTTTT
TTTTTTTTTTTT

Dear Mr. TTTTTTT:

We wish to acknowledge receipt of your e-mail dated February 27, 2001, regarding the application of Kansas Retailers’ Sales tax.

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. Although, labor services rendered in connection with the original construction of a building or facility are exempt from Kansas sales tax(es), the cost of the materials would be subject to the appropriate Kansas sales/use tax(es).

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: 03/06/2001 Date Modified: 10/11/2001

Table 1

Table 2