Can a Kansas contractor buy materials tax-free for an out-of-state project under the temporary-storage exemption?

Plain-English summary

A Kansas contractor asked whether materials it buys for a construction project outside Kansas can be purchased free of Kansas tax. The Department said it depends entirely on how and where the items are bought.

The temporary-storage exemption - and its three conditions. Under K.S.A. 79-3702(e), if items are "purchased from an out-of-state vendor for a specific job that is outside Kansas and shipped to the contractor's business location in Kansas," the contractor may claim the temporary-storage exemption. To qualify, the contractor must: "(1) purchase the items from an out-of-state vendor; (2) earmark the items for use outside Kansas; and (3) actually use the items out-of-state." That means keeping the items "in an area segregated from the contractor's normal inventory" and documenting that they were bought specifically for the out-of-state project.

It does not cover purchases from Kansas vendors. The Department was explicit: "This exemption does not apply to purchases from Kansas vendors." If a Kansas contractor wants to buy from a Kansas vendor and be taxed in the other state, "the contractor would have to have the vendor deliver the items to the project site in the state where the construction is being performed."

Pulling items from Kansas inventory is a taxable event here. If the contractor "withdraws items from his or her Kansas inventory, the withdrawal is considered to be a taxable event that occurs in Kansas," because the inventory "come[s] to rest in Kansas" and the withdrawal for use "occurs entirely within this state." Intending to remove the item for out-of-state use "does not exempt the transaction anymore than any other purchaser's act of buying something from a Kansas retailer with the intention of taking it from Kansas."

Bottom line: the temporary-storage exemption is available only for items bought from an out-of-state vendor, earmarked and segregated for a specific out-of-state job, and actually used there; Kansas purchases and inventory withdrawals are taxed in Kansas.

What this means for you

Contractors working across state lines

To buy materials free of Kansas tax for an out-of-state job, purchase them from an out-of-state vendor, earmark them for that project, keep them segregated from your regular inventory, and document the intended out-of-state use. Meeting all three conditions of K.S.A. 79-3702(e) is what unlocks the exemption.

Kansas-vendor purchases don't qualify

If you buy from a Kansas vendor, the temporary-storage exemption is unavailable. To be taxed in the destination state instead, have the Kansas vendor deliver the materials directly to the out-of-state project site.

Don't pull it from Kansas inventory tax-free

Withdrawing items from your Kansas inventory is a taxable event in Kansas, even if you plan to use them out-of-state. Intent to remove the goods does not create an exemption.

Common questions

Q: Can a Kansas contractor buy materials tax-free for an out-of-state project?
A: Yes, but only under K.S.A. 79-3702(e): the items must be bought from an out-of-state vendor, earmarked for out-of-state use, and actually used out-of-state (kept segregated and documented).

Q: Does the exemption apply to purchases from Kansas vendors?
A: No. To be taxed in the destination state, the Kansas vendor must deliver the materials to the out-of-state project site.

Q: What if the contractor pulls the materials from its Kansas inventory?
A: That withdrawal is a taxable event in Kansas, regardless of the contractor's intent to use the items in another state.

Citations and references

• K.S.A. 79-3702(e) - the temporary-storage provision of the Kansas compensating (use) tax act; allows a contractor to claim exemption for items purchased from an out-of-state vendor for a specific out-of-state job (earmarked, segregated, and actually used out-of-state). It does not apply to purchases from Kansas vendors, and withdrawing items from Kansas inventory is a taxable event in Kansas.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-027

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

March 23, 2001

TTTTTTTTTTTTTTTTTTTTTTTTTTTTTT

Dear Ms. TTTTT:

We wish to acknowledge receipt of your e-mail dated February 19, 2001, regarding the application of Kansas Retailers’ Sales tax.

Generally, the answer to your question depends on how and where the items are purchased. If the items are purchased from an out-of-state vendor for a specific job that is outside Kansas and shipped to the contractor’s business location in Kansas, the contractor may claim exemption under the temporary storage provisions of K.S.A. 79-3702(e). To take advantage of this exemption, the contractor must: (1) purchase the items from an out-of-state vendor; (2) earmark the items for use outside Kansas; and (3) actually use the items out-of-state. This requires maintaining the items in an area segregated from the contractor’s normal inventory, if he or she maintains one, and being able to document that the items were purchased specifically for the out-of-state construction project. This exemption does not apply to purchases from Kansas vendors. If the Kansas contractor wants to be subject to tax in the other state where the construction is being performed and to buy materials from a Kansas vendor, the contractor would have to have the vendor deliver the items to the project site in the state where the construction is being performed.

If the contractor withdraws items from his or her Kansas inventory, the withdrawal is considered to be a taxable event that occurs in Kansas. This is because items in inventory have come to rest in Kansas and because the withdrawal for use occurs entirely within this state. The fact that contractor intends to remove the item from Kansas for use in another state does not exempt the transaction anymore than any other purchaser’s act of buying something from a Kansas retailer with the intention of taking it from Kansas for consumption in another state.

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: 03/30/2001 Date Modified: 10/11/2001

Table 1

Table 2