Are construction materials and labor for a project on an Indian reservation subject to Kansas sales tax?

Plain-English summary

A taxpayer asked how Kansas sales tax applies to a construction/remodeling project on an Indian reservation — both the materials and the labor. The Department split the answer: the on-reservation labor is not taxed, but the materials are.

Materials are taxable to the contractor as the final user. In Kansas, material used by a contractor for a construction/remodeling project is subject to sales tax, because contractors are deemed the final user of the materials. The taxing event occurs when the contractor buys the materials, or when a contractor/retailer removes them from inventory to perform the project. The taxable base is the cost of the materials. The contractor pays the tax at purchase, or a contractor/retailer accrues the tax on the cost when the materials are pulled from inventory for the project. The Department noted this includes, but is not limited to, gasoline pumps and tank-monitoring systems.

Labor on the reservation is not taxed. The Department concluded that any labor services performed on the Indian Reservation would not be subject to Kansas sales tax.

Bottom line: on-reservation labor services escape Kansas sales tax, but the contractor still owes Kansas sales tax on the cost of the materials it consumes on the project — paid at purchase or accrued when removed from inventory.

What this means for you

Contractors working on reservation projects

The labor you perform on the Indian reservation is not subject to Kansas sales tax. But you remain the final user of the materials — you owe Kansas sales tax on their cost regardless of where they are installed, paid when you buy them or accrued when you pull them from inventory for the job.

Contractor/retailers: accrue tax on inventory pulls

If you are a contractor/retailer who stocks materials, the taxing event on project materials is when you remove them from inventory for the construction/remodeling work — accrue the Kansas sales tax on their cost at that point, even for items like gasoline pumps and tank-monitoring systems.

Separate labor from materials

The exemption here is for the labor performed on the reservation, not for the materials. Keep your materials cost and your on-reservation labor distinct so the material tax is handled correctly and the labor is treated as nontaxable.

Common questions

Q: Is labor performed on an Indian reservation subject to Kansas sales tax?
A: No. The Department ruled that labor services performed on the Indian reservation are not subject to Kansas sales tax.

Q: Does the contractor still owe tax on the materials?
A: Yes. The contractor is the final user of the materials, so Kansas sales tax applies to their cost — due at purchase, or accrued when a contractor/retailer removes them from inventory.

Q: What is the taxable base for the materials?
A: The cost of the materials.

Citations and references

• The Department did not cite a specific statutory section. It applied the settled Kansas treatment of contractors as the final users/consumers of construction materials (tax due on the cost of the materials at purchase or when removed from inventory), while holding that labor services performed on the Indian reservation are not subject to Kansas sales tax.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-068

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 28, 2001

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Dear Ms. TTTTTTT:

We wish to acknowledge receipt of your letter dated June 14, 2001, regarding the application of Kansas Retailers’ Sales tax.

Material used by a contractor for a construction/remodeling project shall be subject to sales tax. In the state of Kansas, contractors are deemed to be the final user of material in residential remodeling projects. The taxing event shall be deemed to occur at the time a contractor purchases materials, or when a contractor/retailer removes material from inventory to perform a construction/ remodeling project. The taxable base subject to sales tax shall be the cost of the materials.

The contractor shall pay the appropriate Kansas sales tax at the time of purchase on the materials, and a contractor/retailer shall accrue any applicable Kansas sales tax on the cost of the materials, when the respective materials are removed from inventory, to be used in a construction/remodeling project. This would include, but not be limited to, gasoline pumps and tank monitoring systems.

In closing, any labor services that are performed on the Indian Reservation would not be subject to Kansas sales tax.

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: 07/06/2001 Date Modified: 10/11/2001

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