Are the gross receipts from an internet information service that converts paper documents into an electronic file subject to Kansas sales tax?

Plain-English summary

A company asked whether the gross receipts from an information service are subject to Kansas sales tax. Its service is an internet business process that lets clients create business forms online; in practice, as clarified by phone, the service converts physical (paper) forms or documents into an electronic file, which is then emailed to the client. The Department ruled the service is not taxable.

How Kansas decides. The Department restated its two-step test: first, does the sales-tax act generally impose tax on this type of transaction; second, if so, is there an exemption? Sales of tangible personal property are generally taxable, but services are taxed only when specifically enumerated in the act.

No imposition on this service. The Department concluded that "no imposition exists in the law to impose Kansas sales tax on the services as described in this letter." In other words, converting paper documents into an emailed electronic file is not an enumerated taxable service, so the company's receipts are not taxed. (The taxpayer had argued the service fell under K.S.A. 79-3603(s) and was like previously exempted customized computer services and consulting; the Department resolved the matter more simply — the service is not imposed on at all.)

The provider pays tax on its own purchases. The company must pay Kansas sales and compensating taxes on all purchases of tangible personal property and taxable services it uses or consumes in its business — it is the consumer of its inputs.

Bottom line: an internet service that converts paper documents into an emailed electronic file is a nontaxable service in Kansas (no statutory imposition), but the provider still owes sales/use tax on the goods and taxable services it buys to operate.

What this means for you

Information-service and document-processing businesses

If your service is not one of Kansas's specifically enumerated taxable services — here, converting paper documents into an electronic file delivered by email — your receipts are not subject to Kansas sales tax. The key is enumeration: Kansas taxes services only when the statute names them.

You are the consumer of your inputs

A nontaxable service provider pays sales or compensating (use) tax on the tangible personal property and taxable services it buys to run the business — hardware, software, supplies, and the like. You cannot buy those inputs for resale.

Delivery format matters

The Department focused on what was actually delivered — an electronic file emailed to the client, not tangible personal property. If a service instead delivers taxable tangible personal property, or bundles in an enumerated taxable service, the analysis (and the tax result) can change.

Common questions

Q: Is an internet document-conversion service taxable in Kansas?
A: No. The Department found no imposition in the law to tax the service as described — converting paper documents into an electronic file emailed to the client.

Q: Why isn't it taxable?
A: Kansas taxes services only when they are specifically enumerated in the sales-tax act, and this service is not enumerated.

Q: Does the company owe any tax at all?
A: Yes — on its own purchases. It must pay Kansas sales and compensating taxes on the tangible personal property and taxable services it uses or consumes in the business.

Citations and references

• K.S.A. 79-3603(s) — the provision the taxpayer argued its internet service fell under (alongside previously exempted customized computer services and consulting). The Department resolved the case on the broader ground that no statutory imposition reaches the described service, so the receipts are not taxable.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-076

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

July 23, 2001

XXXXXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX

Dear XXXXXX:

The purpose of this letter is to respond to your letter received by this office on June 12, 2001. In it, you ask if the gross receipts from an information service are subject to Kansas retailers’ sales tax.

In deciding whether a particular transaction is subject to sales tax, a two step analysis is generally necessary. The first step is to determine whether the sales tax act generally imposes tax on the type of transaction in question. The second step is to determine whether the act provides an exemption for the particular type of transaction.

As a rule, sales tax is imposed on all transactions involving the transfer of tangible personal property. With services, however, tax is imposed only on those transactions that are specifically enumerated in the sales tax act. Exemptions for transactions involving either tangible personal property or services are allowed as specifically enumerated.

In your letter you stated:

XXXXXXXXX would like to request a Private Letter Ruling on the collection -and remittance of Sales Tax on an internet business process which will be marketed under the XXXXXXXXXX will allow clients to create their business forms in an Internet environment, The service marketed as XXXX will have fundamental similarities in its marketing, Internet presentation and assimilation into a clients business practices, However, because each instance of XXXXXXXXXXwill be unique to each client's business forms and processes, it will be continually modified to meet each client's requirements. XXXXXXXXis not a PC based software which must be installed, nor is it a stand-alone accounting software package. Furthermore, XXXXXXXXXX is not intending to contract with clients for maintenance XXXXXXXXX subsequent to implementation.

Despite the core similarities in the service, this Internet business process appears to fall under the exceptions provided by K.S.A. 79-3603(s) and as represented by previously exempted services including customized computer services and consulting, and as such would be exempt from the collection and remittance of sales tax.

Please provide a ruling XXXXXXXXX understanding that the XXXXXXXXXX is exempt from the collection and remittance of sales tax. If further information is required for the ruling, please XXXXXXXXXXXX, at the address noted below.

Per our telephone conversation it was determined that your company’s service consists of the service of converting physical (paper) forms or documents in an electronic media. This electronic copy is then email to the client.

It is the opinion of the Department that no imposition exists in the law to impose Kansas sales tax on the services as described in this letter.

Your Company is required to pay Kansas sales and compensating taxes on all purchases of tangible personal property and taxable services used or consumed by their business.

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: 07/30/2001 Date Modified: 10/11/2001

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