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

Plain-English summary

A contractor asked whether it could avoid Kansas tax on materials that will be used on jobs outside Kansas. The Department's answer turns on where and how the materials are bought, and whether they ever come to rest in Kansas inventory.

The temporary-storage exemption. Under K.S.A. 79-3702(e), if materials 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 segregating the items from normal inventory and being able to document that they were bought specifically for the out-of-state project.

It does not cover Kansas-vendor purchases. The Department was explicit: "This exemption does not apply to purchases from Kansas vendors." If the contractor wants to buy from a Kansas vendor for out-of-state work, the vendor must deliver the items to the project site in the other state.

Pulling from Kansas inventory is taxable in Kansas. If the contractor withdraws items from his or her Kansas inventory, that withdrawal is "a taxable event that occurs in Kansas," because the items "have come to rest in Kansas" and the withdrawal for use occurs entirely in-state. Intending to remove the item for use in another state does not exempt the transaction — no more than any shopper buying from a Kansas retailer intending to take the goods out of state.

Bottom line: the exemption is a narrow, well-documented path for out-of-state-vendor purchases earmarked and actually used out of state. Kansas-vendor buys and withdrawals from Kansas inventory are taxable here regardless of the later out-of-state use.

What this means for you

Multi-state contractors

If you serve jobs in several states, you can buy materials free of Kansas tax only when they come from an out-of-state vendor, are earmarked for the out-of-state job, and are actually used there — and you keep them physically segregated and documented. Treat the paperwork as part of the exemption, not an afterthought.

Don't pull out-of-state-job materials from Kansas stock

Once materials sit in your Kansas inventory, taking them out for use is a Kansas taxable event even if the destination is another state. Buy project-specific out-of-state materials on a separate, earmarked basis rather than drawing down general stock.

Buying from a Kansas vendor for an out-of-state job

The temporary-storage exemption won't help. To keep a Kansas-vendor purchase out of Kansas tax, have the vendor ship directly to the out-of-state project site.

Common questions

Q: Can a contractor buy materials tax-free in Kansas for an out-of-state job?
A: Only under the temporary-storage exemption, and only when the materials are bought from an out-of-state vendor, earmarked for out-of-state use, and actually used out of state — segregated and documented.

Q: Does the exemption apply to purchases from Kansas vendors?
A: No. For a Kansas-vendor purchase, the vendor must deliver the items to the project site in the other state for Kansas tax not to apply.

Q: What if I take the materials out of my Kansas inventory?
A: That withdrawal is a taxable event in Kansas, because the items came to rest in Kansas; intending to use them out of state does not exempt it.

Citations and references

• K.S.A. 79-3702(e) — the temporary-storage provisions permitting a contractor to claim exemption for out-of-state-vendor materials earmarked and actually used outside Kansas (segregated and documented).
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-139

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

December 27, 2001

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Dear Ms. TTTTTT:

We wish to acknowledge receipt of your letter dated November 6, 2001, which was received by this office on December 21, 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 you can provide this department with the above information, we will be able to provide a definitive answer to your question.

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

Enc

Date Composed: 01/07/2002 Date Modified: 01/07/2002

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