Is a third-party hauler's separate charge to deliver materials to a job site subject to Kansas sales or use tax?

Plain-English summary

An asphalt paving contractor described its process: on a non-exempt highway overlay, it sets up an asphalt plant at the job site, buys oil, sand, and aggregate to mix there, and separately hires an independent third-party hauler — paid separately from the supplier — to deliver those materials to the job. It asked whether it owes sales or compensating (use) tax on that third-party transportation. The Department's answer: no, on these facts — provided the contractor pays sales or use tax on the cost of the materials themselves.

Why the third-party hauling isn't taxed here. Because the hauler is independent and paid separately from the supplier, the transportation is not a charge from the retailer to the consumer — so it is not folded into the retailer's taxable price.

The general rule is the opposite. The Department was careful to explain that in most sale-and-delivery situations, delivery, shipping, and handling charges ARE taxable. Kansas measures tax on "gross receipts" and "selling price":

• K.S.A. 79-3603(a) imposes tax on the gross receipts from retail sales (the ruling quotes the then-current 4.9% rate).
• K.S.A. 79-3602(h) defines "gross receipts" as the total selling price or amount received.
• K.S.A. 79-3602(g) defines "selling price" as the total cost to the consumer, "including freight and transportation charges from the retailer to the consumer."

So when the retailer delivers (or arranges delivery as part of the sale), the freight is part of the taxable base. The same is true for use tax: K.A.R. 92-20-4 makes the actual cost of transportation (freight, express, parcel post, other hauling, plus crating/packaging) taxable as part of the purchase price — a regulation upheld in J.G. Masonry, Inc. v. Department of Revenue, 235 Kan. 497, 680 P.2d 291 (1984).

Bottom line: a separately contracted, independently paid third-party hauler is not taxable transportation; but if the retailer/supplier provides or bills the delivery, that freight is part of the taxable selling price.

What this means for you

Buyers arranging their own hauling

If you buy materials and separately hire an independent hauler (not the supplier, and not billed through the supplier), that hauling charge is not taxable — as long as you pay sales or use tax on the materials. Keep the hauler's contract and invoices distinct from the material purchase.

When delivery becomes taxable

If the supplier delivers or includes freight in the sale, that freight is part of the taxable "selling price" and is taxed with the goods. You cannot avoid tax on the goods by splitting out a supplier's own delivery charge.

Use tax too

The same principle applies to use tax on out-of-state or untaxed purchases: transportation cost is part of the taxable purchase price under K.A.R. 92-20-4.

Common questions

Q: Do I owe tax on a third-party hauler's charge to bring materials to my job site?
A: Not when you hire the hauler independently and pay it separately from the supplier, and you pay tax on the materials. On those facts the hauling is not taxable.

Q: Are a supplier's delivery or freight charges taxable?
A: Yes. Freight and transportation from the retailer to the consumer are part of the taxable "selling price" (K.S.A. 79-3602(g)) and "gross receipts" (79-3602(h)).

Q: Does this apply to use tax as well?
A: Yes. K.A.R. 92-20-4 makes the actual cost of transportation part of the taxable purchase price for use tax; the regulation was upheld in J.G. Masonry, Inc. v. Department of Revenue.

Q: What's the deciding factor?
A: Whether the transportation is a charge from the retailer to the consumer (taxable) or a separate, independently paid third-party arrangement (not taxable here).

Citations and references

• K.S.A. 79-3603(a) — imposes sales tax on the gross receipts from retail sales of tangible personal property (ruling quotes the 2002 rate of 4.9%).
• K.S.A. 79-3602(h) — defines "gross receipts" as the total selling price or amount received.
• K.S.A. 79-3602(g) — defines "selling price" to include freight and transportation charges from the retailer to the consumer.
• K.A.R. 92-20-4 — makes the actual cost of transportation (freight, express, hauling, crating/packaging) part of the taxable purchase price for Kansas use tax.
• J.G. Masonry, Inc. v. Department of Revenue, 235 Kan. 497, 680 P.2d 291 (1984) — upheld K.A.R. 92-20-4 against constitutional challenge.
• 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-2002-020

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 14, 2002

XXXXXXXXXXXXX
XXXXXXXXXXXXX
XXXXXXXXXXX

Dear XXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated January 14, 2002.

In your letter you stated:

Per our phone conversation regarding sales or use tax on materials hauled to the job.

As we discussed, one of our divisions is in the business of asphalt paving. If we contract to do an overlay on a highway (non-exempt job), we typically set up an asphalt plant at the job site. Once the plant is set-up we buy oil, sand, & aggregate to mix at the plant. These items are all included in an asphalt mix that is applied to the surface of the road. When we purchase the oil, sand & aggregate from our suppliers, we typically hire a third party independent hauler to deliver the materials to the job. The third party independent hauler is paid separately from the supplier. Would the State require us to remit sales or compensating tax on the third party transportation of these materials to the jobsite?

In the situation you have described, the delivery charges are not subject to Kansas sales or compensating taxes. This statement assumes that your company pays sales or compensating tax on cost of the materials.

However, in most cases involving the sale and delivery of tangible personal property, sales tax is due on the purchase price of the item sold and any delivery, shipping or handling charges. A more complete discussion follows:

The Kansas retailers’ sales tax act makes shipping and handling taxable by including them in the controlling definitions for “gross receipts” and “selling price.” These terms establish the tax base for sales tax. The tax base for goods being sold is the total amount that is billed for the goods. This amount is then multiplied by the sales tax rate to yield, as the product, the sales tax that is due or owing. The terms “tax base” and “measure of tax” are often used interchangeably. In Kansas, the tax base for sales tax is “gross receipts.” see K.S.A. 79-3603(a) through (ggg)(“there shall be collected and paid a tax at the rate of 4.9% . . . upon: (a) the gross receipts received from the sale of tangible personal property at retail within this state.”); K.S.A. 79-3602(h).

The statutes define “gross receipts” to mean: “the total selling price or the amount received as defined in this act, in moneys, credits, property or other consideration valued in money from sales at retail within this state. . . .” K.S.A. 79-3602(h)(emphasis provided). “Selling price” is defined as: “the total cost to the consumer exclusive of discounts allowed and credited, but including freight and transportation charges from the retailer to the consumer.” K.S.A. 79-3602(g)(emphasis provided). Thus, the tax base for Kansas sales tax includes: “freight and transportation charges from the retailer to the consumer.”

Shipping and handling charges from the retailer to the consumer are also part of the tax base for Kansas use tax. One of our use tax regulations explains: “The actual cost of transportation from the place where the article was purchased to the person using the same in this state is taxable as part of the consideration and purchase price. Transportation costs means freight, express, parcel post, or other hauling charges. It shall include charges for crating, packaging and preparing tangible personal property for shipment.” K.A.R. 92-20-4. This regulation withstood a constitutional challenge in J.G. Masonry, Inc. v. Department of Revenue, 235 Kansas 497, 503-8, 680 P.2d 291 (1984), and continues to explain the application of the Kansas use tax law to shipping and handling charges.

This is a private letter ruling and 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: 02/25/2002 Date Modified: 02/27/2002

Table 1

Table 2