Is an HVAC contractor's markup on materials subject to Kansas sales tax?

Plain-English summary

An HVAC contractor — mostly residential — pays Kansas sales or compensating tax on its material purchases and marks up those materials. It asked whether the markup is subject to Kansas sales tax.

The Department confirmed the contractor is correct to pay tax on its material purchases, and then explained that whether the markup is taxed depends on whether the underlying service is taxable:

• Taxable service →markup is taxed. Kansas broadly taxes the gross receipts from typical contractor services. When those receipts are taxable, the contractor deducts the cost of materials (including any sales or compensating tax it paid on them) and remits sales tax on the remainder. In that case the markup on materials is included in the taxable gross receipts.
• Exempt/excluded service → markup is not taxed. When the receipts come from a service that the law exempts or excludes — and the contractor has already paid tax on its materials — no additional tax is due, so the markup is not taxed.

The Department gave the dividing lines: all services to construct or repair a residence are exempt from Kansas sales tax; and services at non-residential locations are taxable unless the service is installing or applying tangible personal property in connection with the original construction of a building or facility. The ruling quoted the full labor-services regulation, K.A.R. 92-19-66b.

What this means for you

Residential HVAC and repair contractors

Because services to construct or repair a residence are exempt, your markup on materials for residential work is not separately taxed — as long as you paid sales or compensating tax on the materials themselves.

Commercial and other non-residential work

Non-residential services are generally taxable unless they are installation in connection with original construction. On a taxable job, compute tax on your gross receipts minus your material cost (including tax paid), which means your material markup is taxed.

Common questions

Q: I paid tax on my materials — is my markup taxed too?
A: Only if the service you are performing is taxable. On a taxable job the markup is part of the taxed gross receipts (receipts minus material cost). On an exempt job — such as residential work or original construction — the markup is not taxed if you already paid tax on the materials.

Q: Are residential HVAC services taxable?
A: No. All services to construct or repair a residence are exempt from Kansas sales tax.

Q: When is non-residential work exempt?
A: When it is installing or applying tangible personal property in connection with the original construction of a building or facility.

Citations and references

• K.A.R. 92-19-66b — the Kansas labor-services regulation quoted in full in the ruling. It sets the taxable base for installation/application contracts (contract price minus materials, supplies, and subcontractor payments, including tax paid) and defines the original-construction exclusion that determines whether a contractor's markup is taxed.

Source

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-012

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

April 29, 2004

XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX

Dear Sirs:

The purpose of this letter is to respond to your request received by this office on April 21, 2004. In it you asked if your markup on materials are subject to Kansas retailers’ sales tax.

In your letter you stated that you are in the HVAC business. You pay sales tax on your purchases of materials. A large percentage of your business is residential. You markup your materials.

You are correct in paying Kansas sales or compensating taxes on your purchases.

Kansas broadly imposes a sales tax on the gross receipts on the typical services performed by contractors. The same law that broadly imposes this tax also excludes from the tax services performed in connection with original construction of a building or facility.

When a contractor’s gross receipts are subject to tax, the contractor is allowed to deduct from his receipt the cost of materials and remit to Kansas sales tax on the remainder. In this situation the markup on materials would be included the gross receipt subject to sales tax. Please note that deduction for materials would include any sales or compensating tax paid by the contractor.

When a contractor’s gross receipt is from services that the law exempts or excludes from sales tax, the contractor is not obligated to remit any additional sales tax, if the contractor has paid a sales or compensating tax on his cost of materials. In other words in this example the markup on materials would not be subject to sales tax.

All services performed to construct or repair a residence are exempt from Kansas retailers’ sales tax.

Services performed at locations other than a residence are subject to sales tax unless the service is installing or applying in connection with the original construction of a building or facility.

K.A.R. 92-19-66b provides: Labor services. (a) Each contractor, subcontractor, and repairman shall be responsible for collecting and remitting sales tax on taxable services performed for others, including taxable services performed for other contractors. A contractor, subcontractor, or repairman shall not issue or accept a resale exemption certificate that claims an exemption from sales tax for services being purchased from or sold to another contractor, subcontractor, or repairman.
(b) The taxable base for all contracts involving the application or installation of tangible personal property shall be the difference between the contract price and the cost of material, supplies, and payments to subcontractors, including sales or compensating tax paid by the contractor on the materials, supplies, and subcontractor charges purchased by the contractor to complete the contract.
(c) Each contractor, subcontractor, or repairman who does not separately state the amount of sales tax for services performed in that person’s contract, bid estimates, customer billings, or other evidence of the transaction shall state in the document that all applicable sales taxes are included in the selling price. If the statement does not appear in the contract, bid estimate, billing, or other evidence of the transaction, it shall be presumed that the sales tax was not charged to the consumer. Each retailer shall carry the burden of proving that the sales tax was charged to the consumer and properly remitted to the state.
(d) The service of installing or applying tangible personal property in connection with the original construction, which is the first or initial construction of a new building or facility, shall not be subject to sales tax. The erection of a building or facility on a site previously occupied by a building or facility that has been demolished, razed, or dismantled shall be considered to be original construction if the building or facility is totally new, whether or not the old foundation was also demolished.
(e) The service of installing or applying tangible personal property for the addition of an entire room or floor to the exterior of an existing building or facility shall not be subject to sales tax. Any replacement, remodeling, restoration, repair, renovation, or reconstruction done in the interior of an existing building or facility necessary to the construction of an entire room or floor added to the exterior of an existing building or facility shall be considered to be original construction and not subject to sales tax when any of these conditions is met.
(1) Except for the addition of the entire room or floor to the exterior of the building or facility, the work performed inside the existing building or facility would not be necessary.
(2) The work being done in the existing building or facility is necessary to support the addition of the new room or floor being added to the exterior of the building, facility, or the machinery contained therein.
(3) The support to the entire room or floor being added to the exterior of the existing building or facility is the direct causal factor of the construction being performed to the interior of the existing building or facility.
If none of the three requirements can be met, the services performed to the interior of the existing building or facility shall be subject to sales tax, and the cost of services rendered in connection with the entire project shall be allocated between the addition of the new room or floor and the services performed to the interior of the existing building or facility. Sales tax shall be collected and remitted for that portion of services allocated to those services performed to the interior of the existing building or facility.
(f) Services of installing or applying tangible personal property to complete unfinished portions of newly constructed buildings, facilities, shopping centers, and malls when space within the building, facility, center, or mall is leased or sold to the first or initial tenant of that space shall not be subject to sales tax. Services performed to install or apply tangible personal property for the completion of an unfinished portion of an existing building or facility shall be presumed not to be taxable when: all of the following conditions are met.
(1) The service being rendered was called for in the original blueprint, building plan, or building specification at the time original construction of the building or facility was started, including any change orders issued during the original construction of the building or facility;.
(2) The completion of the unfinished portion of the building or facility is within a time that is reasonably close to the time of the original construction of the building or facility.
(3) The service rendered would have been performed at the time of the original construction of the building or facility, except for circumstances beyond the owner's control. Those circumstances shall not include instances in which the project is essentially completed and usable for the purposes intended, but the owner merely fell short of funds, or when the owner, after taking possession or occupancy of the building or facility, contracts for additional services.
(4) The owner or occupant is the first or initial owner or occupant of the building or facility.
(g) Sales tax shall not be imposed on the service of installing or applying tangible personal property for the purpose of restoring, reconstructing, or replacing a building or facility damaged or destroyed by fire, flood, tornado, lightning, explosion, or earthquake. This exemption shall not apply to restoration, reconstruction, or replacement of a building or facility due to normal deterioration resulting from the continuous exposure to the elements, or the obsolescence of the building or facility. Each retailer performing a service under this exemption shall secure an affidavit from the owner of the building or facility stating that the building or facility was damaged or destroyed by one or more of the above-mentioned causes. Each retailer shall retain the affidavit in the retailer's records for three years.

This is a private letter ruling pursuant to K.A.R. 92-19-59, based on the representations you have made. To the extent those representations are incomplete or inaccurate, this ruling is void. This ruling will be revoked by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 04/30/2004 Date Modified: 04/30/2004

Table 1

Table 2