How does Kansas sales tax apply when the Kansas Turnpike Authority hands out KTAG transponders to subscribers and bills them for tolls?

Plain-English summary

The Kansas Turnpike Authority (KTA) planned to start signing up KTAG accounts at grocery stores and pharmacies, giving each subscriber a KTAG — a transponder (a wireless device that automatically responds to a signal at a toll booth so the toll can be billed to the account). KTA asked how Kansas sales tax applies.

The Department worked through it in three steps:

1. KTA is the consumer of the KTAGs, not a reseller. Title to each KTAG stays with KTA, which can require its return. Following the Kansas Supreme Court's decision in In re AT&T Technologies (a phone company is the final consumer of the handsets it provides to subscribers) — and the same logic courts have applied to cable converters, hotel linens, and bowling shoes — KTA is the final user or consumer of the KTAGs. So the resale exemption does not apply, and any tax would be owed when KTA buys the KTAGs from the manufacturer, not when it hands them to subscribers.

2. But KTA is a state agency, so its purchases are exempt. The Kansas Supreme Court has held KTA is "an arm or agency of the State." Retail sales to state agencies are direct sales to the State of Kansas and are exempt under K.S.A. 79-3606(b). KTA can therefore buy the KTAGs — and related items such as batteries and signal-blocking containers — tax-exempt by giving its vendor an exempt-entity exemption certificate, because it uses them exclusively in the KTAG accounting system.

3. Tolls and lost-tag charges are not taxed. The Kansas sales tax act taxes services only when the act specifically lists them, and turnpike tolls are not listed. So KTA should not charge sales tax on toll charges billed to a KTAG account, and it also should not charge tax on amounts billed for a lost KTAG or for failing to return one when an account closes.

What this means for you

The Kansas Turnpike Authority (and similar state agencies)

Equipment you provide to customers but keep title to is equipment you consume. As a state agency you buy it exempt under K.S.A. 79-3606(b) with an exempt-entity certificate, so you don't charge your subscribers sales tax on the device, on tolls, or on lost-device charges.

Businesses that give customers equipment to use a service

If you retain ownership of a device (a transponder, converter, meter, etc.) and provide it as part of your service, you are generally treated as the final consumer of that device — you owe any tax at your purchase, and you are not "reselling" it to the customer. Whether that purchase is actually taxed then depends on your own exempt status.

KTAG subscribers

You are not charged Kansas sales tax on your KTAG, your tolls, or a charge for a lost or unreturned tag.

Common questions

Q: Does a KTAG subscriber pay Kansas sales tax on the transponder or the tolls?
A: No. KTA is treated as the consumer of the KTAGs and, as a state agency, buys them tax-exempt; turnpike tolls are not a taxable service.

Q: Why isn't KTA "reselling" the KTAG to the subscriber?
A: KTA keeps title to the KTAG and can require its return. Under Kansas case law (such as In re AT&T Technologies), a provider that keeps and controls the equipment it hands to customers is the final user or consumer, not a reseller.

Q: Are charges for a lost or unreturned KTAG taxable?
A: No. The Department said KTA should not charge sales tax on amounts billed for a lost KTAG or for failing to return one after an account is closed.

Citations and references

• K.S.A. 79-3606(b) — exempts sales of tangible personal property (including rentals and leases) purchased directly by the State of Kansas and used exclusively for state purposes; retail sales to a state agency such as KTA are direct sales to the State.
• K.A.R. 39-1-1 — cited in support of KTA's status as a state agency.
• In re Appeal of AT&T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988) — a provider is the final user or consumer of equipment (there, telephone handsets) it uses to deliver its service; it is not reselling that equipment to subscribers.
• Rockers v. Kansas Turnpike Authority, 268 Kan. 110, 991 P.2d 889 (1999) — the KTA is an arm or agency of the State performing an essential governmental function.
• In re Appeals of Genesis Health Clubs, Docket No. 99,772 (July 2, 2009) — cited as a recent application of the same "provider is the consumer" logic (a health club providing towels and other items to members).

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2009-006

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 3, 2009

XXXX
XXXX
XXXX

RE: Your letter dated July 17, 2009

Dear XXXX:

Thank you for your recent letter. You represent the Kansas Turnpike Authority (KTA). The KTA will begin selling KTAG accounts in grocery stores and pharmacies. The KTA will provide a KTAG subscriber with a KTAG. You ask how Kansas sales tax applies to this transaction.

A KTAG is a transponder, which is a wireless communications device that picks up and automatically responds to an incoming signal. The term is a contraction of the words transmitter and responder. When a motorist with a KTAG approaches a toll booth on the Kansas turnpike, the KTAG communicates with KTA's equipment which records the motorist's account number and other information. This allows the KTA to bill the appropriate tolls to the subscriber each month for its turnpike use. Use of a KTAG avoids the delays and traffic bottleneck caused by motorist who are required to stop and produce cash or credit to pay the toll. A KTAG's only use is to record information for a KTAG account.

The KTA provides KTAGs to motorists who secure a KTAG account. Title to the KTAG remains with the KTA, which has the right to require a motorist to return the KTAG or exchange the KTAG in its possession for another one. The KTA also charges a substantial fine if the KTAG is not relinquished when a KTAG account is closed.

In In the Matter of the Appeal of AT & T Technologies, Inc., 242 Kan. 554, 749 P.2d 1033 (1988), the Kansas Supreme Court rejected AT & T's contention that Southwestern Bell was reselling its handsets to its telephone service subscribers as part of its telephone services. The Court reaffirmed an earlier decision that a telephone company is the final user or consumer of equipment that it uses to provide its telephone services, including the handsets that are located in the subscriber's home or business. Because the telephone company is considered to be the final user or consumer of the handsets, the court ruled that Southwestern Bell was not "reselling" the handsets to its telephone service subscribers and therefore could not claim the resale exemption that is extended in the Kansas retailers' sales tax act. The court held that the telephone company was liable for sales tax when the company bought the handsets from the manufacturer and when it paid a third party to repair them.

Courts have applied this same logic to other items and transactions, including television converters that a cable-television company provides to its subscribers, bedding and towels that a hotel provides to its guests, and shoes and bowling balls that bowling alleys provide to bowlers. The Kansas Court of Appeals recently upheld the department's regulations that applied this logic to a Kansas health club that charged membership dues and provided towels and other items to its members. In the Matter of the Appeals of Genesis Health Clubs, Docket No. 99,772 (July 2, 2009)

This same logic applies to the KTAGs that are purchased by KTA and provided to KTAG subscribers. If sales tax is due on the KTAG, the tax is owed by the KTA when it buys KTAGs from the manufacturer. However, no sales tax is owed when the KTAGs are purchased because the KTA is a state agency. Kansas state agencies are exempt from paying sales tax on their direct purchases, provided the purchases are used exclusively for state purposes.

The Kansas Supreme Court has ruled: "The Kansas Turnpike Authority is an arm or agency of the State created by the legislature to perform an essential governmental function." Rockers v. Kansas Turnpike Authority, 268 Kan. 110, 991 P.2d 889 (1999); See e.g. K.A.R. 39-1-1. Retail sales to state agencies are considered to be direct sales to the State of Kansas and are exempted from sales tax by K.S.A. 79-3606(b). This exemption subsection provides, in parts relevant here:

The following shall be exempt from the tax imposed by this act: . . . (b) all sales of tangible personal property or service, including the renting and leasing of tangible personal property, purchased directly by the state of Kansas . . . and used exclusively for state . . . purposes . . . .

Because the KTA is a Kansas agency and because direct sales to state agencies are exempt from sales tax, the KTA can claim exemption when it buys KTAGs and any related items such as batteries and signal-blocking containers from its suppliers. To claim exemption, the KTA is required to provide its vendor with a exempt entity exemption certificate. The exclusive use requirement for exemption is met because the KTA uses the KTAGs solely in the KTAG accounting system.

Toll charges for the use of the Kansas turnpike are not subject to Kansas sales tax. The Kansas sales tax act contain a broad imposition on the sale of goods but only taxes sales of a service if the service is identified in the act as being subject to tax. There is nothing in the sales tax act that imposes sales tax on toll fees charged for use of the Kansas turnpike. Therefore, the KTA should not charge sales tax on turnpike toll charges that are billed on a KTAG account. The KTA also should not charge sales tax on subscriber charges billed for a lost KTAG or for failing to return a KTAG after an account is closed.

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 you have any additional questions, please call me at 785-296-3081.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 08/27/2009 Date Modified: 08/27/2009

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