Is a returned-check (insufficient funds) fee on a utility bill subject to Kansas sales tax?

Plain-English summary

A company that supplies tax-compliance software to gas and electric utilities asked whether a bad-check (insufficient funds) fee charged on a utility bill is subject to Kansas sales tax.

The Department said no — bad-check fees are exempt. This is a carve-out from the general rule that many utility charges are taxable. Kansas sales tax is collected on the sale of electricity, gas, and heat, and it applies to charges a customer must pay to receive the utility — including late fees, connect/reconnect fees, and debt-reduction (minimum-usage) charges, all taxed at the same state and local rate as the utility itself. But K.A.R. 92-19-3a specifically exempts "charges to customers for insufficient funds checks or closed-account checks." So even though a late fee on a gas, electric, or heat bill is taxable, a returned-check or bad-check fee is not.

The ruling is limited to gas, electric, and heat utilities; the Department noted that Kansas Publication 1527 treats water utilities differently.

What this means for you

Utilities and utility billing systems

Tax utility late fees, connect/reconnect fees, and minimum-usage/debt-reduction charges at the utility's own state and local rate — but do not charge sales tax on returned-check or closed-account (NSF) fees, which K.A.R. 92-19-3a exempts. This distinction matters for correctly configuring billing and compliance software. Note the water-utility treatment differs.

Utility customers

A bounced-check fee on your gas, electric, or heat bill shouldn't include sales tax, even though a late-payment fee on the same bill can.

Common questions

Q: Is a returned-check fee on a utility bill taxable in Kansas?
A: No. K.A.R. 92-19-3a exempts charges for insufficient-funds or closed-account checks from Kansas Retailers' Sales Tax.

Q: But aren't utility late fees taxable?
A: Yes — late fees, connect/reconnect fees, and debt-reduction (minimum-usage) charges on gas, electric, and heat utilities are taxable at the same rate as the utility. Bad-check fees are the exception.

Q: Does this apply to water utilities?
A: The ruling is limited to gas, electric, and heat; the Department said Publication 1527 applies differently to water utilities.

Citations and references

• K.A.R. 92-19-3a — exempts from Kansas Retailers' Sales Tax "charges to customers for insufficient funds checks or closed-account checks"; the basis for treating utility bad-check fees as nontaxable.
• Kansas Publication 1527 — the Department's utilities sales-tax guide, which treats late fees, connect/reconnect fees, and debt-reduction charges as taxable and refundable deposits as nontaxable, and applies differently to water utilities.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2012-007

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 2, 2012

XXXXXXX
XXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXX
XXXXX, XX XXXXX

Dear XXXXXX;

Your letter dated September 20, 2012, has been referred to me for response. Your letters state, in pertinent part, as follows:

XXXXX, supplies tax compliance software to utility (gas and electric) industries. We are currently researching the taxability of bad check fees, or insufficient check charges.

Per Publication 1527: Sales tax is collected on the sale or furnishing of electricity, gas, water or heat. Therefore the tax is due on the total amount charged for furnishing the customer these utilities. If the charge must be paid by the customer in order to receive gas, water, electricity or heat, the charge is taxable at the same state and local rate applicable to the utility itself. See exception below. A customer is late paying his gas bill, so a late charge or fee is added. This fee is subject to the same rates of state and local sales tax as the utility. Conversely, if you off a discount to customers who pay within a prescribed period of time, the sales tax attaches to the discounted amount actually paid by the customer. Other taxable fees include connect/reconnect fees and debt reduction charges (minimum usage charges) on gas, electrical and heat utilities. A refundable utility deposit is an example of a fee that is not subject to sales tax.

Would a fee or charge for a returned check for insufficient funds on a utility bill be subject to sales tax?

Please note that Publication 1527 applies differently to water utilities. This letter is limited to utilities for gas, electric, and heat. K.A.R. 92-19-3a exempts from Kansas Retailers’ Sales Tax, “charges to customers for insufficient funds checks or closed-account checks.” Therefore, although Kansas Retailers’ Sales Tax is imposed on late fees on utilities for gas, electric, and heat, the fees related to insufficient funds / bad checks are not subject to the tax.

This 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 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.

Sincerely,

Mark D. Ciardullo
Tax Specialist

arw

Date Composed: 10/02/2012 Date Modified: 10/02/2012

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