What choice did the 2001 Clean Drinking Water Fee give Kansas public water supply systems?

Plain-English summary

Historically Kansas taxed public and private water utilities the same way. Because tracking taxable vs. exempt production purchases had become burdensome, 2001 Senate Bill 332 created the Clean Drinking Water Fee and gave each public water supply system a choice:

• Pay the Fee: $.03 per 1,000 gallons of water sold at retail, and in exchange claim sales tax exemption on all purchases beginning the next year. A system that does nothing becomes subject to the Fee automatically.
• Opt out: keep paying sales and use tax on taxable purchases. To opt out, the system had to notify the Department in writing on or before October 1, 2001, using the Fee Opt Out Form. This election is irrevocable.

Key points:

• The Fee is the water system's liability owed to the Department, and SB332 says the price to retail consumers shall not include the Fee.
• Systems subject to the Fee start accruing and remitting it on January 1, 2002.
• "Public water supply systems" include municipal and county water districts, wholesale and rural water districts, and other public water utilities delivering through mains/pipes/lines — not private water utilities.
• SB332 also made certain charges no longer subject to state or local sales tax effective January 1, 2002: (1) rural water benefit units; (2) service-establishment fees, including water system impact and enhancement fees; and (3) connection fees. The duty to collect sales tax (and the water protection fee) on the sale of water to retail customers was unchanged.

What this means for you

If you run a Kansas public water supply system, in 2001 you had a one-time, irreversible decision: take the Clean Drinking Water Fee (simpler — buy everything tax-exempt and remit $.03 per 1,000 gallons) or opt out by October 1, 2001 and keep the old sales-tax-on-purchases regime. Doing nothing meant you were opted in to the Fee automatically starting January 1, 2002. Either way, you couldn't add the Fee as a line item to customers' bills.

Common questions

Q: What is the Clean Drinking Water Fee rate?
A: $.03 per 1,000 gallons of water sold at retail, owed by the water system.

Q: What happens if a system does nothing?
A: It becomes subject to the Fee automatically and may claim sales tax exemption on purchases beginning the next year.

Q: How and when could a system opt out?
A: By written notice to the Department on or before October 1, 2001; the election is irrevocable.

Q: Can the Fee be charged to customers?
A: No. SB332 directs that the price to retail consumers not include the Fee.

Citations and references

• 2001 Senate Bill 332 -- Clean Drinking Water Fee and related sales tax changes (Fee accrues January 1, 2002).

Subject

Clean Drinking Water Fee (Senate Bill 332)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 01-02

Original ruling text

Notice
Notice Number: 01-02
Tax Type: Clean Drinking Water Fee; Kansas Retailers' Sales Tax
Brief Description: Senate Bill 332 (2001 Legislative Session) implementation.
Keywords:
Approval Date: 08/08/2001

Body:
KANSAS DEPARTMENT OF REVENUE
CUSTOMER RELATIONS

                                                  NOTICE 01-02
                                TO KANSAS PUBLIC WATER SUPPLY SYSTEMS
                                 ABOUT THE CLEAN DRINKING WATER FEE

The Kansas Retailers’ Sales Tax Act was first enacted in 1937. Since then, Kansas has imposed the same sales and use
tax duties on public utilities as on private utilities. This means that, over the years, public and private utilities have
collected the same tax from consumers on sales of water, electricity, and gas. Similarly, public and private utilities
have been required to pay, or have been exempted from paying, the same tax to vendors on purchases of generating
equipment, poles, power lines, water purification equipment, pumping equipment, pipe, office equipment, motor
vehicles, and other items used in their business operations. These requirements put public and private utilities on the
same competitive footing.

Since 1937, most states, including Kansas, have broadened their sales tax exemptions for production inputs. These
exemptions, while reducing costs for utilities, have increased the time spent accounting for taxable and exempt
purchases to the point that this recordkeeping has become burdensome for some public water supply systems. To help
alleviate this burden, the 2001 Kansas legislature enacted Senate Bill 332. This bill gives public water supply systems
the choice of either paying the Clean Drinking Water Fee (the “Fee”), or opting out of the Fee and continuing to pay
sales and use tax on taxable purchases. A water system that does not opt out will become subject to the Fee
automatically and entitled to claim sales tax exemption on all purchases beginning next year. The Fee is imposed
at the rate of $.03 per 1,000 gallons of water sold at retail. The Fee is the liability of the water system, owed to the
department. SB 332 directs that the price to retail consumers shall not include the amount of the Fee. Public water
supply systems include municipal and county water districts, wholesale water supply districts, rural water districts,
and all other public water utilities that supply water to consumers through mains, pipes, or lines. Public water supply
systems do not include private water utilities.

To opt out of the Fee and thereby continue paying sales and use tax on purchases, a public water supply system must
notify the Kansas Department of Revenue in writing on or before October 1, 2001. This election is irrevocable. A Fee
Opt Out Form, for use in opting out of the Fee, will be included with the initial mailing of this notice and is available
on our web site. Systems that do not opt out and thereby become subject to the Fee automatically will receive a water
fee reporting packet from the department sometime after October 1, 2001. The packet will include instructions on how
to report the Fee and claim exemption, along with returns and exemption certificates. As noted, utilities that are
subject to the Clean Drinking Water Fee will start accruing and remitting the Fee on January 1, 2002.

In addition to the Fee, SB 332 provides that certain charges and fees that utilities bill to consumers are no longer
subject to state or local sales tax effective January 1, 2002. These are: (1) charges for rural water benefit units; (2) fees
collected to establish service, including water system impact fees and system enhancement fees; and, (3) connection
fees collected by the water supplier. No change was made to the duty of a public water supply system to collect and
remit the sales tax or water protection fee on the sale of water to its retail customers.

This notice and the “Clean Drinking Water Fee Opt Out Form” are available at the Department of Revenue’s web site,
www.ink.org/public/kdor. If you need to discuss this notice or the Water Fee, please call either our toll free (1-877-
526-7738) or Topeka area number (368-8222), press “1” to speak to a representative (listen briefly), press “5” for

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Business Taxes (listen briefly), and then press “8” for Miscellaneous Taxes.

Date Composed: 08/08/2001 Date Modified: 07/22/2003

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