Could Kansas taxpayers deduct sales tax on federal Schedule A, and could homeowners deduct the sales tax on their 2004 residential construction materials?

Plain-English summary

A 2004 federal law change let individuals who itemize deductions choose, on federal Schedule A (Form 1040), to deduct state and local general sales taxes in place of state and local income taxes. A taxpayer may deduct one or the other, not both, and this notice addressed the sales tax paid in 2004. Sales tax paid on items used in a trade or business cannot be deducted this way.

The Kansas-specific point: some homeowners asked contractors to re-bill their 2004 invoices to show how much sales tax was paid on construction materials, hoping to deduct it. Kansas says they cannot. Under K.S.A. 79-3603(l), the sales tax on construction materials is paid by the contractor (who is treated as the consumer of the materials), not by the property owner. A taxpayer cannot deduct sales tax that a third party paid, so contractors should not reissue invoices showing a materials sales-tax figure.

What this means for you

If you itemized for 2004, you could compare your state and local income tax against your state and local general sales tax and deduct whichever was larger -- but only one. If you had residential construction work done, do not expect to deduct the sales tax on the materials: Kansas law treats the contractor as the buyer who paid that tax. Residential construction labor services are not taxed in Kansas, so a homeowner charged sales tax on a project was likely having business work done, and business sales tax is not deductible on Schedule A.

Common questions

Q: Could I deduct both sales tax and income tax on Schedule A?
A: No. The federal rule let itemizers deduct state and local general sales tax in lieu of state and local income tax -- one or the other, not both.

Q: Can I deduct the sales tax on materials for my home remodel?
A: No. Under K.S.A. 79-3603(l) the contractor pays that sales tax as the consumer of the materials, so it is not a tax you paid and cannot be deducted.

Q: Should a contractor re-bill me to show the materials sales tax?
A: No. Kansas says contractors should not reissue 2004 invoices to display a materials sales-tax amount, because it would encourage a deduction the Internal Revenue Code does not allow.

Q: Is sales tax on business purchases deductible this way?
A: No. Sales tax paid on items used in a trade or business may not be deducted on Schedule A.

Citations and references

• K.S.A. 79-3603(l) -- the contractor is the consumer who pays sales tax on construction materials.
• IRS Publication 600 and Schedule A of IRS Form 1040 (federal itemized sales-tax deduction), referenced in the notice.

Subject

Schedule A Deductions of Sales Tax

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: Notice 05-01

Original ruling text

Notice
Notice Number: 05-01
Tax Type: Individual Income Tax; Kansas Retailers' Sales Tax
Brief Description: Schedule A Deductions of Sales Tax
Keywords:
Approval Date: 03/28/2005

Body:
Office of Policy & Research

                                              NOTICE 05-01
                                      Schedule A Deductions of Sales Tax
                                                 March 28, 2005

Under new federal income tax enactments, individuals who itemize their deductions are now allowed to deduct state
and local general sales taxes in lieu of deducting state and local income taxes. Generally, this deduction only extends
to the sales taxes that the individual paid in 2004. Sales tax paid on items used in a trade or business may not be
deducted. The itemized deduction is taken on Schedule A of IRS Form 1040. Individuals may not deduct both sales
and income taxes. IRS Publication 600.

Recently, residential property owners have asked Kansas contractors to reissue their 2004 customer billings to reflect
the amount of sales tax that was paid on construction materials. Under Kansas law, this tax was paid by the contractor
--- not by the property owner. K.S.A. 2003 Supp. 79-3603(l). Taxpayers cannot deduct sales taxes that were paid by a
third party, including a contractor who did construction work for them. Accordingly, contractors should not re-bill
their customers to show how much sales tax was paid on construction materials. Providing this figure would only
encourage a property owner to claim a deduction that is not allowed under the Internal Revenue Code.

As a general rule, a contractor's labor services are taxed when construction work is done to existing commercial
property. Residential construction services are not taxed. This means that individuals who contract for residential
improvements are not charged sales tax. If an individual paid sales tax on construction services, the construction
services were probably performed for the individual's trade or business. Taxes paid by a trade or business may not be
deducted on Schedule A of Form 1040. Therefore, Kansas contractors should not reissue customer invoices from 2004
that were originally billed "all applicable sales tax included."

Taxpayer Assistance. If you have questions about this notice or its application, please contact the department at (785)
368-8222, or visit our web site at www.ksrevenue.org.

Date Composed: 03/29/2005 Date Modified: 03/29/2005

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