Can a plumbing company cancel its sales tax registration and just pay tax on the materials it buys?

Plain-English summary

A plumbing company had been told it could cancel its sales tax registration and satisfy its sales tax obligations simply by paying sales tax on the materials and supplies it buys. It asked the Department whether that was right. The Department said the advice was incorrect — the company must remain registered and keep collecting tax.

The Department's reasoning:

• The company still makes taxable sales. "As a plumbing company, you probably make some sales at retail and perform some labor services for commercial entities that do not qualify for the new residential exemption." That means "you continue to have sales tax collection duties under the Kansas retailers' sales tax act and should remain registered and report sales tax on your retail sales."
• Untaxed inventory is a trap. "[Y]ou have a resale inventory that has not been taxed. If you change your reporting status, you will owe sales tax on all your entire inventory during the period that you change your reporting status." In other words, dropping registration would make the previously-untaxed resale inventory taxable.
• Local tax sourcing for labor services. "[T]he local tax is due based on your retail location for all contracts that are $10,000 or less. For contracts that are more than $10,000, the local tax due is the local tax that in place at the job situs" (K.S.A. 12-191).

The Department enclosed Notice #92-02, which explains and applies the then-new exemption for residential repair and remodeling.

What this means for you

Plumbers and similar contractors

You cannot escape sales tax collection duties by canceling your registration and paying tax on your inputs. If you make any retail sales or perform taxable labor for customers who don't qualify for the residential exemption, you must stay registered and collect and remit the tax.

Watch your resale inventory

Inventory you bought tax-free for resale is only tax-free while you remain a registered retailer collecting tax on sales. If you change your reporting status, that untaxed inventory becomes taxable — a costly surprise.

Local tax on labor services

Source local tax by contract size: for jobs of $10,000 or less, use your retail (business) location's local rate; for jobs over $10,000, use the local rate at the job site. That split is set by K.S.A. 12-191.

The residential exemption

The residential repair-and-remodeling exemption (explained in Notice #92-02) can exempt some residential labor — but commercial labor generally does not qualify, which is part of why the company retains collection duties.

Common questions

Q: Can a plumbing company cancel its sales tax registration and just pay tax on materials?
A: No. If it makes retail sales or does taxable commercial labor, it must stay registered and collect and remit sales tax.

Q: What happens to untaxed resale inventory if the company changes status?
A: It becomes taxable — the company would owe sales tax on its entire inventory when it changes its reporting status.

Q: How is local tax on labor services sourced?
A: For contracts of $10,000 or less, by the retailer's location; for contracts over $10,000, by the job situs (K.S.A. 12-191).

Citations and references

• K.S.A. 12-191 — sources local sales tax on labor-service contracts: the retailer's location for contracts of $10,000 or less, and the job situs for contracts over $10,000.
• The letter also references Notice #92-02, which explains and applies the exemption for residential repair and remodeling.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-1998-20

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

November 13, 1998

XXXXX
XXXXX
XXXXX

RE: Your letter of October 27, 1998

Dear Ms. XXXXX:

I have been asked to respond to your letter of October 27, 1998. In it you state that someone advised you that you can cancel your sales tax registration and satisfy your sales tax obligations by paying sales tax on your purchases of materials and supplies. This advice is incorrect. As a plumbing company, you probably make some sales at retail and perform some labor services for commercial entities that do not qualify for the new residential exemption. This means that you continue to have sales tax collection duties under the Kansas retailers’ sales tax act and should remain registered and report sales tax on your retail sales. In addition, you have a resale inventory that has not been taxed. If you change your reporting status, you will owe sales tax on all your entire inventory during the period that you change your reporting status.

For reporting local sales tax on labor services, the local tax is due based on your retail location for all contracts that are $10,000 or less. For contracts that are more than $10,000, the local tax due is the local tax that in place at the job situs. K.S.A. 12-191.

I have enclosed a copy of Notice #92-02. It explains and applies the new exemption for residential repair and remodeling. Please call me if you have any other questions or wish to discuss this matter further. My number is (785) 296-4008.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Enclosure

Date Composed: 11/24/1998 Date Modified: 10/10/2001

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