When can a contractor claim the sales tax exemption on a U.S. government (or other exempt-entity) project, and what happens to purchases made before the certificate is issued?

Plain-English summary

The requester asked how Kansas sales tax applies to a project involving the U.S. government — specifically, how and when the project exemption certificate (PEC) can be used. The Department explained that the exemption is available only after the exempt entity has actually obtained the certificate from the state, and that purchases a contractor makes before the certificate is issued are taxable.

The Department quoted the two governing statutes. K.S.A. 79-3606(d) covers projects for political subdivisions, nonprofit hospitals, and public or private schools and educational institutions: the exempt entity "shall obtain from the state and furnish to the contractor an exemption certificate for the project involved," the contractor "shall furnish the number of such certificate to all suppliers," and the suppliers execute invoices bearing that number. K.S.A. 79-3606(e) works "in the same manner except that it applies to projects for the government of the United States."

From those statutes, the Department laid out the required order:

1. The exempt entity secures the certificate from the state;
2. The exempt entity furnishes the certificate to the contractor;
3. The contractor furnishes the certificate number to its supplier; and
4. The suppliers execute invoices bearing the certificate number.

Because the steps run in that order, "a contractor cannot furnish the certificate number to his suppliers and claim the sale as exempt until after the exempt entity has requested and been furnished from the state the project exemption certificate." A contractor buying for the project before the certificate issues "does not have any authority to claim the tax exemption and must pay the sales tax to the supplier," and suppliers making such pre-certificate sales "must collect the tax from the contractor and remit" it.

Two more points: the PEC's effective date is the date the Department receives the application, so only sales on or after that date can be honored as exempt; and if an entity fails to secure a certificate in time, a regulation lets it apply for permission to seek a refund from its contractor's suppliers for sales that would have been exempt. An exempt entity can also obtain agency status to issue its own certificates on a timely basis.

What this means for you

Exempt entities (including on U.S. government projects)

Apply for and obtain the project exemption certificate before your contractor starts buying materials. The exemption does not exist until you have the certificate, and its effective date is the date the Department receives your application — not the date the project starts.

Contractors

Do not claim the exemption or pass a certificate number to suppliers until the exempt entity has actually secured the certificate. Materials you buy before then are taxable, and you must pay the supplier — you cannot retroactively treat those purchases as exempt on your own.

Suppliers

If you sell to a contractor before a project exemption certificate has been issued, collect the tax and remit it. You can honor the exemption only for sales on or after the certificate's effective date.

If the certificate is late

Not all is lost: the exempt entity can apply to the Department for permission to seek a refund from the contractor's suppliers for sales that would have been exempt. High-volume exempt entities can also obtain agency status to issue their own certificates and avoid timing gaps.

Common questions

Q: Can a contractor claim the exemption before the entity gets the certificate?
A: No. Until the exempt entity secures and furnishes the certificate, the contractor has no authority to claim the exemption and must pay tax on its purchases.

Q: What is the certificate's effective date?
A: The date the Department receives the application. Only sales on or after that date can be honored as exempt.

Q: What if the certificate wasn't obtained in time?
A: A regulation lets the exempt entity apply for permission to seek a refund from the contractor's suppliers for the sales that would have been exempt.

Citations and references

• K.S.A. 79-3606(d) — the project exemption certificate procedure for political subdivisions, nonprofit hospitals, and schools/educational institutions.
• K.S.A. 79-3606(e) — the same procedure applied to projects for the government of the United States.
• The letter also notes a regulation permitting a late exempt entity to seek a refund from a contractor's suppliers, and the availability of "agency status" for an exempt entity to issue its own certificates.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-1999-17

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

October 20, 1999

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Dear Ms. TTTTT:

We wish to acknowledge receipt of your letter dated October 15, 1999, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3606(d) states in part; “When any political subdivision of the state, public or private nonprofit hospital, public or private elementary or secondary school or public or private nonprofit educational institution shall contract for the erection, repair, or enlargement of any building or other project, it shall obtain from the state and furnish to the contractor an exemption certificate for the project involved, and the contractor may purchase materials for incorporation in such project. The contractor shall furnish the number of such certificate to all suppliers from whom such purchases are made, and such suppliers shall execute invoices covering the same bearing the number of such certificate.”

K.S.A. 79-3606(e) is written in the same manner except that it applies to projects for the government of the United States.

As can be seen from the statutes, the instructions for the project exemption certificate are listed in the following order:
1) The exempt entity shall secure the certificate from the state.
2) The exempt entity shall furnish the certificate to the contractor.
3) The contractor shall furnish the certificate number to his supplier.
4) The suppliers shall execute invoices bearing the certificate number.

Thus, a contractor cannot furnish the certificate number to his suppliers and claim the sale as exempt until after the exempt entity has requested and been furnished from the state the project exemption certificate. Therefore, a contractor making purchases for a project prior to the issuance of a project exemption certificate by the Kansas Department of Revenue does not have any authority to claim the tax exemption and must pay the sales tax to the supplier.

Suppliers who make sales to a contractor prior to issuance of a project exemption certificate must collect the tax from the contractor and remit the same to the Kansas Department of Revenue.

The effective date of the project exemption certificate is the date the application for such certificate is received by the Kansas Department of Revenue. Only sales made on or after this date can be honored as tax exempt by the Kansas Department of Revenue.

Please be advised that a regulation was adopted, that would, permit an exempt entity that fails to secure a project exemption certificate in time for a contractor to secure exemption for part or all of its purchases may apply to the department for permission to seek from its contractor’s suppliers a refund of taxes on sales that would have been exempt had a project exemption certificate been secured in time for its contractors to claim exemption on their purchases. Additionally, the current law permits a tax exempt entity to obtain agency status with the Kansas Department of Revenue and issue its own project exemption certificates on a timely basis, on forms issued by this department.

If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 11/03/1999 Date Modified: 10/10/2001

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