How is Kansas tax applied to items a Kansas contractor buys for use in out-of-state construction projects?

Plain-English summary

A Kansas elevator contractor asked how items should be taxed when purchased for use in out-of-state construction projects. The Department ruled the answer depends on how and where the items are bought.

The temporary-storage exemption (out-of-state vendor). "If the items are purchased from an out-of-state vendor for a specific job that is outside Kansas and shipped to the contractor's business location in Kansas, the contractor may claim exemption under the temporary storage provisions of K.S.A. 79-3702(e)." The contractor must "(1) purchase the items from an out-of-state vendor; (2) earmark the items for use outside Kansas; and (3) actually use the items out-of-state," keeping them "in an area segregated from the contractor's normal inventory" and documenting the out-of-state purpose. "This exemption does not apply to purchases from Kansas vendors."

Withdrawing from Kansas inventory is taxable here. "If the contractor withdraws items from his or her Kansas inventory, the withdrawal is considered to be a taxable event that occurs in Kansas," because the items "have come to rest in Kansas and because the withdrawal for use occurs entirely within this state." Intending to remove the item for use in another state "does not exempt the transaction."

Place of delivery is the place of sale. "[I]f your client is working in another state, the contractor can have the Kansas vendor deliver the items to the work site in that state," so "delivery and sale would occur outside Kansas and the transfer would be subject to the state of delivery's use tax." But if the contractor "sends a truck back into Kansas from an out-of-state construction site to pick up a purchase . . . the delivery and sale would take place here and would be subject to this Kansas sales tax."

What this means for you

Kansas contractors buying for out-of-state jobs

Buy from an out-of-state vendor, earmark the goods for the out-of-state job, keep them segregated from your regular inventory, and actually use them out of state — then the K.S.A. 79-3702(e) temporary-storage exemption can apply even though the goods pass through Kansas.

Kansas-vendor purchases are different

The temporary-storage exemption does not cover purchases from Kansas vendors. To avoid Kansas tax on a Kansas-vendor purchase, have the vendor deliver directly to the out-of-state job site, where that state's use tax applies.

Don't pull it from Kansas inventory

Once goods sit in your Kansas inventory, withdrawing them for a job is a taxable Kansas event — even if you plan to take them out of state. And sending a truck back into Kansas to pick up goods makes the sale a Kansas sale.

Common questions

Q: Can a Kansas contractor buy tax-free for an out-of-state project?
A: Yes, under the K.S.A. 79-3702(e) temporary-storage exemption — but only if the items are bought from an out-of-state vendor, earmarked for out-of-state use, segregated, documented, and actually used out of state.

Q: Does the exemption cover purchases from Kansas vendors?
A: No. For a Kansas-vendor purchase, the way to avoid Kansas tax is to have the vendor deliver directly to the out-of-state job site, so that state's use tax applies instead.

Q: What if I take items from my Kansas inventory?
A: That withdrawal is a taxable event in Kansas, because the goods came to rest here and the withdrawal for use occurs entirely in Kansas.

Citations and references

• K.S.A. 79-3702(e) — the compensating (use) tax "temporary storage" provision, under which items bought from an out-of-state vendor, earmarked for use outside Kansas, and actually used out of state can pass through Kansas free of Kansas tax if kept segregated and documented. It does not apply to purchases from Kansas vendors.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2000-011

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

June 26, 2000

XXXX
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RE: Your letter of May 11, 2000

Dear XXXX:

I have been asked to answer your letter that we received last month. In it, you ask how items should be taxed when they are purchased by a Kansas elevator contractor for use in out-of-state construction projects.

Generally, the answer to this question depends on how and where the items are purchased. If the items are purchased from an out-of-state vendor for a specific job that is outside Kansas and shipped to the contractor’s business location in Kansas, the contractor may claim exemption under the temporary storage provisions of K.S.A. 79-3702(e). To take advantage of this exemption, the contractor must: (1) purchase the items from an out-of-state vendor; (2) earmark the items for use outside Kansas; and (3) actually use the items out-of-state. This requires maintaining the items in an area segregated from the contractor’s normal inventory, if he or she maintains one, and being able to document that the items were purchased specifically for the out-of-state construction project. This exemption does not apply to purchases from Kansas vendors. If the Kansas contractor wants to be subject to tax in the other state where the construction is being performed and to buy materials from a Kansas vendor, the contractor would have to have the vendor deliver the items to the project site in the state where the construction is being performed.

If the contractor withdraws items from his or her Kansas inventory, the withdrawal is considered to be a taxable event that occurs in Kansas. This is because items in inventory have come to rest in Kansas and because the withdrawal for use occurs entirely within this state. The fact that contractor intends to remove the item from Kansas for use in another state does not exempt the transaction anymore than any other purchaser’s act of buying something from a Kansas retailer with the intention of taking it from Kansas for consumption in another state.

Please note that the place of delivery is normally the place of sale. This means that if your client is working in another state, the contractor can have the Kansas vendor deliver the items to the work site in that state. In such a case, delivery and sale would occur outside Kansas and the transfer would be subject to the state of delivery’s use tax. If your client sends a truck back into Kansas from an out-of-state construction site to pick up a purchase arranged over the telephone or to buy something, the delivery and sale would take place here and would be subject to this Kansas sales tax.

I hope that this adequately answers your questions. If not, please call me at (785) 296-3081.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 07/24/2000 Date Modified: 10/10/2001

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