Could an oil-well customer rely on a 1970 Kansas bulletin to stop paying sales tax on well-site inspection and labor services?

Plain-English summary

An oil-patch service provider had been collecting sales tax on well-site inspection and labor. A customer stopped paying and cited a 1970 Department bulletin as proof that the services were nontaxable.

The Department said the customer could not rely on that bulletin. It implemented a 1970 statute that the Kansas Supreme Court held unconstitutional in Kansas City Millwright Co. v. Kalb (1977). The legislature then enacted a replacement labor-services tax, later upheld in In re Tax Appeal of R & R Janitorial Services (1984).

K.A.R. 92-19-58 says a revenue ruling ceases to be valid after pertinent statutory, judicial, regulatory, or Department changes. At least three of those invalidating events applied to the old bulletin.

The current guidance was Revenue Ruling 19-2002-2 and its companion questions and answers. Based on the services discussed, the Department said the provider had properly charged sales tax on well-site inspection and labor.

The customer could not simply refuse to pay tax to the retailer. Its remedies were to pay and file a refund claim within the then-stated three-year period or request a current written ruling. If the Department later found the tax erroneous, the provider could refund the customer and take a return credit.

What this means for you

Oil and gas service providers

Do not let a customer override current collection guidance with a decades-old ruling. Check whether later statutes, cases, or Department publications invalidated the cited authority.

Purchasers disputing sales tax

Pay the collected tax and pursue the Department's refund or ruling process. K.S.A. 79-3651(g) requires purchasers to pay tax lawfully due to the retailer.

Tax professionals

An official ruling is only as current as the law it interprets. K.A.R. 92-19-58 provides a concrete obsolescence checklist: legislative, judicial, regulatory, or formal Department change.

Common questions

Q: Why was the 1970 bulletin invalid?
A: Its statute was held unconstitutional and replaced, and later Department guidance addressed the current law.

Q: Which guidance controlled in 2008?
A: Revenue Ruling 19-2002-2 and the companion Q&A for drilling contractors, well-service providers, and producers.

Q: Were the inspection and labor charges taxable?
A: Yes under the facts discussed; the Department said the provider had correctly charged tax.

Q: How could the customer challenge the tax?
A: Pay and seek a refund, or request a current written ruling from the Department.

Citations and references

• K.A.R. 92-19-58 — events that invalidate a revenue ruling
• K.S.A. 79-3651(g) — purchaser duty to pay tax lawfully due to the retailer
• Revenue Ruling 19-2002-2 — Sales taxation of drilling contractors, well service providers, and oil and gas producers
• Kansas City Millwright Co. v. Kalb, 221 Kan. 658, 562 P.2d 65 (1977)
• In re Tax Appeal of R & R Janitorial Services, 9 Kan. App. 2d 500, 680 P.2d 909 (1984)

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: O-2008-003

Original ruling text

Opinion Letter

Body:

Office of Policy & Research

August 27, 2008

XXXX
XXXX
XXXX

RE: Your fax received yesterday

Dear XXXX:

One of your customers has been paying sales tax on charges that you bill for your oil patch services. Recently, the customer refused to pay the sales tax, claiming that Kansas Department of Revenue Bulletin, Vol. III, No. 9 (September 1, 1970), instructs that the services in question are not subject to Kansas sales tax.

The 1970 Revenue Bulletin implemented a 1970 legislative enactment that the Kansas Supreme Court ruled was unconstitutional seven years later. Kansas City Millwright Co. v. Kalb, 221 Kan. 658, 562 P.2d 65 (1977). Five weeks after the court handed down its decision in the Millwright case, the Kansas legislature enacting a new law to tax labor services. See 1977 Kansas Session Laws Chap. 337, Sec. 2. The constitutionality of the new enactment was upheld seven years latter. In re Tax Appeal of R & R Janitorial Services, 9 Kan. App. 2d 500, 680 P.2d 909 (1984). This means that your customer is basing its exemption claim on a thirty-year old department ruling that interpreted a statute that the Kansas legislature repealed in 1977 because the Kansas Supreme Court had held that it was unconstitutional.

K.A.R. 92-19-58 explains when department rulings should not be followed:

(c) A revenue ruling shall cease to be valid when any one or all of the following occur:
(1) The statute or regulation to which the ruling applies is changed in any pertinent part by the Kansas Legislature;
(2) a pertinent change in the interpretation of the statute or regulation is made by a court decision;
(3) the regulation or interpretation is changed in any pertinent part by a department regulation or revenue ruling, whether the change is accomplished by means of a new regulation or revenue ruling or by means of a revision of an existing regulation or revenue ruling; or,
(4) the department rescinds an outstanding ruling issued prior to any given specified date by issuing a general bulletin or notice in the Kansas register.

K.A.R. 92-19-58 provides at lease three reasons that 1970 Revenue Bulletin, Vol. III, No. 9 should not be followed by any Kansas taxpayer. Subsections(c)(1), (c)(2), and (c)(3) clearly apply to the 1970 bulletin and its announcements.

During our telephone conversation, you stated that, prior to its reliance on the 1970 Revenue Bulletin, your customer had been following the directives in Revenue Ruling 19-2002-2, Sales taxation of drilling contractors, well service providers, and oil and gas producers, and a Q & A that was issued at the same time. These publications are current. Based on our discussion, it appears that you were properly charging sales tax when you billed your customer for inspection and labor services performed at its well sites.

K.S.A. 79-3651(g) provides:

(g) It shall be the duty of every person who purchases tangible personal property or services that are taxable under this act to pay the full amount of tax that is lawfully due to the retailer making the sale. Any person who willfully and intentionally refuses to pay such tax to the retailer shall be guilty of a misdemeanor and upon conviction shall be punished and fined as provided by subsection (g) of K.S.A. 79-3615, and amendments thereto.

Your customer has a number of remedies that it can call upon if its continues to believe that your charges should not be taxed. The first is to pay the tax to you and then seek a refund from the department for the taxes claimed to be paid in error. Kansas has a three year statute of limitations on refund requests, which means that your customer will not be out of any taxes if it follows this procedure and establishes that your services are not taxable. Another remedy your customer can use is to submit a written request to the department for a letter ruling on the taxability of your charges. If sales tax should not have been charged, we would issue a letter ruling to the customer stating as much. It would also direct you to reimburse the customer for any taxes that you collected in error for the past three years. You would then refund the taxes to the customer and take a credit on your next sales tax return. If your customer follows either of these approaches, your company will no longer be in the middle of a dispute that your customer needs to resolve with the department. Please let me know how you are able to resolve this matter.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 08/27/2008 Date Modified: 08/27/2008

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