Does finishing unfinished space in a previously constructed building qualify as exempt original construction in Kansas?

Plain-English summary

A new owner had recently acquired a Kansas building containing unfinished space and asked whether completing that space would qualify for the original-construction exemption from sales tax. The Department learned from the project architect that the building was constructed in 1976, totals about 10,000 square feet (roughly 1,000 square feet office, the balance production area).

The Department quoted regulation K.A.R. 92-19-66b(f), which lets the completion of an unfinished portion of an existing building or facility escape sales tax only when all four conditions are met:

1. the service was called for in the original blueprint, building plan, or specification when original construction started (including change orders during original construction);
2. the completion occurs within a time reasonably requisite to the original construction;
3. the service would have been performed at the time of original construction except for circumstances beyond the owner's control (not merely running short of funds, and not additional services contracted after the owner takes possession/occupancy); and
4. the owner or occupant is the first or initial owner or occupant of the building or facility.

Based on the facts and the architect conversation, the Department concluded the completion of the unfinished area would not meet the regulation's criteria to be defined as original construction.

What this means for you

Finishing unfinished space inside an older, already-occupied building generally does not qualify as exempt original construction in Kansas — the four-part test is strict.

• All four conditions must be met. Missing any one (for example, not being the first owner/occupant, or completing years after the original build) defeats the exemption.
• Buying a decades-old building and finishing it out typically fails the test — here, a 1976 building acquired by a new owner did not qualify.
• If it doesn't qualify, the installation/application labor to finish the space is taxable under the ordinary rules (materials are taxable as well).
• Documentation matters. Whether the work was in the original plans and done within a reasonable time of the original construction, by the first owner/occupant, is what the Department examines.

Common questions

Is finishing unfinished space in an existing building exempt in Kansas?
Only if it satisfies all four conditions of K.A.R. 92-19-66b(f). On the facts here — a 1976 building acquired by a new owner — the Department ruled it did not qualify.

Why didn't this project qualify?
The completion did not meet the regulation's criteria for original construction; among other things, the work was long after the 1976 construction and by a later owner.

What are the four conditions?
The work was in the original plans; it's completed within a time reasonably requisite to original construction; it would have been done then but for circumstances beyond the owner's control; and it's done for the first/initial owner or occupant.

If it doesn't qualify, is the labor taxable?
Yes. Installation/application labor that isn't original construction is taxable, and the materials are taxable too.

Citations and references

• K.A.R. 92-19-66b(f) — sets the four-part test under which completing an unfinished portion of an existing building or facility is treated as (nontaxable) original construction.

Source

• Original ruling (DOCX): https://www.ksrevenue.gov/pildocs/rulings/P-1998-04.docx
• Kansas Policy Information Library: https://www.ksrevenue.gov/prpil.html

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 2, 1998

XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX

Dear XX XXXXXX:

The purpose of this letter is to respond to your letter dated January 22, 1997.

You stated that the XXXXXXXXXXXXXXXXXX had recently acquired a building in XXXXX, Ks. The building contains an amount of unfinished space. You asked if the completion on the unfinished space would qualify for exemption from sales tax as original construction.

You suggested that if additional information was needed that the architectural firm handling the this work be contacted. I spoke with XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXX and she indicated that building in question was constructed in 1976. The total present building consisted of approximately ten thousand square feet (10,000). One thousand square feet is office and the balance is production area formerly used to produce XXXXXXXXXXX.

The regulation K.A.R. 92-19-66b(f) states:

Services of installing or applying tangible personal property to complete unfinished portions of newly constructed buildings, facilities, shopping centers and malls as space within the building, facility, center or mall is leased or sold to the first or initial tenant of that space shall not be subject to sales tax. Services performed to install or apply tangible personal property for the completion of an unfinished portion of an existing building or facility shall not be taxable when:
(1) The service being rendered was called for in the original blue print, building plan or building specification at the time original construction of the building or facility was started, including any change orders issued during the original construction of the building or facility;
(2) the completion of the unfinished portion of the building or facility is within a time reasonably requisite to the original construction of the building or facility;
(3) the service rendered would have been performed at the time of the original construction of the building or facility, except for circumstances beyond the owner's control. Those circumstances shall not include instances in which the project is essentially completed and usable for the purposes intended, but the owner merely fell short of funds, or when the owner, after taking possession or occupancy of the building or facility, contracts for additional services; and

(4) the owner or occupant is the first or initial owner or occupant of the building or facility.

Based on the facts of your letter and a conversation with XX XXXXX the project architect, it would be the opinion of the Department that the completion of the unfinished area would not meet the criteria of the regulation to be defined as original construction.

Sincerely yours,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 02/04/1998 Date Modified: 10/10/2001

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