Can a tribe get a Kansas exemption for its government center construction, and how should it proceed?

Plain-English summary

A representative asked the Department to agree that a tribe and its Tribal Government Center qualify for the sales tax exemption at K.S.A. 79-3606(cc). The argument was that the tribe qualifies for enterprise-zone benefits available to "any commercial enterprise other than a manufacturing business or a retail business" under K.S.A. 1997 Supp. 74-50,114(g), and that the Government Center is such a "commercial enterprise" because the tribe runs gambling operations.

The Department did not rule on qualification — it called the request premature. "Your request is premature. The appropriate procedure for the Tribe to raise its arguments is to submit a request for a project exemption certificate to the department." The Department enclosed Form PR-70b and explained that once the completed request is received, it "will review it and issue a determination that either grants or denies the request," with the same appeal rights as any other applicant.

An alternative route: Central Machinery. The Department reminded the tribe of a prior letter noting that Central Machinery Co. v. Arizona Tax Comm'n, 448 U.S. 160 (1980), "established that an Indian tribe can avoid paying state sales tax on its purchases of construction materials by negotiating the sale on the reservation, and by arranging to take delivery of, title to, and to directly pay for the goods there." If the tribe "structures the construction contract for its Tribal Government Center in accordance with Central Machinery, it can accomplish the same tax saving that would be achieved by securing a project exemption certificate."

Bottom line: the Department declined to pre-approve the exemption. The tribe's path is either to apply for a project exemption certificate through the normal process or to structure its construction-material purchases to fit the Central Machinery on-reservation rule — either of which can achieve the tax saving.

What this means for you

The Department won't pre-approve an exemption by letter

When a project-based exemption is at stake, the Department routes the applicant to the formal project-exemption-certificate process rather than issuing an advance blessing in a letter ruling. The determination — and any appeal — happens through that process.

Use Form PR-70b to request a project exemption certificate

A project exemption certificate lets qualifying project owners and their contractors buy construction materials tax-free. The applicant submits Form PR-70b, and the Department grants or denies the request.

Tribes have a distinct tax-avoidance route under Central Machinery

Separate from the state's certificate process, a tribe can avoid state sales tax on construction materials by negotiating the sale on the reservation and taking delivery, title, and making payment there. Structuring the deal that way achieves the same result as a certificate.

Arguments about "commercial enterprise" status belong in the application

The representative's enterprise-zone/commercial-enterprise arguments were not decided here. They are to be raised in the project-exemption-certificate request, where the Department will evaluate them.

Common questions

Did the Department say the tribe qualifies for the exemption?
No. It called the request premature and did not decide qualification; the tribe must apply for a project exemption certificate.

How does the tribe apply?
By submitting Form PR-70b to request a project exemption certificate. The Department then grants or denies the request, with normal appeal rights if denied.

Is there another way to avoid tax on construction materials?
Yes. Under Central Machinery Co. v. Arizona Tax Comm'n, a tribe can avoid state sales tax by negotiating the sale on the reservation and taking delivery, title, and paying there.

What exemption statute was at issue?
K.S.A. 79-3606(cc), together with the enterprise-zone provision in K.S.A. 1997 Supp. 74-50,114(g) the representative relied on.

Citations and references

• K.S.A. 79-3606(cc) — the exemption the representative asked the Department to apply; the Department did not decide it, directing the tribe to the project-exemption-certificate process instead.
• K.S.A. 1997 Supp. 74-50,114(g) — the enterprise-zone provision (benefits for "any commercial enterprise other than a manufacturing business or a retail business") the representative relied on; described in prose.
• Central Machinery Co. v. Arizona Tax Comm'n, 448 U.S. 160 (1980) — establishes that a tribe can avoid state sales tax on construction materials by negotiating the sale and taking delivery, title, and payment on the reservation.
• Form PR-70b — the application to request a Kansas project exemption certificate.
• K.A.R. 92-19-59 — authorizes Kansas private letter rulings; this ruling binds the Department only as to the requesting taxpayer and the facts presented.
• Issued August 25, 1998 by Thomas E. Hatten, Attorney, Policy & Research, Kansas Department of Revenue.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1998-111

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

August 25, 1998

XXXXX
XXXXX
XXXXX

RE: Your letter of July 30, 1998

Dear XXXXX:

I have been asked to respond to your letter of July 30, 1998, addressed to Mr. Mark Ciardullo. In it, you discuss whether the XXXXX Tribe (the “Tribe”) and its Tribal Government Center qualify for the exemption extended at K.S.A. 79-3606(cc). You argue that the Tribe qualifies for enterprise zone benefits that are available to “any commercial enterprise other than a manufacturing business or a retail business.” K.S.A. 1997 Supp. 74-50,114(g). You assert that the Tribal Government Center qualifies as a commercial enterprise since the Tribe runs gambling operations. You conclude your letter by asking the Department to agree that the Tribe qualifies for such an exemption.

Your request is premature. The appropriate procedure for the Tribe to raise its arguments is to submit a request for a project exemption certificate to the department. I have enclosed a Form PR-70b (Rev. 9/97) for the Tribe to use. Once we receive the completed request, we will review it and issue a determination that either grants or denies the request for project exemption. If the request is denied, the Tribe will have the same appeal rights as any other applicant whose request for a project exemption certificate has been denied.

As I pointed out in my letter to you of June 15, 1998, Central Machinery Co. v. Arizona Tax Comm’n, 448 U.S. 160, 164-5 (1980) established that an Indian tribe can avoid paying state sales tax on its purchases of construction materials by negotiating the sale on the reservation, and by arranging to take delivery of, title to, and to directly pay for the goods there. If the Tribe structures the construction contract for its Tribal Government Center in accordance with Central Machinery, it can accomplish the same tax saving that would be achieved by securing a project exemption certificate from the State of Kansas. Please call me if you have any additional questions.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Enclosure

Date Composed: 09/02/1998 Date Modified: 10/10/2001

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