How is Kansas sales tax applied to carpet sales and installation in a hotel — replacement versus a newly built hotel?

Plain-English summary

A multistate hotel chain uses an out-of-state contractor/retailer to install carpet in its hotels and asked how Kansas sales and use tax applies. Because the chain did not provide the contract or billings — and did not say whether the contractor/retailer installs the carpet itself or subcontracts to Kansas contractors — the Department could only give general guidance, "cannot provide you with a definitive answer."

No special carpet rule; the labor rule governs. "Kansas currently has no separate rule for carpet installation. Installation labor services for commercial buildings are taxed in Kansas, unless the project qualifies as 'original construction' of a building. This is the building's first or initial construction."

Replacement vs. new hotel. "[F]or carpet that is replaced in one of your existing hotels, tax is due on charges for both the carpeting and the installation. For carpet that is installed in one of your new hotels, tax is due on the charges for carpeting only." (In the new hotel, installing the carpet is part of original construction, so the labor is not taxed — only the carpet is.)

The tax base depends on the paperwork. Whether the deal is a "retail sale with installation" or a contract "for the improvement of real property" turns on the contract and billings. "Most carpet sales in Kansas are considered to be retail sales with installation." If it is a construction contract on which the home state was paid sales tax on inventory items, "the tax base for the Kansas sales tax on taxable installation services would be the difference between the contract price and the tax paid carpeting and other materials." The contractor/retailer could also bill a lump sum with "tax included" stated on the invoice.

Bottom line: replacing carpet in an existing hotel is fully taxable (carpet + labor); carpeting a newly built hotel is taxed on the carpet only. The precise tax base needs the contract and billing documents to pin down.

What this means for you

Replacement carpet: both carpet and labor are taxed

When carpet is replaced in an existing hotel, the job is not original construction, so Kansas taxes both the carpeting and the installation labor.

New-build carpet: only the carpet is taxed

When carpet goes into a newly built hotel, the installation is part of the building's original construction, so the labor is exempt and only the carpeting is taxed.

The contract and billings determine the treatment and tax base

Whether the transaction is a taxable retail sale with installation or a real-property improvement contract — and how the tax base is computed — depends on the contract and billing documents. Keep them; the Department needs them to give a definitive answer, and they drive the result.

Cross-state carpet jobs are handled case by case

Kansas will try to give the business the same treatment its home state affords, but that is not always possible. For a construction-contract job where the home state taxed inventory, the Kansas installation-service tax base is the contract price minus the tax-paid carpeting and materials; alternatively a "tax included" lump-sum billing is possible.

Common questions

Q: Is carpet installation taxable in Kansas?
A: Installation labor for commercial buildings is taxable unless the job is original construction. Replacing carpet in an existing building is taxable (carpet + labor); carpeting a newly built building is taxed on the carpet only.

Q: Why is new-hotel carpet labor exempt but replacement labor taxed?
A: Installing carpet in a newly built hotel is part of the building's original (first/initial) construction, which is exempt labor. Replacing carpet in an existing hotel is not original construction, so the labor is taxed.

Q: Why couldn't the Department give a definitive answer?
A: Because the tax treatment and tax base depend on the contract and billings, which were not provided. Those documents show whether the deal is a retail sale with installation or a real-property improvement contract.

Citations and references

• Kansas installation-labor / original-construction rule — installation labor for commercial buildings is taxable unless the work is the original (first or initial) construction of the building; the released ruling states this rule without citing a specific statute subsection (the underlying provision is K.S.A. 79-3603 and its original-construction exception).
• K.A.R. 92-19-59 — the regulation authorizing private letter rulings; this ruling was issued under it and binds the Department only as to the requesting taxpayer.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-1999-110

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

April 20, 1999

XXXXX
XXXXX
XXXXX

RE: Your letter of March 15, 1999

Dear XXXX:

I have been asked to answer your letter that we received last month. XXXX owns and operates a chain of hotel’s throughout the United States. Your business must comply with the different sales tax treatments that states give to construction activities. One problem area for your multistate business operations is the varied treatment given by states to carpet sales and installation. As you are aware, many states have special rules which govern carpet sales and installation. This is because the sale and installation of carpet has aspects of being both a retail sale and a construction contract.

You employ an out-of state contractor/retailer to install carpet in the hotels that you operate in different states. You state: “They [the contractor/retailer] holds themselves out as a retailer, but also act as a contractor on such sales.” You ask what the appropriate sales and use tax treatment should be for work done in Kansas.

You did not provide copies of the contract or billings between you and the out-of-state contractor/retailer. In addition, you do not indicate whether the contractor/retailer performs the carpet installation itself or subcontracts with Kansas contractors to do the installation. You may not know this fact. Because of the absence of this documentation, I can discuss your question generally but cannot provide you with a definitive answer. As I will explain, copies of the contract and billings are needed to show whether the carpet is being provided as a retail sale with installation or under a contract for “improving . . . real . . . property of others.”

Kansas currently has no separate rule for carpet installation. Installation labor services for commercial buildings are taxed in Kansas, unless the project qualifies as “original construction” of a building. This is the building’s first or initial construction. This means that for carpet that is replaced in one of your existing hotels, tax is due on charges for both the carpeting and the installation. For carpet that is installed in one of your new hotels, tax is due on the charges for carpeting only.

This raises the basic problem that I have answering your letter. That is determining what the tax base should be for the cost of the carpeting. I do not know if you have contracted for the carpeting as a separate retail selling price based on the marked up retail selling price of the carpet to you or if the billing is for a standard installed amount without regard to the contractor/ retailer’s cost. The contract and billings between you and the contractor/retailer should establish whether the contract in question is a contract for the sale and installation of carpet or for the improvement of real property. Most carpet sales in Kansas are considered to be retail sales with installation. This is apparent where a homeowner picks out carpeting at a retailer and has it installed.

I also do not know how the contractor/retailer holds itself out to its home state taxing authorities on these jobs. The State of Kansas would try to afford the same treatment to the business that its home state affords, although this is not always possible. Please note that if the contract is a construction contract in which the home state is being paid sales tax on items removed from inventory, the tax base for the Kansas sales tax on taxable installation services would be the difference between the contract price and the tax paid carpeting and other materials. The out-of-state contractor/retailer also could bill the job as a lump sum amount with taxes included. If this were done, “tax included” would be stated on the billing to you from the contractor/retailer rather than a separate tax amount.

I hope that this discussion answers your questions. If not, please provide me with copies of the contract and billings between you and your contractor/retailer. Please call me at (785) 296-4008 if you need to discuss this matter further.

Sincerely,

Thomas E. Hatten

Attorney/Policy & Research

Date Composed: 07/07/1999 Date Modified: 10/11/2001

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