Is the labor to build a new office where an old structure was torn down to bare dirt exempt from Kansas sales tax?

Plain-English summary

A taxpayer built a new office adjacent to its existing warehouse, on a space once occupied by another company's building: "We tore down the structure down to bare dirt and build new." It asked whether the service to construct the new building is subject to Kansas retailers' sales tax.

The statute. As the ruling states, "Kansas sales tax law exempts services rendered in connection with the original construction of a building or facility. K.S.A. 79-3603(p)."

The holding. "It is the opinion of the Kansas Department of Revenue that the services to construct this building qualify as performed in connection [with the] original construction of a building and therefore are exempt from Kansas retailers' sales tax."

Why it qualifies. Clearing the old structure down to bare dirt and erecting an entirely new building is the first or initial construction of a new building on that site — original construction. The construction labor for that work is exempt.

Bottom line: the labor to build the new office is exempt as original construction. (As in the Department's other original-construction rulings, the contractor's purchases of materials and supplies for the job remain taxable even though the labor is exempt.)

What this means for you

Building new on a cleared site is original construction

Tearing an old building down to bare dirt and putting up a totally new structure is "original construction" under K.S.A. 79-3603(p). The services to construct the new building are exempt from Kansas sales tax.

The exemption is for the construction labor

K.S.A. 79-3603(p) exempts the installation/construction services performed in connection with original construction. That is what makes the labor on this new office tax-free.

Materials remain taxable

Consistent with Kansas's treatment of original construction generally, the contractor still pays sales tax on the materials and supplies purchased for the job; only the construction labor is exempt.

Contrast with remodeling

Had this been a remodel of an existing building rather than a new build on a cleared site, the labor would have been taxable. The exempt result here depends on the building being totally new.

Common questions

Q: Is the labor to build the new office taxable?
A: No. The Department ruled the construction services qualify as original construction of a building and are exempt under K.S.A. 79-3603(p).

Q: Does tearing the old structure down to bare dirt matter?
A: Yes — that is what makes the new building "original construction." Erecting a totally new building on the cleared site is the first or initial construction of a new building.

Q: Are the materials exempt too?
A: No. Only the construction labor is exempt; the contractor's materials and supplies for the job remain subject to Kansas sales tax.

Citations and references

• K.S.A. 79-3603(p) — taxes installation/application labor but exempts services rendered in connection with the original construction of a building or facility.
• 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-1999-120

Original ruling text

Private Letter Ruling

Body:

Office of Policy and Research

May 21, 1999

XXXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXX

Dear XXXXXXXX:

I have been asked to respond to your letter dated May 7, 1999. In it, you ask for guidance in the application sales tax.

In your letter you stated:

We have recently built an office adjacent to our existing warehouse in a space once occupied by a XXXXX company. We tore down the structure down to bare dirt and build new.

You ask if the service to construct this building is subject to Kansas retailers’ sales tax.

Kansas sales tax law exempts services rendered in connection with the original construction of a building or facility. K.S.A. 79-3603(p).

It is the opinion of the Kansas Department of Revenue that the services to construct this building qualify as performed in connection original construction of a building and therefore are exempt from Kansas retailers’ sales tax.

This is a private letter ruling pursuant to K.A.R. 92-19-59. It is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to an accurate determination by the department, this ruling is null and void. This ruling will be revoked in the future by the operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 05/27/1999 Date Modified: 10/11/2001

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