May a contractor deduct overhead and profit when figuring the Kansas sales tax base on an installation contract?

Plain-English summary

A contractor asked whether it could subtract its overhead costs (and profit) when calculating the Kansas sales tax on an installation contract. The Department ruled that it cannot - overhead and profit are part of the taxable amount.

The installation-services tax and its base. The ruling quotes the imposition statute as written - "K.S.A. 79-3606(p) imposes a sales tax upon: 'the gross receipts received for the service of installing or applying tangible personal property. . .'" (Note: the current installation-services provision is generally cited as K.S.A. 79-3603(p); the ruling's own text is quoted here verbatim.) It then defines the taxable base: "the taxable base for all contracts involving the application or installation of tangible personal property shall be the difference between the contract price and the cost of material, supplies and payments to subcontractors, including sales or compensating tax paid by the contractor on the materials, supplies and subcontractors charges, and any excavation charges purchased by the contractor to complete the contract."

Overhead and profit are not deductible. "Like any other retail business, your profit (including the mark-up on materials) and overhead costs are figured into the total charged the customer and are therefore subject to sales tax. A contractor may not deduct overhead expenses when figuring the taxable amount of a given contract." So the contractor removes only its costs of materials, supplies, subcontractor payments (with tax paid), and excavation - not its own overhead or markup.

The Department's list of non-deductible items. These stay in the taxable base: "building permits; consumable supplies, such as form lumber and sand paper; employee labor costs; lease payments for tools, equipment and machinery; office supplies; per diem and travel expenses; sewer hook-up fees; [and] utilities."

The general rule restated. "When the labor services are subject to sales tax in the state of Kansas, the overhead and profit associated with the particular job would likewise be subject to sales tax in this state."

Bottom line: on a taxable installation contract, a contractor cannot carve out its overhead or profit; those are part of the total charged the customer and are taxable, along with a list of internal costs like permits, consumables, employee labor, equipment leases, travel, and utilities.

What this means for you

Contractors on taxable installation jobs

You cannot reduce the taxable amount by your overhead or profit. From the contract price you subtract only your cost of materials, supplies, and subcontractor charges (with the tax you paid on them) and excavation charges - nothing else.

Watch the list of non-deductible internal costs

Building permits, consumable supplies (form lumber, sandpaper), employee labor, equipment/tool lease payments, office supplies, per diem and travel, sewer hook-up fees, and utilities all stay in the taxable base. Do not deduct them.

Overhead and profit follow the labor

When the underlying labor is taxable, the overhead and profit on the job are taxable too. The only receipts you exclude are the enumerated material/subcontractor/excavation costs.

Common questions

Q: Can a contractor deduct overhead when figuring Kansas sales tax?
A: No. The Department ruled that overhead (and profit) are figured into the total charged the customer and are subject to sales tax; they may not be deducted.

Q: What can be subtracted from the contract price?
A: The cost of materials, supplies, and payments to subcontractors (including the sales or compensating tax the contractor paid on them) and any excavation charges purchased to complete the contract.

Q: Are permits, employee labor, and utilities deductible?
A: No. The Department listed building permits, consumable supplies, employee labor costs, equipment/tool lease payments, office supplies, per diem and travel, sewer hook-up fees, and utilities as non-deductible items that remain in the taxable base.

Citations and references

• K.S.A. 79-3606(p) - quoted in the ruling as imposing Kansas sales tax on "the gross receipts received for the service of installing or applying tangible personal property" (the installation-services provision is generally cited as K.S.A. 79-3603(p); the ruling's own citation is reproduced as written). The Department held that the taxable base is the contract price minus only the cost of materials, supplies, subcontractor payments (with tax paid), and excavation - so a contractor's overhead and profit are not deductible and remain subject to tax.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2000-061

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

November 17, 2000

TTTTTTTTTTT
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Dear Mr. TTTTTT:

We wish to acknowledge receipt of your letter postmarked November 3, 2000, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3606(p) imposes a sales tax upon: “the gross receipts received for the service of installing or applying tangible personal property. . .”

The taxable base for all contracts involving the application or installation of tangible personal property shall be the difference between the contract price and the cost of material, supplies and payments to subcontractors, including sales or compensating tax paid by the contractor on the materials, supplies and subcontractors charges, and any excavation charges purchased by the contractor to complete the contract.

Like any other retail business, your profit (including the mark-up on materials) and overhead costs are figured into the total charged the customer and are therefore subject to sales tax. A contractor may not deduct overhead expenses when figuring the taxable amount of a given contract, that would be subject to sales tax in the state of Kansas.

Non-deductible items include:

building permits
consumable supplies, such as form lumber and sand paper
employee labor costs
lease payments for tools, equipment and machinery
office supplies
per diem and travel expenses
sewer hook-up fees
utilities

In closing, when the labor services are subject to sales tax in the state of Kansas, the overhead and profit associated with the particular job would likewise be subject to sales tax in this state.

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 effects this private letter ruling. If I may be of further assistance, please contact me at your earliest convenience at (785) 296-7776.

Sincerely yours,

Thomas P. Browne, Jr.
Tax Specialist

TPB

Date Composed: 11/21/2000 Date Modified: 10/11/2001

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