On a taxable installation contract, what is included in the Kansas sales-tax base — and can a contractor deduct overhead and profit?

Plain-English summary

A contractor asked how Kansas sales tax applies to its labor services and how to figure the taxable amount of a contract. The Department explained the rule for contracts that install or apply tangible personal property and, most importantly, that a contractor cannot back out its overhead and profit from the taxable amount.

The taxable service. The Department quoted the statute it relies on — citing K.S.A. 79-3606(p) as imposing sales tax on "the gross receipts received for the service of installing or applying tangible personal property." So labor to install or apply property is a taxable service in Kansas.

How to compute the taxable base. For contracts involving the installation or application of tangible personal property, the taxable base is the contract price minus these deductible costs:

• the cost of material and supplies,
• payments to subcontractors (including sales or compensating tax the contractor already paid on materials, supplies, and subcontractor charges), and
• any excavation charges the contractor bought to complete the contract.

Overhead and profit stay in — they are taxable. The Department was explicit: "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. In plain terms, you deduct hard costs (materials, supplies, subs, excavation) — not your markup or overhead.

Non-deductible items. The ruling lists costs a contractor cannot subtract from the taxable amount, because they are part of overhead: building permits; consumable supplies (such as form lumber and sandpaper); employee labor costs; lease payments for tools, equipment, and machinery; office supplies; per diem and travel expenses; sewer hook-up fees; and utilities.

Overhead and profit follow the job's taxability. The Department summed up: "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." If the job's labor is taxable, so are the overhead and profit baked into the price.

A pointer to the exemption. The Department enclosed Revenue Notice 98-02, titled "Kansas Retailers' Sales Tax, Exemption of Residential Repair and Remodel work" — relevant because some residential repair/remodel labor is treated differently, so a contractor should check whether a given job falls under that exemption before taxing the labor.

Bottom line: on a taxable Kansas installation/application contract, tax the contract price less hard costs (materials, supplies, subs, excavation). You may not carve out your overhead or profit — those ride along and are taxed whenever the underlying labor is taxable.

What this means for you

Contractors installing or applying property

When your installation or application labor is taxable, compute the tax on the contract price minus your documented hard costs — materials, supplies, subcontractor payments (including tax you already paid on them), and excavation. Everything else, including your markup and overhead, stays in the taxable base.

Don't try to deduct overhead

The Department listed the usual overhead items as non-deductible: permits, consumables like form lumber and sandpaper, employee wages, tool/equipment lease payments, office supplies, per diem and travel, sewer hook-up fees, and utilities. Building these into a "cost" deduction to shrink the tax base is not allowed.

Check the residential repair/remodel exemption first

Before you tax a job's labor, determine whether it qualifies under Revenue Notice 98-02 (exemption of residential repair and remodel work). Whether the labor is taxable at all comes first; the base computation here applies once you know the labor is taxable.

Common questions

Q: Is labor to install or apply property taxable in Kansas?
A: Yes. The ruling cites K.S.A. 79-3606(p) as imposing sales tax on the gross receipts for the service of installing or applying tangible personal property.

Q: What can a contractor deduct from the taxable amount?
A: The cost of materials and supplies, payments to subcontractors (including tax already paid on materials/supplies/subcontractor charges), and excavation charges bought to complete the contract.

Q: Can a contractor deduct overhead and profit?
A: No. The Department said profit (including markup on materials) and overhead are part of the total charged the customer and are subject to sales tax; overhead cannot be deducted.

Q: What counts as non-deductible overhead?
A: Building permits, consumable supplies (like form lumber and sandpaper), employee labor costs, lease payments for tools/equipment/machinery, office supplies, per diem and travel, sewer hook-up fees, and utilities.

Citations and references

• K.S.A. 79-3606(p) — cited in the ruling as imposing sales tax on "the gross receipts received for the service of installing or applying tangible personal property."
• Revenue Notice 98-02 — "Kansas Retailers' Sales Tax, Exemption of Residential Repair and Remodel work"; enclosed with the ruling as the reference for whether particular residential repair/remodel labor is exempt.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2001-112

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 18, 2001

TTTTTTTTTTT
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Dear Mr. TTTTTT:

We wish to acknowledge receipt of your letter dated October 3, 2001, 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.

For your convenience, I have enclosed Revenue Notice 98-02, which is entitled “Kansas Retailers’ Sales Tax, Exemption of Residential Repair and Remodel work”.

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: 10/26/2001 Date Modified: 10/26/2001

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