Is installing water, sanitary sewer, and storm sewer lines for a developer exempt as original construction, and can the developer buy the materials tax-free?

Plain-English summary

The question was about a developer's project to install water lines, sanitary sewer lines, and storm sewer lines on land the developer owns and later dedicates to a political subdivision (a city, county, or similar public body). Two things were at issue: is the installation labor taxable, and can the developer buy the materials tax-free? The Department split the answer: labor exempt, materials taxable.

The labor is exempt as "original construction." Kansas taxes the service of installing or applying tangible personal property under K.S.A. 79-3603(p) — but that same statute exempts installation done "in connection with the original construction of a building or facility." "Original construction" means the first or initial construction of a new building or facility. The Department ruled that installing these water and sewer lines "are considered original construction, and are therefore exempt from sales tax in the state of Kansas."

The materials are still taxable. The Department cautioned that "the developer can not qualify for a project exemption certificate," so "materials and supplies purchased for this job would be subject to the appropriate Kansas sales/use tax(es)." A project exemption certificate is what lets a contractor buy materials tax-free for certain exempt projects; without one, the developer pays tax on the pipe, fittings, and other materials even though the installation service itself is exempt.

Bottom line: exempting the labor as original construction does not exempt the materials. Only a valid project exemption certificate does that, and this developer could not get one.

What this means for you

Developers and site-work contractors

Installing new infrastructure — water lines, sewers, storm drainage — as part of the first construction of a facility is exempt installation labor under the original-construction rule. But budget for sales/use tax on all the materials unless a qualifying entity provides a valid project exemption certificate. The labor exemption and the materials exemption are separate questions.

"Original construction" is about new, not repair or replacement

The statute limits "original construction" to the first or initial construction of a new building or facility (plus adding a whole room or floor, finishing an unfinished portion, or rebuilding after certain disasters). Ordinary remodeling, renovation, repair, or replacement of an existing non-residential facility is not original construction and its installation labor is taxable.

Dedicating improvements to a city doesn't create a materials exemption

Even though the finished lines are turned over to a public body, that later dedication does not let the developer buy the materials tax-free. The path to tax-free materials is a project exemption certificate, which the Department said the developer here could not obtain.

Common questions

Q: Is installing new water and sewer lines taxable in Kansas?
A: The installation service is exempt when it is part of original construction, as the Department found here under K.S.A. 79-3603(p).

Q: Can the developer buy the pipe and materials tax-free?
A: No. The Department said the developer cannot qualify for a project exemption certificate, so materials and supplies for the job are subject to Kansas sales/use tax.

Q: What counts as 'original construction'?
A: The first or initial construction of a new building or facility — including adding an entire room or floor, finishing an unfinished portion, or rebuilding one destroyed by fire, flood, tornado, lightning, explosion, or earthquake — but not ordinary remodeling, renovation, repair, or replacement of an existing non-residential facility.

Citations and references

• K.S.A. 79-3603(p) — taxes the service of installing or applying tangible personal property, but exempts installation "in connection with the original construction of a building or facility," and defines "original construction" as the first or initial construction of a new building or facility.
• K.A.R. 92-19-59 — the regulation authorizing Kansas private letter rulings.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-009

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

January 17, 2002

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Dear Ms. TTTTT:

We wish to acknowledge receipt of your letter dated January 11, 2002, regarding the application of Kansas Retailers’ Sales tax.

K.S.A. 79-3603(p) states in part: “the gross receipts received for the service of installing or applying tangible personal property which when installed or applied is not being held for sale in the regular course of business, and whether or not such tangible personal property when installed or applied remains tangible personal property or becomes a part of real estate, except that no tax shall be imposed upon the service of installing or applying tangible personal property in connection with the original construction of a building or facility, the original construction, reconstruction, restoration, remodeling, renovation, repair or replacement of a residence or the construction, reconstruction, restoration, replacement or repair of a bridge or highway.
For the purposes of this subsection:
"Original construction" shall mean the first or initial construction of a new building or facility. The term "original construction" shall include the addition of an entire room or floor to any existing building or facility, the completion of any unfinished portion of any existing building or facility and the restoration, reconstruction or replacement of a building or facility damaged or destroyed by fire, flood, tornado, lightning, explosion or earthquake, but such term, except with regard to a residence, shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances. . .”

The service of installing improvements such as water lines, sanitary sewer lines and storm sewer lines that are installed on real property owned by a developer and subsequently dedicated to a political subdivision are considered original construction, and are therefore exempt from sales tax in the state of Kansas. Since the developer can not qualify for a project exemption certificate, materials and supplies purchased for this job would be subject to the appropriate Kansas sales/use tax(es).

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: 01/22/2002 Date Modified: 01/22/2002

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