Is a rural water district's flat monthly meter fee subject to Kansas sales tax?

Plain-English summary

A rural water district employee asked whether the district's flat monthly meter fee — described as a $9.50 charge that "doesn't include the purchase of any water" and is billed even when a user temporarily stops using water — is subject to Kansas sales tax. The Department's answer is yes: the fee is taxable.

The general rule. Since 1937, Kansas has taxed "the gross receipts from the sale or furnishing of gas, water, electricity and heat." The Department explained that this historically taxed all charges a utility bills its customers — including hook-up charges, disconnection fees, franchise fees, debt reduction charges, and late fees.

The 2001 change. In 2001, Senate Bill 332 amended K.S.A. 79-3603(c) to add three exceptions, so tax is no longer collected on: (1) the sale of a rural water district benefit unit; (2) a water system impact fee, system enhancement fee or similar fee collected "as a condition for establishing service"; or (3) connection or reconnection fees.

Why the meter fee is still taxable. The Department walked through all three exceptions and found the meter fee fits none of them. It is not a benefit unit; it is not a fee "as a condition for establishing service," because it is billed to all customers on an ongoing basis; and it is not a connection or reconnection fee, for the same reason. So the fee "is subject to tax at the appropriate tax rate according to whether there is commercial or residential use."

Bottom line: the 2001 exceptions are narrow. A recurring monthly charge billed to everyone — even a "meter" or "standby" fee that includes no water — remains a taxable receipt of a water utility.

What this means for you

Rural water districts and other water utilities

Your recurring service charges are presumptively taxable as gross receipts from furnishing water. The 2001 exceptions cover only three specific things — a benefit unit, a one-time fee to establish service, and connection/reconnection fees. A fee billed month after month to all customers does not qualify, even if labeled a "meter" or "availability" fee and even if it buys no water that month.

Residential vs. commercial matters for the rate, not the taxability

The fee is taxable either way, but how it is taxed depends on the customer. Under K.S.A. 79-3606(w), most residential water service is subject only to local sales tax, while commercial use is taxed at the full state-and-local rate. The utility must still classify each customer correctly.

"As a condition for establishing service" is the key phrase

Exception (2) turns on a fee being charged to start service. An ongoing charge that continues for the life of the account — including while service is temporarily idle — falls outside it. Look at when and why a fee is billed, not just its name.

Common questions

Q: Is a flat monthly meter or standby fee from a water district taxable?
A: Yes. The Department ruled such a fee is a taxable gross receipt because it is billed to all customers on an ongoing basis and fits none of the three exceptions in K.S.A. 79-3603(c).

Q: What are the three exceptions added by 2001 Senate Bill 332?
A: (1) the sale of a rural water district benefit unit; (2) a water system impact, enhancement, or similar fee collected as a condition for establishing service; and (3) connection or reconnection fees.

Q: Does it matter that the fee includes no water?
A: No. The tax applies to gross receipts for furnishing water service generally, not only to the water itself. A no-water monthly charge is still taxable unless it falls within an exception.

Q: Is the fee taxed the same for homes and businesses?
A: It is taxable for both, but residential water service is generally subject only to local sales tax (K.S.A. 79-3606(w)), while commercial use is taxed at the full rate.

Citations and references

• K.S.A. 79-3603(c) — imposes sales tax on "the gross receipts from the sale or furnishing of gas, water, electricity and heat," subject, since 2001, to three exceptions (benefit unit; fee to establish service; connection/reconnection fee).
• 2001 Senate Bill 332 — added the three water-service exceptions to K.S.A. 79-3603(c).
• K.S.A. 79-3606(w) — treatment of residential utility service (generally local tax only), referenced by the Department in distinguishing residential from commercial customers.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2002-010

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

January 28, 2002

XXXX
XXXX
XXXX

RE: Your letter of January 24, 2002

Dear XXXX:

Thank you for your recent letter. You ask if a monthly meter fee charged by the rural water district that employs you is subject to sales tax. To answer your question, I will review the legislative history of how Kansas has taxed customer purchases of water utility services.

From 1937 to 2001, Kansas taxed:

the gross receipts from the sale or furnishing of gas, water, electricity and heat, which sale is not otherwise exempt from taxation under the provisions of this act, and whether furnished by municipally or privately owned utilities. . . K.S.A.2000 Supp. 79-3603(c); 1937 Kan. Sess. Laws Chap 374, Sec.3.

This levy taxed all charges from a utility to the customer for the furnishing of gas, water, electricity and heat. This included hook-up charges, disconnection fees, franchise fees, debt reduction charges, late fees, and other charges. See Water Protection Fee Notice of SB 2765, published 2751. This established the simple rule that water utilities were required to charge sales tax on each charge billed to their customers. This left water utilities with the task of determining whether the customer was a residential customer or a commercial customer. As you know, most utility customer are homeowners who pay only local sales tax on their services. See K.S.A. 79-3606(w).

The 2001 Kansas legislature amended K.S.A. 79-3603(c) to benefit certain water consumers. Senate Bill 332 added three exceptions and changed the sixty-four year old law which required utilities to collect tax on the entire amount billed to customers. Since July, 2001, Kansas has taxed:

the gross receipts from the sale or furnishing of gas, water, electricity and heat, which sale is not otherwise exempt from taxation under the provisions of this act, and whether furnished by municipally or privately owned utilities but such tax shall not be levied and collected upon the gross receipts from: (1) The sale of a rural water district benefit unit; (2) a water system impact fee, system enhancement fee or similar fee collected by a water supplier as a condition for establishing service; or (3) connection or reconnection fees collected by a water supplier. 2001 Senate Bill 332.

The three numbered exceptions mean that rural water districts must now determine whether the individual service charges fall within the meaning of the exceptions now contained in K.S.A. 79-3603(c). To answer your question, I will review the service that you ask about and comparing it with the three exception in subsection (c).

You describe the fee in question in your letter: "This [$9.50 meter] fee doesn't include the purchase of any water. When a user temporarily discontinues use of the water the meter fee is still charged. This gives the user the privilege of resuming water service at a later time." The question is whether this fee is subject to Kansas s sales tax, be it state and local or only local.

The fee your describe is a monthly fee that is charged to all customers. It is billed to them whether or not they buy water. This fee does not qualify under K.S.A. 79-3603(c)(1) as a charge for a rural water district benefit unit. Second, it does not qualify under K.S.A. 79-3603(c)(2) as a fee charged by a water system as a condition for establishing service. This is because the fee is billed to all customers on an ongoing basis. It is not charged "as a condition for establishing service." Third, the fee does not qualify under K.S.A. 79-3603(c)(3) as a "connection or reconnection" fee. As noted, the fee is billed to all customer on an ongoing basis, and not just for connecting or reconnecting their home or business to the service. Accordingly, the fee described in your letter is subject to tax at the appropriate tax rate according to whether there is commercial or residential use.

I hope that my letter adequately answers your questions. If you have more, please call me at 785-296-3081 and we can discuss them. This private letter ruling is based solely on the facts provided in your request. If it is determined that undisclosed facts were material or necessary to make an accurate determination by the department, this ruling is null and void. This private letter ruling will be revoked in the future by operation of law without further department action if there is a change in the statutes, administrative regulations, or case law, or a published revenue ruling, that materially affects this private letter ruling.

Sincerely,

Thomas E. Hatten
Attorney/Policy & Research

Date Composed: 02/12/2002 Date Modified: 02/12/2002

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