Are Internet service and web-hosting services subject to Kansas sales tax?

Plain-English summary

A retail computer sales and service center in Manhattan, Kansas that also provides Internet service and web hosting asked whether those two activities are subject to Kansas sales tax. The Department's answer: they are not.

The two-step analysis. The Department explained how it decides taxability: first, is the type of transaction generally taxed by the sales tax act? Second, does the act provide an exemption for it? As a rule, sales tax applies to all transfers of tangible personal property, but for services the tax applies only to those specifically enumerated in the sales tax act.

Why these services aren't taxed. Internet service and web hosting are not enumerated as taxable services, so they are not subject to Kansas sales tax.

Two caveats the Department flagged.

• Incidental vs. more-than-incidental property. If the provider gives a client tangible personal property that is more than incidental to the service, sales tax might be due on that property.
• The provider's own purchases are taxable. The provider must pay sales tax on all tangible personal property and services it buys in Kansas that enable it to provide these nontaxable services (a service provider is the taxable consumer of its own inputs).

Bottom line: selling Internet service and web hosting is a nontaxable service in Kansas because those services are not enumerated — but the provider still pays tax on its inputs, and any more-than-incidental goods it hands to customers can be taxable.

What this means for you

Internet, hosting, and similar service providers

If your service is not enumerated in the Kansas sales tax act, you do not charge sales tax on it. Internet access and web hosting fell outside the enumerated taxable services as of this 2002 ruling.

You still pay tax on your inputs

A nontaxable-service provider is the consumer of the equipment, software, and services it buys to deliver the service — those purchases are taxable to you. Don't try to buy them for resale/exempt when they're consumed in providing a nontaxable service.

Watch bundled tangible property

If you also transfer goods that are more than incidental to the service (hardware, media, etc.), the sale of that property can be taxable. Keep taxable product sales separate from the nontaxable service.

Confirm current law

This is a 2002 determination. The taxation of digital and electronically delivered products and services has evolved since; verify the current Kansas treatment before relying on this for today's transactions.

Common questions

Q: Are Internet service and web hosting taxable in Kansas?
A: Not under this ruling. The Department found they are not enumerated taxable services, so they are not subject to Kansas sales tax.

Q: How does Kansas decide if a service is taxable?
A: By a two-step analysis — is the transaction taxed at all, and is there an exemption. Services are taxed only if specifically enumerated in the sales tax act.

Q: Do I owe tax on anything?
A: Yes — on the tangible personal property and services you buy to provide the nontaxable service, and possibly on any more-than-incidental property you transfer to a client.

Q: Can I rely on this today?
A: Treat it with care. It's a 2002 ruling that predates later digital-products developments; confirm the current law.

Citations and references

• Kansas retailers' sales tax act — taxes transfers of tangible personal property and only those services specifically enumerated; Internet service and web hosting are not enumerated (the ruling applies this framework without citing a subsection number).
• 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-2002-019

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

February 26, 2002

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Re: Kansas Sales Tax

Dear Mr. XXXXX:

Your correspondence of January 29, 2002 has been referred to me for response. Thank you for your inquiry.

Your letter indicates your company is located in Manhattan, Kansas, and is a retail computer sales and service center. In addition to computer sales and service, we also provide Internet Service and Web Hosting services. By your letter you ask whether these two activities are subject to Kansas sales tax.

In deciding whether a particular transaction is subject to sales tax, a two step analysis is generally necessary. The first step is to determine whether the sales tax act generally imposes tax on the type of transaction in question. The second step is to determine whether the act provides an exemption for the particular type of transaction.

As a rule, sales tax is imposed on all transactions involving the transfer of tangible personal property. With services, however, tax is imposed only on those transactions that are specifically enumerated in the sales tax act. Exemptions for transactions involving either tangible personal property or services are allowed as specifically enumerated.

After reviewing the information provided in your letter, we have concluded the services about which you inquire (Internet service and web hosting) are not subject to the Kansas sales tax. This determination is based on our belief that the type of services you provide have not been enumerated in the sales tax act as a service which is subject to tax. In the event you provide a client with tangible personal property which is more than incidental to your service, however, sales tax might be due on the transfer of the tangible personal property. You should also be aware that you must pay sales tax on all articles of tangible personal property and all services purchased by you in Kansas that enable you to provide the nontaxable services.

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.

I trust this information is of assistance. If I can be of further service, please feel free to contact me.

Sincerely,

Jim Weisgerber
Attorney
Tax Specialist

JW:jw

Date Composed: 02/25/2002 Date Modified: 02/27/2002

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