Is the labor to install landscaping and build ponds during original construction of a building exempt from Kansas sales tax?

Plain-English summary

A contractor asked whether the labor to install landscape materials and to construct ponds is taxable when the work is tied to a new building. The Department's answer separates labor from materials.

Labor tied to original construction is exempt. K.S.A. 79-3603(p) taxes the gross receipts for the service of installing or applying tangible personal property — but it excludes installation/application labor performed "in connection with the original construction of a building or facility" (and also original construction/remodeling/repair of a residence, and construction or repair of a bridge or highway). Because the landscaping installation and pond construction here are in connection with the original construction of a building or facility, that labor is exempt from sales tax.

Materials are still taxable. The exemption reaches only the labor service, not the materials. The contractor must pay tax on the materials and supplies it uses:

• Bought from an in-state retailer — the contractor pays that retailer the appropriate Kansas state and local sales tax.
• Bought from an out-of-state retailer registered to collect Kansas compensating (use) tax — the contractor pays the retailer the compensating (use) tax.
• Bought from an out-of-state retailer not registered with Kansas — the contractor must remit the compensating (use) tax directly to Kansas.

Bottom line: on an original-construction job, the installation labor for landscaping and ponds is not taxed, while the materials the contractor buys to do the work are taxed (sales or use tax).

What this means for you

Landscaping and site-work contractors

When your installation of landscaping or a pond is part of the original construction of a new building or facility, your labor charge is exempt under the 79-3603(p) original-construction exclusion. This exclusion is specific to original construction (and residential construction/remodel and bridge/highway work) — labor on later, stand-alone landscaping that is not tied to original construction can be taxable.

You still owe tax on materials

The materials you buy — plants, stone, liner, pumps, etc. — are taxable to you as the contractor/consumer. Pay Kansas sales tax to in-state suppliers, and use tax on out-of-state purchases (to a registered retailer, or directly to Kansas if the retailer isn't registered).

Draw the labor/materials line on your invoices and records

Because labor here is exempt but materials are taxed, keep the two clearly separated in your books, and keep documentation that the labor was in connection with original construction to support the exemption.

Common questions

Q: Is the labor to install landscaping and build ponds taxable?
A: Not when it is performed in connection with the original construction of a building or facility — that labor is exempt under the original-construction exclusion in K.S.A. 79-3603(p).

Q: Are the materials exempt too?
A: No. Materials are taxable. The contractor pays Kansas sales tax on in-state purchases and compensating (use) tax on out-of-state purchases.

Q: What if the out-of-state supplier isn't registered with Kansas?
A: Then the contractor must remit the compensating (use) tax directly to the state of Kansas.

Q: Does the exemption apply to all landscaping labor?
A: No — it is tied to the original-construction exclusion. Installation labor not connected to original construction (or the other listed categories) can be taxable.

Citations and references

• K.S.A. 79-3603(p) — taxes the service of installing or applying tangible personal property, but excludes such labor performed in connection with the original construction of a building or facility (and original residential construction/remodel/repair and bridge/highway work).
• The ruling confirms materials remain taxable: contractors pay Kansas sales tax to in-state retailers and compensating (use) tax on out-of-state purchases (to a registered retailer, or directly to Kansas if unregistered).
• 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-2002-056

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

June 25, 2002

XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX

Dear XXXXXXXXXX:

The purpose of this letter is to respond to your letter dated May 30, 2002.

The labor services for the installation of landscape materials and the construction of ponds, that are “in connection” with the original construction of a building or facility are exempt from sales tax.

Allow me to explain the departments rationale:

K.S.A. 79-3603(p) imposes a sales tax upon: “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, remodeling, restoration, renovation or reconstruction, restoration, replacement or repair of a bridge or highway. . .”

Materials are taxable. When a contractor purchases materials and supplies from an in-state retailer, the contractor must pay the retailer the appropriate Kansas state and local sales tax. When a contractor purchases materials and supplies from an out-of-state retailer who is registered to collect the compensating (use) tax for the state of Kansas, the contractor must pay the retailer the compensating (use) tax. If the out-of-state retailer is not registered with Kansas for compensating (use) tax purposes, the contractor must remit the compensating (use) tax directly to the state of Kansas.

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 by operation of law without further department action if there is a change in the controlling statutes, administrative regulations, revenue rulings or case law that materially effects this determination.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 07/09/2002 Date Modified: 07/09/2002

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