Is an ASP dictation / website file-transfer service subject to Kansas sales tax?

Plain-English summary

A company sells an ASP (application service provider) service: customers either call an 800 number to record dictation, or use the company's website to transfer files to and from their clients and employees. The company asked whether it must charge Kansas sales tax on the service.

The Department said the service is not subject to Kansas retailers' sales tax. Its reasoning follows the standard two-step analysis:

1. Is the transaction generally taxed? Sales tax applies to transfers of tangible personal property as a rule, but services are taxed only when they are specifically enumerated in the sales tax act. This dictation/file-transfer service is not one of the enumerated taxable services.
2. Is there an exemption? Because the service is not taxed in the first place, no exemption question arises.

There is a flip side, though: because the company is providing a nontaxable service, it is the final consumer of the equipment and supplies it uses. So the company must pay Kansas sales or compensating use tax on the tangible personal property it buys and uses or consumes to produce the service.

What this means for you

ASP, SaaS-style, and other service providers

If your offering is a service that Kansas has not specifically enumerated as taxable, you generally do not charge Kansas sales tax on it. Confirm your service is genuinely outside the enumerated list rather than assuming all "tech services" are exempt.

The cost side: you pay tax on your inputs

Selling a nontaxable service makes you the consumer of the hardware, software media, and supplies you use. Expect to pay Kansas sales or use tax on those purchases — you cannot buy them tax-free for resale.

Multistate providers

This ruling addresses only Kansas. Where a service is taxable turns on each state's enumerated-services list, so analyze other states separately.

Common questions

Q: Do I charge Kansas sales tax on an 800-number dictation or file-transfer service?
A: No. The Department held this ASP service is not an enumerated taxable service, so it is not subject to Kansas retailers' sales tax.

Q: Why isn't the service taxed?
A: Kansas taxes services only when the sales tax act specifically lists them. This service is not on that list, so it falls outside the tax.

Q: Do I owe any Kansas tax at all?
A: Yes, on your inputs. As the provider of a nontaxable service you are the consumer of the tangible personal property you use, and you must pay Kansas sales or compensating use tax on those purchases.

Q: Does this ruling apply to my business?
A: A Kansas private letter ruling addresses only the requesting taxpayer's facts and cannot be relied on as precedent by others, though it shows how the Department decides whether a service is taxable.

Citations and references

• This ruling applies the general Kansas rule that services are taxable only when specifically enumerated in the sales tax act. The Department found the ASP dictation and file-transfer service was not enumerated, so it is not taxable — while the provider still owes sales or compensating use tax on the tangible personal property it consumes to produce the service. It does not turn on a single cited statute section.
• 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-2003-043

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 9, 2003

XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXX

Dear XXXXXXXXXXXX:

The purpose of this letter is to respond to your letter dated August 20, 2003.

In your letter you stated:

I am writing to request a private letter ruling regarding a service that my company sells. It is an ASP service that allows our customers to either call an 800 number that we provide to record dictation or utilize our website to expedite file transfer to and from their clients and employees.

Do we charge sales tax on this service and, if so, whose state tax do we charge? Many states use our service and I want to be in compliant with the new laws.

The service described in your letter is not subject to Kansas retailers' 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.

Your company would be required to pay sale or compensating taxes on all purchases of tangible personal property and taxable used or consumed in the production of this nontaxable service.

Sincerely,

Mark D. Ciardullo
Tax Specialist

MDC

Date Composed: 10/22/2003 Date Modified: 10/22/2003

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