Under Kansas destination-based sourcing, where is a contractor taxed on materials pulled from its own inventory?

Plain-English summary

A subcontractor that installs garage doors and fireplaces — mostly at new homes — keeps an inventory of those items at its warehouse, purchased tax-free for resale. When a job comes up, it pulls the needed items from inventory and installs them. It asked how Kansas's destination-based sourcing rules apply.

The Department applied the standard contractor framework:

• The contractor is the consumer of the materials it installs (not a reseller of them to the customer).
• Because the contractor takes possession of the items at its warehouse when it withdraws them from inventory, that warehouse location's sales tax rate applies to the materials. In other words, pulling goods from inventory for a job is the taxable moment, sourced to the warehouse — not to the eventual job site.
• When the contractor performs taxable labor services, the tax at the location where the items are installed applies to those services, with a tax base equal to the total customer charge minus the tax-paid materials cost.

The contractor's August 2003 return reported all taxable sales to its business location. The Department confirmed that — assuming those sales were either over-the-counter sales at the business location or inventory withdrawn there for installation — reporting all of them to the business location is correct.

What this means for you

Contractors who stock materials in inventory

When you buy materials tax-free for resale and later withdraw them from inventory to install, you become the consumer at the point of withdrawal. Kansas sources the tax on those materials to the warehouse where you take possession, not to the job site.

Separating materials tax from labor tax

Your taxable labor is sourced to the installation location, and its taxable base is the total charge minus the materials you already paid tax on. Keep those two components distinct.

Recordkeeping and reporting

If your sales are over-the-counter at your location or inventory withdrawn there for installation, reporting them to your business location is correct. Track where possession of materials transfers, because that drives the sourcing.

Common questions

Q: When I pull doors from inventory for a job, where is the tax due?
A: At your warehouse location — that is where you, as the contractor-consumer, take possession of the materials. That location's rate applies to the materials.

Q: What about the tax on my installation labor?
A: Taxable labor is sourced to where the items are installed, and the base is the total charge to the customer minus the tax-paid cost of the materials.

Q: I bought the inventory tax-free for resale — is that a problem?
A: No. Buying for resale is fine; you simply account for the tax when you withdraw the items from inventory to consume them on a job.

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 sources a contractor's inventory materials and labor.

Citations and references

• This ruling applies the Kansas destination-based sourcing rules to a contractor that installs materials drawn from its own inventory; it treats the contractor as the consumer of those materials and sources the tax to the warehouse where the contractor takes possession, while sourcing taxable labor to the installation site. 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-2003-046

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

October 23, 2003

XXXX
XXXX
XXXX

Re: Your Correspondence Dated September 22, 2003

Dear XXXX:

You indicate that your business, XXXX, installs garage doors and fireplaces, and 90% of XXXX's business involves work as a subcontractor at new home construction sites. XXXX maintains an inventory of garage doors and fire places at XXXX's business location in XXXX, which inventory is purchased tax-free for resale. When XXXX has a door or fireplace installation project, XXXX withdraws the needed items from inventory and installs them at the construction project site. You have requested guidance on how the new destination-based sourcing rules apply to XXXX on such transactions.

Under the new destination-based sourcing rules, the sales tax in effect at the location where the purchaser receives the product applies. Under Kansas law, the contractor is deemed to be the consumer of the materials installed at the construction project site. Because XXXX maintains an inventory at XXXX's warehouse location, when XXXX withdraws items from inventory at the warehouse for installation at the construction site and takes possession of those items as the contractor at the warehouse, XXXX will be considered the purchaser and consumer of those items. The sales tax in effect at the location where the items are removed from inventory, XXXX's warehouse location, will apply to those materials. When XXXX performs taxable labor services (such as for door installation work at a commercial remodeling project), the sales tax in effect at the location where the materials are installed will apply to those services. The sales tax base for the labor services would be the difference between the total amount charged to the customer less the tax-paid materials charges.

You included a copy of XXXX's August 2003 sales tax return, showing all taxable sales reported to XXXX's business location in XXXX. Assuming those sales involved either over-the-counter retail sales at XXXX's business location or withdrawal of inventory at XXXX's business location for installation by XXXX as contractor at residential construction projects, reporting all of those sales to the XXXX business location is correct.

If you have additional questions concerning this, please let me know.

Very truly yours,

Richard L. Cram

Date Composed: 10/24/2003 Date Modified: 10/24/2003

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