Is installing floor coverings in a new home taxable, and does the installer owe tax on its carpet and materials?

Plain-English summary

A company that has a contract to furnish and install floor coverings for a homebuilder asked two things: whether its purchase of carpet and related materials for a new residence is taxable, and whether the subcontractor labor to install them is subject to Kansas sales tax.

The Department's answers:

• Install labor is exempt. The service of installing floor coverings performed in connection with the original construction of a building or facility is exempt from Kansas sales tax under K.A.R. 92-19-66b. Because a new residence is original construction, the install labor — including subcontractor install labor for that original construction — is not taxed.
• Materials are taxable. When the company buys materials in Kansas, it must pay sales tax to the materials vendor. If it buys from an out-of-state vendor that does not charge Kansas compensating (use) tax, the company must register for, accrue, and remit Kansas compensating (use) tax on the cost of the materials plus shipping and handling.

The ruling then set out the full text of K.A.R. 92-19-66b, the labor-services regulation, which defines the original-construction exemption and related rules (including the taxable base for installation contracts and the exemptions for room/floor additions, first-tenant finish-out, and repair of casualty damage).

What this means for you

Flooring and finish subcontractors on new construction

Your installation labor on original construction (such as a new home) is exempt. Don't charge sales tax on that labor, and note that the exemption also covers subcontractor install labor for the original construction.

You still pay tax on your materials

You are the consumer of the carpet and materials. Pay Kansas sales tax to your in-state vendor, and if an out-of-state supplier doesn't charge Kansas use tax, self-accrue and remit it — on the materials cost plus shipping and handling.

Common questions

Q: Is my install labor on a new home taxable?
A: No. Installing floor coverings in connection with the original construction of a building or facility is exempt under K.A.R. 92-19-66b, and that covers subcontractor labor on the original construction.

Q: Do I owe tax on the carpet and materials?
A: Yes. You pay Kansas sales tax to an in-state vendor; for out-of-state purchases where no Kansas use tax is charged, you must register, accrue, and remit compensating use tax on the materials cost plus shipping and handling.

Citations and references

• K.A.R. 92-19-66b — the Kansas labor-services regulation. It exempts the service of installing or applying tangible personal property in connection with the original construction of a building or facility (and addresses room/floor additions, first-tenant completion, and casualty repair), and defines the taxable base for installation contracts. Quoted in full in the ruling.

Source

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: P-2004-009

Original ruling text

Private Letter Ruling

Body:

Office of Policy & Research

April 26, 2004

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Dear Sirs:

The purpose of this letter is to respond to your request dated March 29, 2004. In it you asked if the purchase by your company of carpet and related materials to be installed in a new residence are taxable. You also asked if any subcontractor labor services to install be subject to Kansas retailers’ sales tax. Your company has a contract to furnish and install floor coverings with a homebuilder.

The service to install floor coverings that is performed in connection with original construction of building or facility is exempt from sales tax in Kansas. See K.A.R. 92-19-66b.

When your company purchases materials in the state of Kansas, your company is required to pay sales tax to the materials vendor.

If the vendor is located outside the state of Kansas and fails to impose a compensating (use) tax on materials shipped to Kansas, your company is obligated to register for and accrue Kansas compensating (use) tax on the cost of materials plus shipping and handling charges and remit that tax directly to the state of Kansas.

K.A.R. 92-19-66b provides: Labor services. (a) Each contractor, subcontractor, and repairman shall be responsible for collecting and remitting sales tax on taxable services performed for others, including taxable services performed for other contractors. A contractor, subcontractor, or repairman shall not issue or accept a resale exemption certificate that claims an exemption from sales tax for services being purchased from or sold to another contractor, subcontractor, or repairman.
(b) The taxable base for all contracts involving the application or installation of tangible personal property shall be the difference between the contract price and the cost of material, supplies, and payments to subcontractors, including sales or compensating tax paid by the contractor on the materials, supplies, and subcontractor charges purchased by the contractor to complete the contract.
(c) Each contractor, subcontractor, or repairman who does not separately state the amount of sales tax for services performed in that person’s contract, bid estimates, customer billings, or other evidence of the transaction shall state in the document that all applicable sales taxes are included in the selling price. If the statement does not appear in the contract, bid estimate, billing, or other evidence of the transaction, it shall be presumed that the sales tax was not charged to the consumer. Each retailer shall carry the burden of proving that the sales tax was charged to the consumer and properly remitted to the state.
(d) The service of installing or applying tangible personal property in connection with the original construction, which is the first or initial construction of a new building or facility, shall not be subject to sales tax. The erection of a building or facility on a site previously occupied by a building or facility that has been demolished, razed, or dismantled shall be considered to be original construction if the building or facility is totally new, whether or not the old foundation was also demolished.
(e) The service of installing or applying tangible personal property for the addition of an entire room or floor to the exterior of an existing building or facility shall not be subject to sales tax. Any replacement, remodeling, restoration, repair, renovation, or reconstruction done in the interior of an existing building or facility necessary to the construction of an entire room or floor added to the exterior of an existing building or facility shall be considered to be original construction and not subject to sales tax when any of these conditions is met.
(1) Except for the addition of the entire room or floor to the exterior of the building or facility, the work performed inside the existing building or facility would not be necessary.
(2) The work being done in the existing building or facility is necessary to support the addition of the new room or floor being added to the exterior of the building, facility, or the machinery contained therein.
(3) The support to the entire room or floor being added to the exterior of the existing building or facility is the direct causal factor of the construction being performed to the interior of the existing building or facility.
If none of the three requirements can be met, the services performed to the interior of the existing building or facility shall be subject to sales tax, and the cost of services rendered in connection with the entire project shall be allocated between the addition of the new room or floor and the services performed to the interior of the existing building or facility. Sales tax shall be collected and remitted for that portion of services allocated to those services performed to the interior of the existing building or facility.
(f) Services of installing or applying tangible personal property to complete unfinished portions of newly constructed buildings, facilities, shopping centers, and malls when space within the building, facility, center, or mall is leased or sold to the first or initial tenant of that space shall not be subject to sales tax. Services performed to install or apply tangible personal property for the completion of an unfinished portion of an existing building or facility shall be presumed not to be taxable when: all of the following conditions are met.
(1) The service being rendered was called for in the original blueprint, building plan, or building specification at the time original construction of the building or facility was started, including any change orders issued during the original construction of the building or facility;.
(2) The completion of the unfinished portion of the building or facility is within a time that is reasonably close to the time of the original construction of the building or facility.
(3) The service rendered would have been performed at the time of the original construction of the building or facility, except for circumstances beyond the owner's control. Those circumstances shall not include instances in which the project is essentially completed and usable for the purposes intended, but the owner merely fell short of funds, or when the owner, after taking possession or occupancy of the building or facility, contracts for additional services.
(4) The owner or occupant is the first or initial owner or occupant of the building or facility.
(g) Sales tax shall not be imposed on the service of installing or applying tangible personal property for the purpose of restoring, reconstructing, or replacing a building or facility damaged or destroyed by fire, flood, tornado, lightning, explosion, or earthquake. This exemption shall not apply to restoration, reconstruction, or replacement of a building or facility due to normal deterioration resulting from the continuous exposure to the elements, or the obsolescence of the building or facility. Each retailer performing a service under this exemption shall secure an affidavit from the owner of the building or facility stating that the building or facility was damaged or destroyed by one or more of the above-mentioned causes. Each retailer shall retain the affidavit in the retailer's records for three years.

This is a private letter ruling pursuant to K.A.R. 92-19-59, based on the representations you have made. To the extent those representations are incomplete or inaccurate, this ruling is 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: 04/30/2004 Date Modified: 04/30/2004

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