Does a contractor qualify for the Enterprise Zone sales tax exemption on a new facility as a 'nonmanufacturing business'?

Plain-English summary

This Final Written Determination resolves a contractor's appeal of a denied sales tax refund of $11,012.84 on materials and equipment for a newly constructed facility, claimed under the Enterprise Zone business-and-job provisions of K.S.A. 79-3606(cc). The short version: although a "retail business" in Wichita would be disqualified by population, the taxpayer qualified as a "nonmanufacturing business" because less than half its sales were taxable — the exemption was granted and a $10,012.00 refund plus interest ordered.

The Department had denied the claim on the ground that the taxpayer, a contractor, "is considered to be a retail business," and a retail business qualifies for the exemption only if it locates in a city of 2,500 or less — which Wichita is not. But the Secretary's Designee walked through the definitions:

• Nonmanufacturing business is the catch-all. K.S.A. 74-50,114(g) defines a "nonmanufacturing business" as "any commercial enterprise other than a manufacturing business or a retail business." The taxpayer was clearly not a manufacturing business, so the question was whether it was a retail business.
• "Retail business" turns on being primarily engaged in taxable sales. K.S.A. 74-50,114(i) defines a retail business as one "primarily engaged in the sale at retail of goods or services taxable under the Kansas retailers' sales tax act." If less than 50 percent of the taxpayer's sales are taxable, it is not primarily engaged in taxable sales, so it is not a retail business — and by default it is a nonmanufacturing business.
• Which period is measured? Because the taxpayer sought a refund after the project rather than a project exemption certificate before it, the Designee set a guideline: the Department "shall determine the 'nature of business' . . . by examining a 12-month period prior to the commencement of the project," using "the taxpayer's previous tax year." The same period applies whether a taxpayer seeks a certificate up front or a refund afterward — though a change in the nature of the business after commencement can let the Department use a more current year.
• Result. On the taxpayer's most recent tax year before the project, it "is not primarily engaged in taxable sales and should be considered a nonmanufacturing business." It therefore "qualifies for the retailers' sales tax exemption under the business and job provisions of K.S.A. 79-3606(cc)," and the Department was directed to refund $10,012.00 with applicable interest for January–October 1997.

What this means for you

Contractors and mixed retail/service businesses

Being called a "retailer" is not the end of the Enterprise Zone analysis. If less than half of your sales are taxable, you may be a "nonmanufacturing business" that qualifies for the K.S.A. 79-3606(cc) exemption even in a larger city, where a "retail business" could not.

Measure the right year

The Department determines your "nature of business" using your tax year before the project started — not the year before you request the refund. Line up that year's taxable-versus-nontaxable sales before claiming the exemption.

Certificate up front vs. refund after

You can pursue the exemption either by obtaining a project exemption certificate before the project or by seeking a refund afterward; the same "nature of business" test and measurement period apply to both.

Common questions

Q: Can a contractor get the Enterprise Zone sales tax exemption in a large city?
A: Yes, potentially — not as a "retail business" (population-limited) but as a "nonmanufacturing business" if less than 50% of its sales are taxable.

Q: What makes a business a "retail business" here?
A: Being "primarily engaged" in taxable retail sales under K.S.A. 74-50,114(i). If under half of sales are taxable, the business is not primarily engaged in taxable sales.

Q: Which year does the Department look at?
A: The taxpayer's tax year before the project commenced, whether the taxpayer seeks a certificate up front or a refund afterward.

Citations and references

• K.S.A. 79-3606(cc) — the Enterprise Zone business-and-job sales tax exemption the taxpayer claimed for its new-facility purchases.
• K.S.A. 74-50,114(g) — defines "nonmanufacturing business" as any commercial enterprise other than a manufacturing or retail business; the taxpayer qualified here.
• K.S.A. 74-50,114(i) — defines "retail business" as one primarily engaged in taxable retail sales; a business with under 50% taxable sales is not primarily engaged in them and so is not a retail business.

Source

• Landing page: Kansas Department of Revenue Policy Information Library
• Original document: WFD-P-2002-1

Original ruling text

Final Written Determination

Body:

Office of Administrative Appeals

February 25, 2002

Written Final Determination, Docket No. 01-638

On June 14, 2001, the taxpayer timely filed a written request for an informal conference with the Kansas Secretary of Revenue (Secretary). The taxpayer’s request was in response to the Kansas Department of Revenue’s (Department) May 18, 2001 denial of a sales tax refund request of $11,012.84 for the period January 1997 through October 1997.

A review of this matter indicates that the taxpayer’s refund request relates to the purchase of materials and equipment for their newly constructed facility that it claims to be exempt under the business and job provisions of K.S.A. 79-3606(cc). The Department denied the refund claim for the reason that the taxpayer, a contractor, is considered to be a retail business. A retail business may qualify for the exemption if it locates in a city of 2,500 or less. The taxpayer’s new facility is located in Wichita, a city with a population in excess of 2,500. The Wichita location disqualified the taxpayer from consideration for the exemption as a retail business.

The taxpayer may still qualify for the exemption if it can be considered to be a ‘nonmanufacturing business’. A nonmanufacturing business is defined by K.S.A. 74-50,114(g) to be “any commercial enterprise other than a manufacturing business or a retail business. Clearly the taxpayer is not a manufacturing business. Is the taxpayer a retail business? Subsection (i) defines a retail business to be “(a)ny commercial enterprise primarily engaged in the sale at retail of goods or services taxable under the Kansas retailers’ sales tax act”. In the event less than 50 percent of the taxpayer’s sales are not taxable, then the taxpayer would not be primarily engaged in taxable sales and could not be a ‘retail business’ as defined by Subsection (i). In this event the taxpayer, by default, would be considered a nonmanufacturing business under Subsection (g) because it is a commercial enterprise other than a manufacturing business or a retail business.

The taxpayer’s ability to qualify as a nonmanufacturing business relates directly to the ‘nature of its business’ and whether 50 percent or more of its business is non-taxable so that it would not be considered a retail business. The taxpayer did not seek a project exemption certificate prior to the commencement of its project. The taxpayer requested a refund of the sales tax after the completion of the project.

The key question now is which time period should the Department examine in order to determine the nature of the taxpayer’s business: the 12-month period prior to the refund request or a 12-month period prior to the commencement of the project. The Department will use the following guidelines to determine a taxpayer’s ‘nature of business’ for the purposes of the business and job provisions of K.S.A. 79-3606(cc).

The Department shall determine the ‘nature of business’ of a taxpayer in order to establish whether they are a ‘retail business’ or ‘nonmanufacturing business’ as defined by K.S.A. 74-50,114 by examining a 12-month period prior to the commencement of the project. The 12-month period will be the taxpayer’s previous tax year, not necessarily the 12-month period immediately prior to the commencement of the project. In order to provide consistency of treatment, this same time period will apply both to a taxpayer who requests a project exemption certificate prior to the commencement of a project and to a taxpayer who seeks a refund after the completion of a project. However, in the event that there is a change in the ‘nature of business’ of a taxpayer after the commencement of a project, then the Department will not be precluded from using a more current tax year to determine if the taxpayer qualifies for the exemption.

An examination of the taxpayer’s most recent tax year immediately prior to the commencement of its project indicates that the taxpayer is not primarily engaged in taxable sales and should be considered a nonmanufacturing business under the provisions of K.S.A. 74-50,114. The taxpayer qualifies for the retailers’ sales tax exemption under the business and job provisions of K.S.A. 79-3606(cc). A further review of the refund request indicates that the Department should refund tax in the amount of $10,012.00 together with applicable interest to the taxpayer for the period January 1997 through October 1997.

Upon reconsideration of all of the facts and issues underlying the taxpayer’s request for an informal conference, it is the final determination of the Secretary’s Designee that the taxpayer qualifies for an exemption under the business and job provisions of K.S.A. 79-3606(cc). The Department shall issue a refund of retailers’ sales tax to the taxpayer in the amount of $10,012.00 together with applicable interest for the period January 1997 though October 1997.

Sincerely,

David J. Heinemann
Secretary’s Designee

Date Composed: 04/17/2002 Date Modified: 04/18/2002

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