Sales Tax Guidelines for Contractor-Fabricators and Contractor- Manufacturers

Transcription

1 -2$1:$*1216(&5(7$5< '(3$570(172)5(9(18( 32/,&<$1'5(6($5&+.$7+/((16(%(/,86*29(5125 Sales Tax Guidelines for Contractor-Fabricators and Contractor- Manufacturers Date Issued: 5/31/05 Tax Types: Sales and Use Tax Department of Revenue guidelines are intended to help you become more familiar with Kansas tax laws and your rights and responsibilities under them. While every attempt is made to provide you with information that is consistent with the Kansas tax statutes, regulations, and court decisions, nothing in this publication supersedes, alters, or otherwise changes any provision of the Kansas tax laws. Department guidelines are not legal rulings and any information that is inconsistent with Kansas tax laws is not binding on either the department or the taxpayer. Not every potential tax situation is covered in these guidelines. If you have any questions about how Kansas sales and use tax laws apply to your business, please visit the department s Policy Information Library on our web site, or call the department s Taxpayer Assistance Center at Application of this publication. This publication explains how Kansas sales and use tax applies to contractor-fabricators and contractor-manufacturers. Contractor-fabricators and contractormanufacturers are businesses that enter into construction contracts and, in the course of performing a contract, install articles that the business fabricated or manufactured. Examples of fabricated or manufactured articles include pre-engineered roof and floor trusses, pre-fabricated wall panels, pre-fabricated stairs, pre-cast concrete floors or walls, doors, windows, prefabricated cabinets, and heating and air-conditioning ducts. Other businesses discussed here are businesses that make and install awnings, elevators and escalators, signs, monuments and gravestones, and ornamental iron. Near the end of these guidelines is a list of businesses that commonly operate as contractorfabricators or contractor-manufacturers. Each listed business is followed by a short synopsis that explains how sales tax applies to that particular business. This publication does not apply to modular or manufactured homes or to prefabricated homes or buildings. How sales tax applies to transactions involving these homes is set forth in Revenue Ruling These guidelines should be read with other department publications that apply to your business. These may include the Sales Tax Guidelines for Businesses that Sell and Service Appliances and '2&.,1*67$7(2)),&(%8,/',1*6:+$55, (.$.6 9RLFH)D[ KWWSZZZNVUHYHQXHRUJ

2 2 Electronic Products, the Sales Tax Guidelines for Fabricators, and the Sales Tax Guidelines for Contractors and Contractor-Retailers. Other materials that you ll need to review include the information guides and other publications listed at the end of these guidelines that pertain to your business. Effective date for this publication. The guidelines in this publication shall take effect on July 1, This publication supersedes and revokes all prior department letters, information guides, and other publications that discuss the issues that are addressed here. Registration. Before you begin to do business in Kansas, you must register with the department of revenue. You can do this by visiting the KSBusinessCenter at and following the appropriate instructions. This web site is a partnership between the Kansas Department of Revenue, the Kansas Secretary of State s Office, the Information Network of Kansas, and other business-oriented state agencies. The goal for the site is to provide a central location where Kansas businesses can electronically file all of the reports required by Kansas law. While the web site is under development, it already contains a great deal of useful information for new businesses. You can also register by submitting a completed Business Tax Application Form (CR-16) to the department. Form CR-16 with instruction is published in the Business Tax Application Booklet, Publication KS You can obtain a copy of Publication KS-1216 from our website at or by calling the department s forms request line at Both resident and nonresident contractors who do work in Kansas must register. Whichever way you register, you must complete the application form with care since the information you provide will determine how the department registers your business for state tax purposes. Depending on how your accounts are set up, you may be required to file sales and use tax returns either annually, quarterly, or monthly. If you are not approved to file your sales and use tax returns electronically, the department will routinely mail you a tax return that is printed with your business name and mailing address, your account number, the tax type being reported, the reporting period, and the due date. You must file a return even if you don t receive one in the mail. You can request a blank return by calling the forms request line at or you can download one from our web site at You must file a timely return for each reporting period, including those when you re reporting zero tax. Glossary --- As used in this publication: Contractor means a person or business, including contractor-retailers, that contract to furnish materials and labor to construct, alter, repair, or improve real property, including buildings and other structures. A contractor expends its labor and skill to convert building materials into real property improvements. A contractor sometimes contracts to furnish labor only, using materials provided by the property owner or by another contractor. Contractor means general contractor, subcontractor, or specialty contractor, unless the context indicates otherwise. Cost price of a fabricated or manufactured article means the price at which similar articles in similar quantities have been previously sold or offered for sale by the fabricator or manufacturer. If similar articles have not been previously sold or offered for sale, the cost price shall be the aggregate of the following costs:

3 3 1. Cost of materials. 2. Direct labor. 3. The pro rata share of all overhead costs attributable to the manufacture or fabrication of the article. 4. Reasonable profit from the fabricating or manufacturing operations. Mixed contract means a single contract that calls both for the performance of construction services and for the retail sale of tangible personal property. A business that enters into a mixed contract is treated as the consumer of the construction materials that it uses on a project and as the retailer of the goods that it sells under the contract. The tangible personal property that is being sold or used in construction can include fabricated or manufactured goods. Retailer includes a person or business that fabricates products for its customers. Set-up services include placing a fabricated article in working order at the customer s home or business by assembling it, locating and fixing it in place, plugging or wiring it into existing electrical services, and so forth. Charges for set-up services are considered to be part of the selling price of certain fabricated articles and are taxed whenever the sale of the article is taxed. Sourcing means determining the tax situs of a transaction. The tax situs determines which local tax applies to sales made and services performed in Kansas. Tax base means the dollar amount upon which sales tax is computed. It is the amount that is multiplied by the sales tax rate to yield the amount of sales tax due from the customer. The tax base for retail sales is the sales or selling price of the goods or services being provided. Contractor-fabricators and contractor-manufacturers. Prefabricated or manufactured building components. Many businesses fabricate or manufacture building components off site that they deliver to a Kansas construction site and install. These components can include pre-engineered roof and floor trusses, pre-fabricated wall panels, pre-fabricated stairs, pre-cast concrete floors or walls, pre-hung doors and windows, heating and air-conditioning ducts, awnings, elevators, escalators, and other similar products. Some of these businesses treat themselves like contractors and pay sales tax when they buy the materials that they make into building components. Others treat themselves like manufacturers and claim an ingredient or component part exemption when they buy materials to make into building components. The next section explains how these businesses should apply Kansas sales tax to their business operations and sets out rules for them to follow. Contractor-fabricators that pay sales tax when they buy materials to fabricate into building components. Some businesses that fabricate building components are treated like contractors and pay sales tax when they buy their materials. These businesses usually follow similar business practices, which can include: The business visits the job site or reviews blue prints to determine what must be fabricated.

4 4 Fabrication is begun only after the business has entered into a contract. The business does not fabricate articles using integrated production equipment and does not operate an integrated production line. The business does not maintain an inventory of fabricated articles or a standard price list for the sale of fabricated articles. The business hauls the fabricated articles to the job site using its own vehicles. The business s own employees usually install the fabricated articles, rather than having a third-party install the articles or selling the articles at retail. Businesses that follow most or all of these business practices are treated like contractors and should pay sales tax when they buy materials. The tax collection duties for these in-state and out-of-state businesses are: When construction services are not taxed on a Kansas job, such as for original and residential construction, the contractor-fabricator s only sales tax duty is to pay Kansas sales tax when it buys the materials to fabricate into building components that it installs. The contractor-fabricator does not charge sales tax on the installation services it performs in Kansas and the value added by the fabrication is not taxed. An out-of-state business may owe some additional Kansas tax if the materials were purchased outside Kansas. See Accruing tax on untaxed purchases in the Contractor Guidelines. When construction services in Kansas are taxed, such as for work done to existing commercial buildings, the contractor-fabricator is required to pay tax when it buys materials and to charge tax on its installation services. The contractor-fabricator should follow the Contractor Guidelines in the section entitled Kansas jobs where labor services are taxed to determine the tax due on its labor services. The value added by the fabrication is taxed because the formula for determining the tax on taxable construction services requires sales tax to be collected on the difference between the total amount charged to the customer less tax-paid materials and tax-paid subcontractor charges. This amount always includes the value added by the fabrication services. When a contractor-fabricator pays sales tax on materials that it fabricates into building components for installation in another state, the contractor-fabricator has no further duties under the Kansas sales tax act. Kansas tax is not owed on the value added by the fabrication and, in almost all cases, the contractor-fabricator should treat itself as a contractor under the laws of the state where the building components are installed. The contractor-fabricator should contact the revenue department in the state where the fabricated item is installed to confirm this. The guidelines in the next section apply to businesses that should claim a sales tax exemption when they buy materials. Businesses that should follow the guidelines in the next section include: (1) contractor-manufacturers; (2) contractor-fabricators that routinely hire third-party installers or that have dealers who do the installation work; and (3) any other contractorfabricators whose business operations differ materially from those listed above. Some businesses that start out as contractor-fabricators grow and expand so that over time they should change

5 their accounting practices and begin to treat themselves like contractor-manufacturers. This means that contractor-fabricators that pay tax on their material purchases should review these guidelines occasionally to determine whether or not they should change their accounting to that required for contractor-manufacturers. 5 Contractor-manufacturers and contractor-fabricators that claim sales tax exemption when buying materials to make into building components. Some businesses claim a resale or component part exemption when they buy materials to fabricate into building components. Their business practices include: The business operates an integrated production line that fabricates or manufactures the articles that it either installs or sells. The business maintains an inventory of fabricated or manufactured articles and parts. The business maintains a price list for the fabricated or manufactured articles and parts. The fabricated or manufactured articles are routinely packaged for sale and shipment, which is normally done by a third-party shipper instead of the business. When performing a construction contract, the business may remove some articles from their resale inventory and make other articles for the particular job. The business sells some of what it makes at wholesale or retail. The business has a network of dealer/installers or routinely hires third-party contractors to install their products. The following rules explain how these businesses should account for sales and use tax: Rules for Kansas businesses. These rules apply to Kansas businesses that claim resale exemption when they buy materials to fabricate or manufacturer into building components or other articles for sale or installation. When a Kansas business fabricates or manufactures building components or other articles and delivers them to a buyer in Kansas without providing installation, the business is treated like a retailer and is required to collect sales tax on the total selling price. The total selling price will include the value added by the fabricating or manufacturing and any delivery charges. The delivery location determines which local tax applies. When a Kansas business fabricates or manufactures building components or other articles that its employees install in Kansas, the business is required to accrue Kansas sales tax on the cost price of the component. This rule applies whether the business custom fabricates or manufacturers all of the articles for the particular job or removes some or all of the components from its inventory of completed goods. The Kansas business should treat all of the articles as being withdrawn from its inventory of completed goods and source the local tax to the location of that inventory. The value added by fabrication is included in the cost price. The Kansas business should follow the rules set forth in the Contractor Guidelines to determine the tax due on its taxable construction services. This rule also applies when articles are installed in Kansas by a third-party hired by the Kansas business.

6 6 When a Kansas business fabricates or manufactures articles that its employees install in another state, the business must determine how it is treated under the laws of the state of installation. If similar businesses are treated like contractors in the other state, the Kansas business should accrue Kansas tax on the cost of materials used to make up the article. If similar business are treated as manufacturers and not as contractors in the state of installation, tax is due to the state where the fabricated article is installed. This rule also applies when the articles are installed by a third-party hired by the Kansas business. When a Kansas business fabricates or manufactures an article and ships it to a dealer in another state for installation there, the Kansas business should not collect or accrue Kansas tax on the transaction. Tax will almost always be owed to the state where installation occurs. Rules for out-of-state businesses. These rules apply to out-of-state businesses that claim resale exemption when they buy materials to make into building components that are delivered to Kansas for installation here. When an out-of-state business fabricates or manufactures building components or other articles and delivers them to a buyer in Kansas without providing installation, it should collect tax on the total selling price charged to the buyer including any delivery charges. The delivery location determines which local tax applies. When an out-of-state business fabricates or manufactures building components or other articles and delivers them to a Kansas dealer to install, the out-of-state manufacturer should collect Kansas tax on the total amount charged to the dealer unless the Kansas dealer presents the business with a resale exemption certificate. If the dealer doesn t issue a resale certificate and the out-of-state business collects tax from the dealer, the value added by fabrication will be included in the selling price charged to the dealer. The delivery location determines which local tax applies. When an out-of-state business fabricates or manufactures building components or other articles and delivers them to a third-party contractor that it hires to do the installation work in Kansas, the out-of-state manufacturer should accrue Kansas tax on the cost price of the building component plus any delivery charges. The contractor providing the construction services should charge the out-of-state business sales tax on its taxable labor services as explained in the Contractor Guidelines. When the employees of an out-of-state business install a fabricated or manufactured article in Kansas under a construction contract, the business shall accrue Kansas tax on its cost-price when the installation services are exempt, or charge tax on the total amount when the installation services are taxable. The value added by manufacturing or fabrication is always included in the tax base. The location of the job site determines which local tax applies. If the out-of-state business lawfully paid sales tax to another state on the materials that make up the article, the business should accrue any additional Kansas tax on the cost of the article as explained in the section entitled Accruing tax on untaxed purchases in the Contractor Guidelines. Such out-of-state

7 7 businesses always have nexus with Kansas since its employees enter Kansas to perform construction services here. The term "cost price" means the price at which similar articles in similar quantities have been previously sold or offered for sale. If similar articles have not been previously sold or offered for sale, the definition of "cost price" set forth in the Glossary, above, explains how the cost price is determined. Articles fabricated at the job site. Some contractors haul equipment to the job site to use in forming metal roofing or gutters and downspouts from rolls of steel or aluminum. Other contractors use similar equipment at the job site to fabricate steel 2x4 s. Contractors sometimes use portable mixers to make concrete at the job site. For these businesses, the fabrication done at the job site is an integral part of performing their construction contract. These businesses are treated as contractors. This means that they are required to pay sales tax when they take delivery of the rolls of steel or aluminum or materials to make concrete. See Sales Tax Guidelines for Contractors and Contractor-retailers. These businesses are required to pay sales or use tax on the equipment they buy and use to form the articles they install. Contractors may not claim the integrated plant exemption extended in K.S.A Supp (kk) when they buy their equipment. Carpenters sometimes fabricate articles at their shop and then install the articles at the job site. These carpenters are treated like any other contractor. This means they should pay sales tax on their purchases and collect tax on their taxable services as explained in the Contractor Guidelines. See also Sales Tax Guidelines for Contractor-Fabricators and Contractor-Retailers. Tax treatment synopsis for contractor-fabricators and contractor-manufacturers. (1) Awnings. Some Kansas businesses that custom fabricate and install awnings treat themselves like contractors and pay sales tax on their material purchases. If installation services qualify for the residential or original construction exemption, the awning fabricator s sales tax duties are complete upon paying tax on its purchases of materials. The fabricator should not charge tax on separately stated installation charges. Taxable installation services should be accounted for as discussed in the Contractor Guidelines, Charging and reporting sales tax on your taxable labor services. Some multi-state awning companies have local dealers who install awnings that are produced at the business s manufacturing or fabrication plant. The value added by the manufacturing or fabrication services is included in the tax base. If an awning manufacturer does not charge sales tax to the dealer, the dealer should accrue and remit Kansas sales tax on their purchase price of the awnings. Local tax is sourced to the location where delivery from the manufacturer to the dealer occurs. Taxable installation services should be accounted for as discussed in the Contractor Guidelines, Charging and reporting sales tax on your taxable labor services. (2) Cabinet makers. Businesses that fabricate and install cabinets should review the sections in this publication that discuss contractor-fabricators and contractor-manufacturers, and determine how they should treat themselves. Most cabinet makers will treat themselves as contractor-manufacturers and collect tax accordingly.

8 8 (3) Drapery and drapery hardware. Businesses that contract to custom make draperies and curtains are fabricators. The value added by the fabrication services is subject to tax. Businesses that sew draperies to fulfill custom orders should claim resale exemption when they buy drapery materials and collect sales tax on the full selling price billed to the customer. When a contract for custom-made draperies requires hanging them at the buyer s residence or business, sales tax should be charged on the entire amount billed to the customer, including the charges for delivering and hanging the draperies. Local tax should be sourced to the customer s residence or business. The department has determined that the sale and installation of drapery rods or other drapery hardware shall be treated as a retail sale plus set up and not as a construction contract. This means that sales and installation of drapery rods or other drapery hardware are fully taxable even when the hardware is installed at a residence or during the original construction of a building. Accordingly, a drapery business is required to collect sales tax on the entire amount it charges to a customer when it fabricates draperies, installs drapery hardware, and hangs the drapes that it fabricated. The drapery business should claim a resale exemption when it buys drapery hardware. (4) Elevators and escalators. Manufacturers whose employees install elevators and escalators are required to accrue and remit sales tax on the cost price of an elevator or escalator installed in Kansas, which includes the manufacturing costs. (5) Manufactured, modular, and prefabricated buildings. These rules do not apply to building manufacturers. See Revenue Ruling (6) Manufacturers that install the articles they manufacture. Some manufacturers have employees or separate divisions that contract to install the articles they manufacture. This includes window manufacturers, and cabinet makers, among others. When these businesses accrue tax, the value added by the manufacturing activities is always subject to tax. Any claim by these businesses to be a manufacturer for income tax, sales, or unemployment tax purposes shall be presumptive proof that the business is required to accrue or collect tax on the cost-price of the manufactured item, rather than paying tax on its material purchases. (7) Monuments and gravestones. The sale, engraving, and installation of monuments and gravestones in Kansas are taxable. Businesses that sell or sell and install monuments in Kansas are treated as retailers and not as contractors. These businesses shall collect sales tax on the total amount billed to the customer, except for any separately stated charges for excavation services. When a monument business hires a third-party contractor to install the marker or pour a foundation in Kansas, the contractor should charge sales tax to the business on their entire charge less any separately stated excavation services. When reporting sales tax, the business should take a deduction for the Kansas tax that it paid to the third-party contractor by following the direction in the section entitled Resale Exemption Certificates in the Contractor Guidelines. A monument business should claim a resale exemption when it buys materials to fabricate into monuments. A monument business that claims resale exemption on its purchases should source all of the transaction to the location where the monument is installed. When a Kansas monument business installs a monument in a state where such businesses are treated as contractors, the

9 9 Kansas business should accrue Kansas sales tax on the cost of the materials taken from inventory and used in the out-of-state job. (8) Ornamental iron. Businesses that fabricate and install ornamental iron should review the sections in this publication that discuss contractor-fabricators and contractor-manufacturers, and determine how they should treat themselves. (9) Pre-fabricated roof and floor trusses, pre-fabricated wall panels, pre-fabricated stairs, pre-cast concrete floors or walls, and other similar products. Businesses that fabricate and install pre-engineered building components should review the sections in this publication that discuss contractor-fabricators and contractor-manufacturers, and determine how they should treat themselves. (10) Ready-mix concrete. The sale of ready-mix concrete is a taxable retail sale of tangible personal property. The tax base for the sale includes the delivered price, including any minimum load and transportation charges, as well as any standby charges that are charged after arrival at the destination. Pouring concrete is considered to be part of the delivery rather than an installation service. Accordingly, charges for delivering and pouring ready-mix are fully taxable whenever the sale of the concrete is taxable. The original and residential construction exemptions do not exempt charges for ready-mix concrete, its delivery, or its pouring. (11) Sheet metal fabricators. Businesses that fabricate and install duct-work and other sheet metal products should review the section in this publication for contractor-fabricators and contractor-manufacturers, and determine how they should treat themselves. Many sheet metal fabricators that make duct work will treat themselves as contractors and pay tax when they buy the sheet metal to use in their construction projects. (12) Signs. Custom sign makers are treated like fabricators. The value added by the fabrication of the sign is subject to tax. Sign makers should claim resale exemption when they buy materials to fabricate a sign from and collect the sales tax on the full selling price billed to their customer for the sign, including charges for setting it in place, bolting it down, and wiring it to existing services. Many other questions that sign makers have are answered by K.A.R a. Sign makers sometimes contract to construct a base or make other improvements to real property to support the sign they are fabricating. This is a mixed contract. When a sign maker enters into a mixed contract, the sign fabricator shall charge tax on the entire amount unless the retail sale of the fabricated sign is shown as a separate line item charge that is being taxed on the customer billing. When the billing under a mixed contract contains a separate line item charge for the fabricated sign, the sign maker should determine the tax due on the construction part of the contract by applying the rules for Mixed Contracts that are set forth in the Sales Tax Guidelines for Businesses that Sell and Service Appliances and Electronic Products. Other publications. The following publications are available free from the Kansas Department of Revenue. Obtain your copy by visiting our web site at or by calling our voice mail Forms

10 Request Line at While the Department of Revenue has discontinued printing some of these publications, all of them are available on our web site. 10 Sales Tax Guidelines for Contractor and Contractor-Retailers Sales Tax Guidelines Businesses that Sell and Service Appliances and Electronic Products Sales Tax Guidelines for Contractor-Fabricators and Contractor-Retailers Pub. KS-1216, Kansas Business Tax Application Pub. KS-1500, North American Industry Classification System Pub. KS-1510, Kansas Sales and Compensating Use Tax Pub. KS-1520, Kansas Exemption Certificates Pub. KS-1526, Kansas Sales and Use Tax for Motor Vehicle Transactions Pub. KS-1527, Sales and Use Tax for Kansas Political Subdivisions Pub. KS-1540, Kansas Business Taxes for Hotels, Motels & Restaurants Pub. KS-1550, Sales and Use Tax for the Agricultural Industry Pub. KS-1560, Tax Guide for Schools and Educational Institutions Pub. KS-1700, Sales Tax Jurisdiction Code Booklet KW-100, Kansas Withholding Tax Guide Taxpayer Assistance. If you have questions about this publication, please contact the Taxpayer Assistance Center at Our fax number is Additional copies of department publications are available by calling the department s forms request line at or by download from our website: The number for the department s hearing impaired TTY is