Randy E. Stookey, KGFA General Counsel
Sales Tax Exemption on Building Materials, Equipment and Services for Construction or Remodel
March 30, 2015
A member recently asked whether building materials, machinery and equipment, and services purchased for use in a construction/restoration building project in Kansas would qualify for a sales tax exemption.
The short answer is yes, possibly. Under Kansas law, a business may qualify for a sales tax exemption on the purchase of tangible personal property or services purchased for a construction project if the construction project is approved by the Kansas Department of Revenue (KDOR) as meeting the requirements of KSA 74-50,115.
The controlling law in Kansas for sales tax exemptions on personal property and machinery and equipment used in conjunction with a commercial building project is KSA 79-3606(cc). KSA 79-3606(cc) exempts the following from Kansas sales tax:
- all sales of tangible personal property or services purchased for the purpose of and in conjunction with constructing, reconstructing, enlarging or remodeling a business or retail business, and which meet the requirements established in K.S.A. 74-50,115; and,
- the sale and installation of machinery and equipment purchased for installation at any such business or retail business.
In order to take advantage of such a sales tax exemption, the business must receive, from the KDOR, a sales tax project exemption certificate (PEC) number for the project. Once a PEC is issued, the entire project – materials, supplies, labor services, construction equipment rental, equipment, and machinery and furnishings which are incorporated into the project – is exempt from Kansas sales and compensating use taxes.
A PEC number must be issued prior to the purchase of any tangible personal property or services for nonmanufacturing building projects.
The business owner provides the PEC number to the general contractor, and the contractor uses the PEC number to purchase all materials, machinery and equipment for the project. The contractor must provide the PEC number to all suppliers from whom purchases of materials, machinery and equipment, and services are made. In turn, the supplier’s invoices for the sales tax exempt materials, machinery and equipment, and services must bear the PEC number. Upon completion of the project, the contractor must provide the business owner with a sworn statement (on a form provided by the KDOR), stating that all purchases made for the project were entitled to the sales tax exemption.
Note: The contractor is required to maintain all sales-tax exempt invoices for a period of five years, and is subject to audit from the KDOR. Any contractor, employee or subcontractor, who uses or otherwise disposes of any materials, machinery or equipment purchased under such a certificate, for any purpose other than that for which such a certificate is issued, without the payment of a sales or compensating use tax, may be found guilty of a misdemeanor and be subject to penalties and fines.
Therefore, in order to qualify for a sales tax exemption for tangible personal property, machinery and equipment, and services purchased for a construction project in Kansas, the construction project must be pre-approved by the KDOR as meeting the requirements of KSA 74-50,115.
Under KSA 74-50,115(b), a nonmanufacturing business located within Kansas is eligible for a sales tax exemption on construction project materials and services if the business:
1. provides documented evidence of hiring at least five additional full-time employees; and
2. receives approval from the Kansas Secretary of Commerce if relocating to another city or county within Kansas.
In order to qualify for a sales tax exemption on tangible personal property used in the construction/remodeling/expansion of a nonmanufacturing business, the business should apply for the sales tax exemption by submitting a Project Exemption Certificate (PEC) application to KDOR You can find an electronic application form at http://ksrevenue.org/pecwelcome.html. Also, find out more information and Frequently Asked Questions on the Project Exemption Certificate in KDOR publication 1528, Here.
I hope this information is helpful. As always, please feel free to contact your Association staff if you have additional questions on your specific situation.
Legal-Link Notice and Conditions of Use