Many contractors in the Kansas City area do business on both sides of the state line. For Missouri contractors, the Kansas rules regarding applicability of sales and use taxes are significantly more complex, resulting in confusion and, not infrequently, significant tax exposure. The sales and use tax differences depend on the state in which the work is done, the type of work and even on the location of the contractor’s inventory. The following is an overview of the guidelines in each state, noting the differences. The application of these guidelines will vary depending on individual circumstances so it is best to consult a sales tax expert to ensure your issues are handled correctly. (BTW - If you are a Kansas contractor - be sure to also read my Kansas Contractors: Missouri Tax Rules May Bring Benefits post so that you can better understand the Missouri tax rules.)
Materials and Supplies Used by a Contractor:
In general, materials and supplies used by a contractor are taxable to the contractor when purchased in both Kansas and Missouri. For those contractors who are also retailers and thus may purchase materials for resale or otherwise purchase materials without paying sales tax, use tax is due when the materials are withdrawn from inventory to be used on a construction project.
Materials used in Fabrication:
Since all materials used by a contractor are taxable in Kansas, the issue is whether the taxable base is the original cost of materials or the cost including the labor and materials to customize the product for installation.
Kansas considers the taxable event to occur when the inventory on which tax was not paid when purchased is withdrawn for use in Kansas. (See Pub KS-1525, pg.5) For example, the treatment of custom made cabinets is addressed in Kansas EDU-27. “Carpenters sometimes fabricate articles in their shop and then install the articles at the job site. These carpenters are treated like any other contractor. This means they should pay tax on their purchases and collect tax on their taxable services as explained in the Contractor Guidelines.” Therefore, Kansas tax is due on the cost of the materials when they are withdrawn from inventory. Tax on the installation and overhead of commercial jobs will be due based on the billing method per the discussion below.
It is the position of the Kansas Department of Revenue that materials delivered to or stored in Kansas and ultimately used on a non-Kansas job are subject to Kansas sales tax when purchased or Kansas use tax upon withdrawal from inventory. Therefore, for inventory stored in Kansas and ultimately used on a Missouri job and assuming the Kansas tax rate exceeds the Missouri rate, no Missouri sales or use tax is due.
Materials are generally taxable when purchased or used in Missouri. However, it should be noted that per the Missouri Supreme Court decision in E & B Granite, Inc. v. Director of Revenue, 331 S.W.3d 314, 317 (Mo. Ban 2011), materials delivered into Missouri for further processing (in the cited case granite for the manufacture of custom granite counters) are not subject to the state portion of the Missouri use tax. Further, since the custom granite counters are real property upon transfer to the consumer, no tax is due on the sale. This creates a planning opportunity for a contractor doing business on both sides of the state line when making a decision of where to accept and store inventory, especially given the Kansas position that all inventory stored in Kansas is taxable when withdrawn from inventory.
Tax on Labor and Installation:
For Missouri jobs, sales or use tax is due on materials as discussed above and no tax is due on labor or installation charges.
Kansas taxes the full cost of commercial construction remodel contacts but only the costs of materials on residential or new construction contracts. For residential or new construction projects sales tax should be paid no the purchase of materials or use tax self-assessed upon withdrawal of materials from inventory and no further tax is due. For commercial contracts there are two billing options, as outlined below:
- Contractors may bill the customer the contract price, stating on the invoice “all applicable sales tax included”. Using this method, no sales tax is included on the invoice but it is factored into the total price of the job. Tax is paid by the contractor based on the contract price of the job less tax paid materials and subcontractor costs. In most cases, Westport lighting would accrue tax based on the total contact price less the cost of materials on which tax was self-assessed when the materials were pulled from inventory. From a business perspective, this allows the contractor to bill the customer a “flat fee” without itemizing the costs of materials, labor and overhead.
- Alternatively, Kansas contractors may separately state sales tax. In this case, tax would not be charged on materials and subcontractor costs separately itemized but would be charged on labor, which would include all other costs, including markup. Under this scenario, a contractor may not bill tax on the total cost, meaning the tax on materials and subcontractors on which tax has already been paid may not be passed through to the customer. (See Pub KS-1525, pg. 22).
Certain entities are exempt from paying Kansas tax on the labor portion of a contract, including the US Government, the state of Kansas and its political subdivisions, elementary and secondary schools and certain 501( c)(3) organizations. You must obtain a copy of the certificate issued to the entity from the state of Kansas in order for the services to be exempt. Note that any materials used by you as the contractor on a job for an exempt entity are still subject to use tax when removed from inventory since the burden of the tax is on the contractor (see Pub KS-1525, pg. 21). If you sell an item to an exempt customer directly, you may collect an exemption certificate for that transaction and not charge tax. Project Exemption Certificates (PECs) are issued by the Kansas Department of Revenue related to specific jobs and exempt both the materials and labor from tax. It is important to verify the type of exemption certificate provided to ensure correct tax treatment of these jobs.
In Missouri purchases of construction materials by contractor to construct, repair or remodel facilities of exempt entities are exempt. Exempt entities include the US government, the state of Missouri and its political subdivisions and certain non-profit entities. Appropriate documentation from the exempt entity must be maintained to verify the exemption.
Contractors conducting business in both Kansas and Missouri should be cautious of making assumptions regarding the sales and use tax implications to their business based on their experience in either state. It should also be noted that The Kansas Department of Revenue has stepped up its self-audit program, focusing on a few industries, including contractors. Contractors who are expanding their business across state lines, have received a letter from the Kansas DOR or just want peace of mind that sales and use taxes are being handled correctly should contact a sales tax professional to review their specific business and circumstances.
Other recent “Missouri (MO)” posts by Kathleen Lusk, CMI:
- Missouri Contractors: Kansas Activity Can Add Tax Complexity
- Missouri Tax Amnesty Will Expire Soon !