If you operate in both Kansas and Missouri, you should familiarize yourself with the sales tax laws of both states. With an understanding of which projects are taxable and which are exempt, you can make better purchasing decisions so that you can keep your sales tax bills — and therefore your overall project costs — as low as possible.
Do contractors owe taxes on materials purchases?
In general, sales tax is only imposed on the end consumer. You need to determine whether your state considers you, the builder, to be the end consumer, or if it considers your customer, the property owner/buyer, to be the end consumer.
Nearly all states consider contractors and subcontractors to be the end consumer of materials they purchase to construct, repair, or improve buildings or real property and will therefore levy sales tax on those purchases. This is true in both Kansas and Missouri.
Kansas considers contractors to be the end user of materials purchases whether the materials are consumed during the construction project or the materials are installed to be used by the purchaser. The statute says that purchases by contractors or subcontractors “for use by them in erecting structures, or building on, or otherwise improving, altering, or repairing real or personal property” are taxable.
Kansas uses what’s known as “destination-based sourcing,” which means that sales are sourced to where the materials are ultimately used rather than where they are purchased. This means that if a construction business headquartered in De Soto purchases materials in Olathe for use in a construction project in Fairway, they should apply Fairway’s local sales tax rates in addition to Kansas’s state-level taxes.
Missouri says that contractors are considered to be the final users and consumers of the materials that are used to fulfill a construction contract and must pay sales taxes on those purchases. There few exceptions for customers who are exempt organizations.
Missouri uses what’s known as “origin-based sourcing,” which means that the applicable local sales tax rate is the rate where the materials were purchased. This means that a business headquartered in Blue Springs who purchases materials in Independence for a construction job in Kansas City would pay local Independence taxes.
Should contractors charge sales tax?
In Missouri, contractors don’t need to charge sales tax when they bill their clients for construction work. Kansas is a bit different.
Kansas considers some construction labor to be taxable. The general rules are:
- Residential construction labor is tax exempt in Kansas.
- Original construction is tax exempt in Kansas.
- Commercial remodels are taxable in Kansas.
- Maintenance contracts are sometimes taxable in Kansas.
Let’s review all four.
Residential Construction Services – EXEMPT
In Kansas, services involving the construction, reconstruction, restoration, remodeling, renovation, and repair of residences are typically exempt from sales tax.
|“Residence” includes:||“Residence” does not include:|
|Single family homes||Hotels and motels|
|Multifamily homes (e.g., duplexes)||Bed and breakfasts|
|Mobile homes affixed to real property||Mobile homes not affixed to real property|
|Nursing homes||Resort lodging|
|Primary and/or secondary homes||Recreational vehicles|
|Land improvements immediately surrounding a residence (sidewalks, driveways, etc.)||Accommodations rented for 28 days or less|
This means that contractors would likely not assess sales tax when charging the customer for the following types of services:
- Remodel of the kitchen in a family’s home in Overland Park.
- Installation of a new roof on an apartment complex in Lawrence.
- Building a fence around someone’s second home on Clinton Lake.
- Repairing the driveway of a duplex in Topeka.
- Reconstructing the living quarters of a nursing home in Wichita.
Although most construction services performed on residences are exempt, there are a few instances where the labor could be taxable. Repairing tangible personal property already installed in the home, like a dishwasher or a sump pump, is a taxable service, as is installing tangible personal property as part of a residence’s retail sale. You can always ask your CPA if you think one of your residential construction services follows one of these exceptions.
Original Construction Services – EXEMPT
Construction services related to the original construction of a building are also tax exempt. The five types of tax-exempt projects in this category are:
- The initial construction of a building or facility.
- An addition of an entire room or floor to an existing building or facility.
- Completion of an unfinished portion of an existing building or facility for the first owner.
- Restoration, reconstruction, or replacement of a building, facility, or utility structure that was damaged by a natural disaster or terrorism.
- Construction, restoration, reconstruction, replacement, or repair of a bridge or highway.
Pub. KS-1525 provides examples of each of these tax-exempt projects (see page 6).
Commercial Remodel Services – TAXABLE
Most other construction work will fall under this category.
Commercial remodel work is installing, applying, servicing, repairing, altering, or maintaining tangible personal property performed on nonresidential real property. Taxable labor in this category could be:
- Painting or wallpapering the interior or a building or facility.
- Upgrading a building’s fixtures.
- Remodeling the interior or exterior of the building.
- Repairing driveways, fences, or parking lots.
- Landscaping and tree removal.
- Roofing, plumbing, electric, or HVAC work.
- Demolishing or razing property if not connected to the original construction of a building.
- Removing asbestos, unless done as part of the original construction of a building.
To determine the taxable amount of the construction services, you begin with the total amount of money you’ve received for the project and subtract the cost of direct materials and payments to subcontractors, including sales tax. This formula can help:
Maintenance Contracts – SOMETIMES TAXABLE
Whether a maintenance contract is taxable or nontaxable in Kansas depends on the underlying project. Residential maintenance contracts are nontaxable, but maintenance contracts for commercial remodel work — whether they are optional or extended warranties — are taxable.
Sales Taxes Can Be Expensive
In the past couple years, the construction industry has had to develop strategies to combat a wide range of external threats. Fortunately, controlling your sales tax expenses could mitigate some of these high-cost purchases. Contact your MarksNelson advisor if you’d like to discuss sales taxes related to your construction business.