The Kansas Retailers' Sales Tax an Overview

JurisdictionKansas,United States
CitationVol. 62 No. 12 Pg. 24
Pages24
Publication year1993
Kansas Bar Journals
Volume 62.

62 J. Kan. Bar Assn. December, 24 (1993). THE KANSAS RETAILERS' SALES TAX AN OVERVIEW

Journal of the Kansas Bar Association
December, 1993

THE KANSAS RETAILERS' SALES TAX: AN OVERVIEW

Michael Lennen [FNa]

Copyright (c) 1993 by the Kansas Bar Association; Michael Lennen

Introduction

The retail sales tax is a mainstay of state finance. Kansas' fiscal year 1993 sales tax collections totaled $1.014 billion, constituting 35.7 percent of state general fund tax revenues. [FN1] Payment of the tax is an everyday experience, common to virtually all Kansans. Over the past half century, however, with the extension of the tax base to selected services, the introduction of differential rates and the adoption of a plethora of exemptions, the tax itself has grown increasingly complex. Compliance can present difficult issues of statutory construction and constitutional interpretation for taxpayers and their counsel. This article contains an overview of the development of the tax, outlines significant statutory amendments adopted in 1992, discusses selected procedural issues with a focus on exemption-related matters and reviews recent judicial opinions.

*25 Development and Characteristics of the Retailers' Sales Tax

Development of the modern retail sales tax was a depression era phenomenon prompted by severe revenue needs of the States. [FN2] The first such tax was adopted by Mississippi in 1932. [FN3] Kansas followed suit five years later. [FN4] By 1939, 28 states had enacted similar types of sales taxes. [FN5] In 1991, retail sales taxes were in effect in 45 states and the District of Columbia. [FN6]

The tax was generally imposed on retail sales of tangible personal property. [FN7] With few exceptions, services were excluded from the tax base. [FN8] This initial exclusion of services has been attributed to the states' wariness of being accused of "taxing labor" during a period of high unemployment and low job availability. [FN9] Over time, as states have confronted additional revenue needs and as the service component of consumption expenditures has increased, the sales tax has been extended to a number of services. [FN10]

Evolution of the Kansas retailers' sales tax act (the Act) has followed the national pattern. The 1937 Act imposed a two-percent tax on gross receipts from the retail sale of tangible personal property. [FN11] It also taxed the retail sale of four services: intrastate telephone and telegraph services; utility services (gas, water, electricity and heat); meals or drinks furnished at restaurants and other public eating or drinking establishments; and admissions to places of amusement, entertainment or recreation. Admissions to fairs and to educational, religious and charitable activities were excepted from the tax. [FN12]

The Act contained four exemptions: sales of motor vehicle fuel, cigarettes and other articles subject to a separate sales or excise tax; sales to the state of Kansas and its political subdivisions, except when such entities were engaged in a taxable business; sales which were constitutionally impermissible; and sales of tangible personal property or services used in the performance of a public works contract. [FN13] Additionally, sales to a producer or manufacturer of tangible property or services that were used in the production or manufacturing process and which became ingredients or component parts of the article or service produced or furnished were deemed to be wholesale sales and thus were also exempt from the tax. [FN14]

By contrast, the Act currently specifies 21 different categories of property or services that are subject to tax. [FN15] It also contains 45 exemption sections. [FN16] This amalgam of inclusions and exemptions, many of which are capricious, illogical and sometimes contradictory, is as much a product of political accommodation as economic or legal principle. Consequently, the Act itself is fraught with ambiguity and complexity, rendering both compliance and administration problematic.

The sales tax is an excise tax, as differentiated from a property or ad valorem tax. [FN17] It is imposed on the privilege of engaging in the business of selling tangible personal property at retail or furnishing services made taxable under the Act. [FN18] The tax is levied on gross receipts derived from a taxable transaction. [FN19] Each retailer is responsible for collecting the tax and remitting it to the Department of Revenue. [FN20] Notwithstanding the retailer's collection and remittance duties, it is intended that the tax burden will be borne by the ultimate property or service consumer. [FN21] Accordingly, the amount of any sales tax due under the Act is deemed to be a debt owed by the consumer to the retailer and is "recoverable at law in the same manner as other debts." [FN22] Moreover, a retailer may not advertise or hold out to the public, directly or indirectly, that any part of the sales tax will be assumed or absorbed by the retailer. [FN23]

In considering whether a particular transaction falls within the scope of the Act's imposition section, the

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courts have consistently noted that tax statutes are penal in nature and must be strictly construed in favor of the taxpayer. [FN24] Operation of the Act should "not be enlarged so as to include matters not specifically embraced." [FN25]

Conversely, if the issue is one of claimed exemption, taxation is the rule and exemption is the exception. [FN26] Statutory exemption provisions are strictly construed against the party claiming exemption. [FN27] All doubts are to be resolved in favor of taxation. [FN28] The burden of proof is on the party claiming exemption to establish clearly that the subject transaction falls within the Act's exemption provisions. [FN29]

The Act was significantly amended during the 1992 legislative session. Major amendments directed toward increasing sales tax revenues were adopted in conjunction with legislation revising the state's school finance system. [FN30] Other procedural and definitional amendments, unrelated to school finance, were also enacted. No substantive or procedural changes to the Act were adopted during the 1993 legislative session. Identification and a brief discussion of the 1992 amendments follow.

1. The sales and use tax rate was increased from 4.25 percent to 4.9 percent effective June 1, 1992. [FN31] 2. Certain existing exemptions were eliminated and the underlying sales transactions were made subject to the 4.9 percent general tax rate. Treated in this manner were: a. Gross receipts from interstate telephone or telegraph services originating or terminating in Kansas and billed to a customer's telephone number or account in Kansas. [FN32] Excluded from the definition of interstate telephone or telegraph service are certain wide-area telephone and transmission services; private-line services; value-added, non-voice services in which computer processing applications are used to act on information transmitted; telecommunication services furnished to a telecommunications provider, including carrier access services; and any telecommunications service among members of an affiliated group. [FN33] b. Gross receipts from the sale of local, noncommercial intrastate telephone and telegraph services. [FN34] Sales tax had previously been imposed on intrastate long distance service. [FN35] c. Gross receipts from the rental of hotel rooms for a period of more than 28 consecutive days. [FN36] K.S.A. 79-3603(g) previously imposed the tax on hotel rentals but provided that it would "not apply where a room is rented . . . for a period of more than 28 consecutive days." The exemption for the lease or rental of a dwelling other than a hotel room for a term of 28 or more consecutive days survives by virtue of the statutory definition of "sale." [FN37] d. Gross receipts from the sale of installed and second-hand trade fixtures and equipment previously qualifying for exemption under K.S.A. 79-3606(p). [FN38] The impact of eliminating this exemption is likely to be negligible because most sales of this type will be exempt as "isolated or occasional sales" pursuant to K.S.A. 79-3606(l). 3. Exemptions for certain utility services and labor services were eliminated and a 2.5 percent tax was imposed. [FN39] Introduction of a second tax rate is a new development in the Kansas sales tax structure and adds another element of complexity to an already abstruse system. Adoption of the lower rate may reflect legislative uncertainty as to the merit of eliminating these exemptions as well as concern about the cascade effect of taxing items or services consumed in the manufacturing process. Subjected to the 2.5 percent sales tax were: a. Gross receipts from the sale of utility services used or consumed in (1) manufacturing, mining, processing or compounding tangible personal property; (2) providing taxable services; or (3) irrigating crops. [FN40] b. Gross receipts from the provision of labor services for installing or applying tangible personal property in connection with the original construction of a building or facility or the construction, reconstruction or repair of a bridge or highway. [FN41] To mitigate the immediate effect of the tax change on contractors, special provision was made for contractors who had entered into binding contracts to provide previously exempt labor services prior to May 15, 1992, to perform such services exempt from taxation. [FN42] No statutory time limit was set for performing

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the services; however, it was necessary to file notice of the contract and claimed exemption with the Department of Revenue prior to July 10, 1992. [FN43] Exemptions were retained for labor services provided in the original construction of community housing development projects and oil and gas wells. [FN44] 4. Stricter recordkeeping duties were imposed on retailers asserting the exempt...

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