Policy Library Questions and Answers
Clean Drinking Water Fee / Kansas Retailers' Sales Tax
I. CLEAN DRINKING WATER FEE
1. EFFECTIVE JANUARY 1, 2002 – Public water supply systems (cities, rural water districts, etc.) that pay the Clean Drinking Water Fee on their sales of water at retail are exempt from paying sales tax on their direct and indirect purchases of tangible personal property and taxable services.
2. FEE IMPOSED ON – The Clean Drinking Water Fee is paid by city water departments, rural water districts and any other organization that is selling water at retail. Collectively, all of these organizations are called “public water supply systems.” The Fee is not due on sales of water at wholesale. The Fee is only due on water that is delivered through mains, lines or pipes. No Clean Drinking Water Fee is due on bottled water, for example, or on water delivered by truck(s) – (these sales are subject to sales tax). Exhibit “A”
3. PAYING THE FEE - Those public water supply systems that choose to “pay” the Clean Drinking Water Fee are paying this Fee to KDOR at the rate of $0.03/1,000 gallons of water sold at retail. The law specifically forbids the public water supply systems from adding this Fee to their water customers’ bill (like sales tax is added to the bill). However, many public water supply systems have increased the selling price of their water in order to recoup the Clean Drinking Water Fee.
4. REPORTING THE FEE – The Clean Drinking Water Fee is reported quarterly on the same form (Form WP-1) as the Water Protection Fee. The Clean Drinking Water Fee on water sold at retail during the months January, February and March is due May 15. The Fee for April, May and June is due August 15. The Fee for July, August and September is due November 15, and the Fee for October, November and December is due the following February 15. The return requires two entries – one for the Water Protection Fee and one for the Clean Drinking Water Fee – since not all public water supply systems will be paying the Clean Drinking Water Fee. All public water supply systems are required to collect and remit the Water Protection Fee. Exhibit “B”
5. OPT-OUT - Prior to October 1, 2001 existing public water supply systems chose whether to pay the Clean Drinking Water Fee or to “opt-out,” i.e., continue to pay sales tax on all of their purchases of materials and labor needed to operate. Approximately 750 public water supply systems chose to pay the Fee on their retail water sales on or after January 1, 2002 and approximately 80 chose to continue to pay sales tax on their taxable purchases. Legacy indicates if the public water supply system opted-out or are paying the Clean Drinking Water Fee.
6. NEW WATER DISTRICTS – All new public water supply systems established after January 1, 2002 must pay the Clean Drinking Water Fee. Licensing Segment registers all new water accounts and is responsible for mailing exemption letters and certificates.
7. SALES TAX EXEMPTION – A public water supply system that pays the Clean Drinking Water Fee is exempt from sales tax on all of its direct and indirect purchases of tangible personal property and/or taxable labor services used to construct, operate or maintain the water utility. This includes indirect purchases by contractors working on the public water supply system’s facilities. (An indirect purchase is a purchase paid for by someone other than the public water supply system – such as a contractor.) Also exempt are all direct purchases (purchases paid for by the public water supply system) by the public water supply system for the operation of its facilities, including (but not limited to) its purchase of phone service, utilities, office supplies, motor vehicles, etc.
8. EXEMPTION LETTER - In December 2001, KDOR sent an Exemption Letter to approximately 750 public water supply systems that chose to pay the Clean Drinking Water Fee. This Exemption Letter is used by the named public water supply system to claim the sales tax exemption on their direct purchases. It also advises them to give their suppliers a copy of the exemption letter when making direct purchases. Exhibit “C”
9. EXEMPTION CERTIFICATE – KDOR also sent a Clean Drinking Water Fee Exemption Certificate (Form ST-28EE) to approximately 750 public water supply systems that chose to pay the Clean Drinking Water Fee. Public water supply systems are to give the exemption certificate to their agents who make indirect purchases on behalf of the public water supply system. An indirect purchase is a purchase paid for by someone other than the public water supply system – such as a contractor. Under the law, said indirect purchases are exempt from sales tax. A contractor using the exemption certificate will complete it and give a photocopy to the supplier of the materials/labor. It is the contractor’s authority to purchase sales tax exempt on behalf of a public water supply system. Exhibit “D”
10. PROJECT EXEMPTION CERTIFICATE – Kansas cities and counties that are accustomed to issuing Project Exemption Certificates may use a Project Exemption Certificate in place of the above-described Exemption Certificate (Form ST-28EE). Cities and counties would complete Form PR-76 and submit it to Policy & Research (3rd Floor, DSOB), FAX: 785-296-7928, phone: 785-296-3498. Exhibit “E.” Cities and counties with “Agent Status” may now issue their own Project Exemption Certificates for their water utility projects.
II. THE RETAIL SALE OF WATER
- Every public water supply system making retail sales of water MUST continue to collect, report and remit Kansas Retailers’ Sales Tax on their retail sales of water regardless of whether or not they are paying the Clean Drinking Water Fee. Sales tax is due in addition to the Water Protection Fee.
- SITUS – The sales tax rate to be collected is the rate in effect at the CUSTOMER’S place of business. KAR 92-21-9.
- Both the State and local (city and/or county) sales tax is due on the gross receipts received except:
- Water sold for residential and/or agricultural use – local (city and/or county) sales tax only.
- Water sold under the “consumed in production” exemption. Purchaser must provide the seller with a completed Form ST-28B. For example:
- Water for irrigation of crops.
- Water sold to restaurants, manufacturers and hotels that is “consumed in producing” an article of tangible personal property or providing a taxable service.
- Water sold to exempt entities such as schools; nonprofit hospitals; blood, organ or tissue banks; state and federal governments; political subdivisions of the state of Kansas; etc. Purchaser must provide the seller with a completed Form ST-28B.
- Effective January 1, 2002 – no sales tax on the gross receipts received from: 1) the sale of a water benefit unit, AKA “water meter”. (This is a one-time fee that many rural water districts charge for the privilege of purchasing water. For example, a new homeowner in a rural area may have to pay the local water district $1,500 for the right to purchase water.) 2) Water system impact fee, system enhancement fee or similar fee collected by a water supplier as a condition for establishing service, 3) connection or reconnection fee collected by a water supplier.
III. PURCHASES BY PUBLIC WATER SUPPLY SYSTEMS THAT “OPTED-OUT”
- Purchases of tangible personal property and/or taxable labor services by a public water supply system that “opted-out” of the Clean Drinking Water Fee for the construction, operation or maintenance of their water operations are taxable - unless the specific purchase qualifies for a specific sales tax exemption:
- Taxable – The purchase of water towers, pipes, valves, concrete, building materials, tools, vehicles, office equipment/supplies.
- Ingredient/Component Part Exemption – Example: chlorine, water purification chemicals.
- Integrated Production Machinery & Equipment Exemption - can be claimed on the purchase, repair & installation labor for mixing pumps and telemetry systems. This exemption does not apply to pumps used to extract water out of the ground or to transport the water to its customers. It does not apply to equipment used in the distribution system such as pipes, valves and pumps.
- Consumed in Production Exemption – Can be claimed only on that amount of electricity used to power pumps that extract water from its source (such as a water well or lake) and the pumps used to “produce” the water (such as mixing water purification chemicals with the water). The consumed in production exception can also be claimed on electricity used to transport water from the water production facility to out-laying pump stations (which in turn further pressurize the water for ultimate delivery to customers). NO exemption can be claimed on the electricity used to power pumps at out-laying pumping stations. Furthermore, if no pump stations are present between the water production facility and the customer – the consumed in production exemption can not be claimed for pumps that transport water from the production facility to the customer.
- “Original Construction” - No tax on LABOR to install or apply tangible personal property on the first or initial construction of a building or facility (water well & water tower are a “facility”). Thus, the labor services of installing and applying tangible personal property performed to drill a new water well are considered “original construction” – not subject to sales tax on the labor. Likewise, installing new water transmission lines are considered “original construction” – not subject to sales tax. Sales tax is due on the labor services to repair existing water wells, water towers, pumps, equipment, mains, lines or pipes.
- No sales tax on the labor services associated with excavation.
- Policy Information Library – check the Policy Library for specific information on impositions/exemptions – there are many Private Letter Rulings on the database. www.ksrevenue.org
- A Public Water Supply System that opted-out of paying the Clean Drinking Water Fee must pay sales tax on all of their purchases unless a specific exemption applies to that purchase and the public water supply system must provide the seller with the appropriate Exemption Certificate – see Publication KS-1527, “Kansas Sales & Use Tax for Political Subdivisions.”
IV. OTHER WATER FEES
- Water Protection Fee - $0.03/1,000 gallons of water sold at retail by a public water supply system and delivered through mains, lines, pipes. KSA 79-82a-954.
- Public Water Supply Fee - $0.002/1,000 gallons of water sold at retail. KSA 65-163. **These two Fees are collected together as the Water Protection Fee for a total rate of $0.032/1,000 gallons of water sold at retail, and are reported on Form WP-1. The Clean Drinking Water Fee is also reported on Form WP-1.
Date Composed: 02/27/2002 Date Modified: 03/16/2005
Corporate Income Tax
Partnership and subchapter S corporation tax business and job development credits must be distributed to each partner or shareholder based on their ownership percentages.
For purposes of the one-time Business and Job Development credit allowed by K.S.A. 79-32,160a, each partner or shareholder is considered to own their piece of the credit and can carry it forward to future years even if they are no longer a partner or shareholder. The ex-partner or ex-shareholder is responsible for checking each year to make sure the partnership or S corporation has maintained the required number of employees to obtain the credit that year. Form K34CO, the paperwork to annually re-certify such credits, must be completed and submitted with the ex-partner's or ex-shareholder's for each year of the carry forward period that the credit is claimed.
If a partner or shareholder leaves the partnership or subchapter S corporation they are no longer considered a partner or shareholder and not eligible to claim the re-computed credit for establishment of a qualified business facility allowed by K.S.A. 79-32,153. Conversely, if a partnership or S corporation gains partners or shareholders, these individuals are eligible to claim the re-computed credit in that particular year.
When a parent Subchapter S corporation which files a federal consolidate return with a subsidiary Subchapter S corporation(s) and both the parent and its subsidiary(ies) derive all of their income and expenses from sources within Kansas, these corporations should file a Kansas consolidated return for purposes of determining their Kansas income tax liability. [K.S.A. 79-32,142.]
If a Subchapter S corporation and its Subchapter S subsidiary(ies) are engaged in a mulitstate unitary business, they should use the combined report method to apportion a percentage of their income to Kansas. If the corporations are not unitary and to not derive all of their income and expenses from sources within Kansas, they should file the Kansas income tax returns on a single entity basis.
Avoiding the double layer of tax (where the net income of a corporation is taxed and then the shareholders are taxed on the dividends) is the prime advantage of electing Subchapter S corporation status. A corporation which has elected to be a Subchapter S corporation for federal income tax purposes is not subject to income tax. Instead, its income is passed through to, and taxed in the hands of, its shareholders. Shareholders may be able to take greater advantage of corporate losses and the tax rate for individuals may be less than the corporate rate.
The tax treatment of a Subchapter S corporation is very similar to that of a partnership. A shareholder’s pro rata share of a Subchapter S corporation’s net income for any tax year depends upon the shareholder’s percentage of stock ownership on each day of the Subchapter S corporation’s tax year.
The Subchapter S corporation election may only be made by small corporations since there is a limit of 75 shareholders. For tax years beginning after 1996, a Subchapter S corporation is permitted to own 80% or more of a C corporation. The Subchapter S corporation parent company cannot file a consolidate federal return with the C corporation.
For tax years beginning after 1996, a Subchapter S corporation is permitted to own a qualified Subchapter S subsidiary. A “qualified Subchapter S subsidiary” is a domestic corporation that qualifies as a Subchapter S corporation and is 100% owned by a Subchapter S corporation parent. [See 26 U.S.C. §1361.] Generally, a parent Subchapter S corporation and a qualified Subchapter S subsidiary are required to file a consolidated federal return. For federal purposes the qualified Subchapter S subsidiary is not treated as a separate corporation.
Corporate Income Tax / Individual Income Tax
K.S.A. 79-32,204(a)(2) defines “required improvements to a qualified swine facility” as:
“capital improvements that the secretary of health and environment certifies to the director of taxation: (A) Are required for a qualified swine facility to comply with the standards and requirements established pursuant to sections 2 through 22 or pursuant to the amendments made by this act to K.S.A. 65-171d; and (B) are not required because of expansion for which a permit has not been issued or applied for before the effective date of this act”.
The Kansas Department of Revenue adopts the following definition of capital improvement for the swine facility improvement credit:
Capital Improvement - An outlay of funds to acquire or to extend the life or increase the productivity of, a real or tangible asset (e.g. plant, machinery, land, buildings, fixtures), which is used in operating a business, and is capitalized and will not be consumed or converted into cash.
A taxpayer may amend a return for a year that is closed by the statute of limitations in order to establish an income tax credit that may be carried forward for use in an open year. To establish the credit for the closed year, the taxpayer must show that the qualifications have been met by completing the applicable credit schedule with appropriate documentation and submitting with the applicable income tax return. Once a credit is established for a closed year, any credit remaining from that closed year may be carried forward to each succeeding year as long as the taxpayer has met the necessary qualifications. Any carryover shall be applied against each closed year’s tax liability until the oldest year that is open for purposes of the statute of limitations is reached. For that year, the Department will issue a refund or credit based on the amended return being filed, provided that a credit remains after having applied the carryforward to each preceding closed year’s tax liability. The Department will not issue a refund for any years that are closed by the statute of limitations. If the necessary qualifications for an income tax credit are not met at any time during the carryforward period, the credit shall end.
K.S.A. 79-3230(a) provides in part:
The amount of income taxes imposed by this act shall be assessed within three years after the return was filed or the tax as shown to be due on the return was paid, whichever is the later date …
K.S.A. 79-3230(c) provides in part:
No refund or credit shall be allowed by the director of taxation after three years from the date prescribed by law for filing the return, provided it was filed before the due date, unless before the expiration of such period a claim therefor is filed by the taxpayer… These two limitation provisions limit the Department’s authority to assess income tax and the taxpayer’s ability to claim refunds or credits for years that are outside the period fixed by the statutes. Neither statute prohibits the Department from accepting an amended return for a closed year. Courts from other jurisdictions have recognized this principal: “The fact that a statute may bar an assessment for taxes or a claim for refund after a certain period does not mean that the administrative agency or the courts must ignore the facts establishing the amount of tax or refund owing. Taxpayers as well as the government may rely upon these principles.” Smurfit Newsprint Corporation, v. Department of Revenue, Or. Tax (Case No. 4298, Dec. 23, 1998); Springfield Street Railway Co. v. The United States, 312 F.2d 754, 759 (USCC 1963); Hill v. Commissioner, 95 TC 437 (1990).
No. When determining qualified business facility investment for purposes of the business and job development credit (K.S.A. 79-32,153 and 79-32,160a) and the high performance incentive program investment credit (K.S.A. 79-32,160a(e)), the value of the “qualified business facility investment” property, for purposes of calculating the credit, shall be the actual original cost of the property, if owned by the taxpayer, or eight times the net annual rental rate, if leased by the taxpayer. Property funded by IRB’s in which a business has assumed the burdens and benefits of ownership of the property, shall be valued at its original cost.
K.S.A. 79-32,154(e) defines qualified business facility investment as:
"Qualified business facility investment" shall mean the value of the real and tangible personal property, except inventory or property held for sale to customers in the ordinary course of the taxpayer's business, which constitutes the qualified business facility, or which is used by the taxpayer in the operation of the qualified business facility, during the taxable year for which the credit allowed by K.S.A. 79-32,153, and amendments thereto, is claimed. The value of such property during such taxable year shall be: (1) Its original cost if owned by the taxpayer; or (2) eight times the net annual rental rate, if leased by the taxpayer. The net annual rental rate shall be the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from subrentals. The qualified business facility investment shall be determined by dividing by 12 the sum of the total value of such property on the last business day of each calendar month of the taxable year. If the qualified business facility is in operation for less than an entire taxable year, the qualified business facility investment shall be determined by dividing the sum of the total value of such property on the last business day of each full calendar month during the portion of such taxable year during which the qualified business facility was in operation by the number of full calendar months during such period. Notwithstanding the provisions of this subsection, for the purpose of computing the credit allowed by K.S.A. 79-32,153, and amendments thereto, in the case of an investment in a qualified business facility, which facility existed and was operated by the taxpayer or related taxpayer prior to such investment the amount of the taxpayer's qualified business facility investment in such facility shall be reduced by the average amount, computed as provided in this subsection, of the investment of the taxpayer or a related taxpayer in the facility for the taxable year preceding the taxable year in which the qualified business facility investment was made at the facility. (emphasis added)
For the purpose of determining qualified business facility investment, the taxpayer must determine how the real and tangible personal property are treated for both apportionment purposes and federal income tax purposes.
When determining the apportionment factor of net income, K.S.A. 79-3280 defines the property factor as:
a fraction, the numerator of which is the average value of the taxpayer’s real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer’s real and tangible personal property owned or rented and used during the tax period.
K.S.A. 79-3281 provides:
Property owned by the taxpayer is valued at its original cost. Property rented by the taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the taxpayer less any annual rental rate received by the taxpayer from sub-rentals.
K.A.R. 92-12-88 provides in part:
Property owned by the taxpayer shall be valued at its original cost. As a general rule “original cost” is deemed to be the basis of the property for federal income tax purposes (prior to any federal adjustments) at the time of acquisition by the taxpayer and adjusted by subsequent capital additions or improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, etc.
For federal income tax purposes, the entity that has the burdens and benefits of ownership is considered to be the owner. An IRB arrangement requires the business to make payments to satisfy a financing arrangement rather than as a lease payment for property. An IRB financing arrangement provides that the political subdivision holds title to the property as a security, but bears no burden of property ownership. The payments made by the business are used to extinguish the IRB’s that were issued to pay for the property. These payments are made to the trustee rather than to the political subdivision.
Because this arrangement is a financing agreement in which the business takes ownership of the property at the time the bonds are extinguished, and because the business assumes the burdens and benefits of property ownership before title transfers to the business, the business shall consider the property financed with IRB’s as owned. The business must determine the property’s actual cost and report that cost when computing “qualified business facility investment” for purposes of the business and job development credit and the high performance incentive program credit. This property shall also be valued at cost when computing the property factor for income apportionment purposes.
In summary, property that is funded by IRB’s, where a business has assumed the burdens and benefits of ownership of the property, shall be valued at its original cost. The base year calculation for property funded by IRB’s in which the business assumed the burdens and benefits of ownership of the property, shall be valued at its original cost as well.
Based on prior communication with the Department, a business may have valued property funded by IRB’s as leased property and calculated qualified business facility investment at eight times the net annual rental rate. Please be advised that the business shall not be required to amend returns and may use the capitalized lease cost in calculations for the life of that credit. However, for all projects commencing operations after January 1, 2003, all property funded by IRB’s shall be valued at its original cost.
As we interpret that section of the law, it is intended to provide a tax credit for certain taxpayers who make expenditures for qualified alternative-fueled motor vehicle property. However, it is not intended to allow an unlimited amount of expenditures to qualify for the fifty percent (50%) tax credit. It is our interpretation that New Section 6 provides for a tax credit of 50% of the total amount expended for each qualified alternative-fueled motor vehicle property, and that it provides for a cap or limit on that credit of $2500.00 for each qualified alternative-fueled motor vehicle property.
Our position is based upon a careful reading of the statute. New Section 6(a) consistently refers to "alternative-fueled motor vehicle property" throughout, except at the very end of New Section 6(a)(1) and New Section 6(a)(2), which refer to "each such motor vehicle." It is our opinion that the word "property" was inadvertently omitted from the end of those two sections, and that inserting the word "property" makes the statute consistent. Further, New Section 6(d) provides a definition for "qualified alternative-fueled motor vehicle property." That definition includes three categories that qualify for the tax credit. "Motor vehicle" is included as one of those categories. It is not delineated separately in the definition to show that the drafters intended for it to qualify for a different amount of tax credit.
Beyond the support that can be found within the statute, there is other evidence as well that supports this interpretation. As a practical matter, there must be a cap or limit on the amount of expenditures that would qualify for such a substantial tax credit. Obviously there is a large difference between a credit of 50% of $5000.00 and a credit of 50% of a much larger amount. We do not believe that the Legislature would purposely allow such a discrepancy.
Finally, the Brief of HB 2161 that Secretary LaFaver forwarded to Governor Graves in May, 1995, reflects our Department's understanding that the purpose of the then-proposed bill was to provide an income tax credit of 50% of the cost of each qualified alternative-fueled motor vehicle property, with the credit not to exceed $2500.00. Again there is no indication that any of the three categories of alternative-fueled motor vehicle property was to be treated differently in terms of the tax credit.