Appeal of Harbour Bros. Const. Co., Inc.

Decision Date04 November 1994
Docket NumberNo. 70681,70681
Citation883 P.2d 1194,256 Kan. 216
PartiesIn the Matter of the Appeal of HARBOUR BROTHERS CONSTRUCTION CO., INC., from an Order of the Director of Taxation on Assessment of Sales Tax.
CourtKansas Supreme Court

Syllabus by the Court

The record is reviewed and K.S.A. 79-3602(r), K.S.A. 79-3603(l ) and (p), K.S.A. 79-3604, K.S.A. 79-3606(b) and (d), and K.A.R. 92-19-66a, K.A.R. 92-19-66b, and K.A.R. 92-19-76 are discussed and applied in holding that under the facts in this case, the contractor taxpayer is not exempt from paying retailers' sales tax for materials purchased and for labor services performed on a project for a political subdivision.

James Bartle, Kansas Dept. of Revenue, argued the cause and was on the briefs, for appellant.

Benjamin J. Neill, Neill & Terrill, Overland Park, argued the cause and was on the brief, for appellee.

SIX, Justice:

This is a retailers' sales tax exemption case. The claimed exemption relates to the materials purchased and labor services provided by a contractor. The Kansas Department of Revenue (KDR) appeals from a decision of the Board of Tax Appeals (BOTA) granting exemptions to Harbour Brothers Construction Company (Harbour). The dispute concerns whether Harbour was entitled to sales tax exemptions for its work laying asphalt parking lots at the Sandstone Amphitheater (Sandstone) in Bonner Springs in 1989. The KDR concluded that Harbour had failed to pay sales tax on the materials it purchased and used, and on the labor services it provided for Sandstone. The Director of Taxation (Director) upheld the assessment of $50,803, plus interest and penalties. In a 3-2 decision, however, BOTA reversed the assessment, holding that the parking lot materials were exempt from sales tax under K.S.A. 79-3606(d) and the labor services were exempt under K.S.A. 79-3603(p). The KDR challenges BOTA's interpretation of these exemptions and the application of the exemptions to the facts of this case.

Our jurisdiction is under K.S.A. 20-3018(c) (a transfer from the Court of Appeals on our own motion).

We reverse BOTA and reinstate the order of the Director upholding the assessment against Harbour, plus interest and penalties. Neither the materials purchased by Harbour nor the labor services it provided were exempt from retailers' sales tax.


The arguments on the sales tax exemptions at issue require an understanding of events preceding Harbour's involvement at Sandstone.

In August 1983, the Board of Park Commissioners of Wyandotte County (Wyandotte County or the County) entered into a lease agreement with Star Brite, Inc. (Star Brite). Star Brite agreed to build Sandstone and produce entertainment events on property owned by Wyandotte County. In return, Wyandotte County would own the amphitheater and receive a share of the ticket, concession, novelty, and parking proceeds from each event, or a guaranteed minimum annual lease payment. As part of the agreement, Wyandotte County promised to improve street access, bring sewer, water, and electricity to the site, and, most pertinent to the case at bar, construct "parking facilities ... includ[ing] a total of 6,500 spaces" as shown on a preliminary plan.

The amphitheater at Sandstone opened for business in June 1984, but the parking lots were not constructed according to the original agreement. For several years, the only improved parking lots at Sandstone were gravel. Finally, in November 1988, Wyandotte County and Star Brite agreed to amend the original lease agreement. The amended agreement explained that the County had not met its original obligation with respect to the parking lots. The County was relieved from its original parking lot obligation if it would provide financing to Star Brite's assignee, World Entertainment Services Kansas, L.P. (World Entertainment), to construct parking lots and other improvements such as restrooms, concession stands, and landscaping. World Entertainment is a company owned and controlled by the Star Brite principals. Thus, World Entertainment became responsible for the Sandstone parking lots.

World Entertainment awarded the parking lot bid to Harbour in December 1988. Harbour began work immediately. It submitted two invoices to World Entertainment for progress payments totaling $241,267.10. World Entertainment then submitted to the County Auditor a request for payment of Harbour's invoice in full. Harbour received a check for the full amount from Home State Bank in Kansas City, Kansas, which was drawn on a Wyandotte County account funded by general obligation redevelopment bonds. A similar procedure occurred for subsequent invoices submitted by Harbour, one for $303,138.06 and another for $302,306.70.

The KDR audited Harbour for the period from June 1, 1986, to May 31, 1989, and issued a Notice of Assessment of Additional Retailers' Sales Tax in the total amount (additional tax, interest, and penalties) of $207,100. Harbour and the KDR settled much of the assessment, which involved many unrelated projects, but the parties could not agree on the sales tax consequences of Harbour's Sandstone work from January-May 1989. The only amount in dispute ($50,803 in tax, plus interest and penalties) pertains to the Sandstone project.

The KDR auditor found that Harbour did not: (1) pay sales tax on its purchases of materials used in constructing the Sandstone lots; (2) charge and remit sales tax on the labor services it provided at Sandstone; (3) obtain a project exemption certificate for purchasing materials for the Sandstone project; or (4) purchase the services of any subcontractors for the project. The only taxable services related to the project were those provided directly by Harbour, billed to World Entertainment, and paid for by Wyandotte County. Harbour does not contest any of these findings by the auditor.

Action of the Director of Taxation

Harbour protested the KDR's assessment by filing a timely petition for an administrative hearing with the Director of Taxation. The Director decided that the KDR correctly assessed sales tax under K.S.A. 79-3603(l ) for the purchase of materials and under K.S.A. 79-3603(p) for labor services. The Director rejected Harbour's claim that the entire Sandstone project was exempt under K.S.A. 79-3606(b) as a direct purchase by a political subdivision because Harbour did the work for and billed World Entertainment, thus defeating the requirements of a "direct purchase." The Director also rejected Harbour's claim that the materials purchase was exempt under K.S.A. 79-3606(d), reasoning that Harbour did not furnish a project exemption certificate as required under subsection (d). Finally, the Director rejected Harbour's claim that its labor services were exempt under the "original construction" exception to K.S.A. 79-3603(p) because the project was not "original construction" as defined in the statute and further explained in K.A.R. 92-19-66b(f).

The BOTA Hearing and Decision

Harbour appealed the Director's decision to BOTA. At the BOTA hearing, Harbour submitted documentary evidence consisting of the original and amended agreements between Wyandotte County and Star Brite, Harbour's invoices to World Entertainment, and payments from Wyandotte County. Harbour put on no live testimony or other evidence. The KDR submitted documentary evidence consisting of the audit report of Harbour's records and a published revenue ruling by the KDR regarding tax-exempt construction projects. The KDR also offered the testimony of the auditor who examined Harbour's books and a KDR tax specialist.

The BOTA majority stated that it "agrees with the Taxpayer that pursuant to K.S.A. 79-3606(d) a project exemption certificate is only required if there is a contract directly with the political subdivision." Since Harbour's work was "pursuant to a contract between the Taxpayer and World Entertainment and not a contract between the Taxpayer and Wyandotte County," no project exemption certificate was required. Thus, BOTA found that "the purchase of the materials and services used by the Taxpayer in constructing the Sandstone parking lots is exempt from sales tax pursuant to K.S.A. 79-3606(d)."

The BOTA majority further concluded that the labor associated with the project is exempt pursuant to K.S.A. 79-3603(p). Specifically, BOTA found that "the construction of the parking lots: 1) was a part of the original plans for Sandstone, 2) is included in the definition of 'building' by being improvements immediately surrounding the Sandstone Amphitheater, and 3) was not replacement, but was new construction of asphalt parking lots." Based on these conclusions, BOTA granted Harbour's request to abate the sales tax assessment, interest, and penalties.

The two dissenting members reasoned that they "would find and conclude pursuant to the applicable statutes and regulations that the Department of Revenue's assessment should be upheld in its entirety." Specifically, the dissenters argued that Harbour's purchase of materials for Sandstone was taxable under K.S.A. 79-3603(l) and K.A.R. 92-19-66(a) and (b) and that the sales tax exemption under K.S.A. 79-3606(d) requires that a project exemption certificate be obtained. Further, the dissenters contended that "[s]ince the Sandstone Amphitheater opened in 1984 and the parking lot(s) at issue were constructed in 1989, the parking lots could not have been built in connection with the first or initial construction of the amphitheater." They concluded that the labor associated with the construction of the parking lots was not exempt.

Introduction and Standards of Review

We are reviewing BOTA's interpretation and application of two provisions (K.S.A. 79-3606[d] and 79-3603[p] of the Kansas Retailers' Sales Tax Act, K.S.A. 79-3601 et seq. (the Act). The KDR, as authorized by K.S.A. 79-3618, has published extensive regulations on the Act. Several regulations, K.A.R. 92-19-66, K.A.R. 92-19-66a, K.A.R. 92-19-66b (effective May 1, 1988)...

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