Syllabus by the Court
1. Each retail sale is presumed to be taxable. When the Kansas Department of Revenue establishes that a transaction was a retail sale to a final user or consumer, the retailer has the burden of showing that the transaction was exempt from sales tax. K.A.R. 92-19-61.
2. In its ordinary sense the word "room" means a single enclosure separated by partitions or other means from other parts of a house or building.
3. A "floor" is the surface or the platform of a structure on which to walk, work, or travel, or a section of a building between horizontal planes.
4. An in-ground outdoor swimming pool is not a room or floor within the meaning of K.S.A. 79-3603(p)(1). The labor services involved in its construction are not exempt from sales tax as the addition of an entire room or floor to any existing building.
5. An in-ground outdoor swimming pool is a land improvement immediately surrounding a building, K.S.A. 79-3603(p)(2). The labor service to construct and install such a pool is exempt from sales tax if the pool was constructed as part of
the first or initial construction of a new building, or was the completion of any unfinished portion of any existing building, K.S.A. 79-3603(p)(1). However, when an in-ground swimming pool is added to a completed structure, the labor services involved in its construction are not exempt from sales tax.
LARSON, Judge:
Bruce McKee d/b/a McKee Pool and Landscape appeals an order of the Board of Tax Appeals (BOTA) finding that labor services involved in the construction and installation of 18 in-ground outdoor swimming pools were not exempt from sales tax pursuant to K.S.A. 79-3603(p).
McKee's primary business is the construction and installation of swimming pools and other related work. The Kansas Department of Revenue Division of Taxation (KDR) conducted a field audit of his business for the period March 1, 1986, through December 31, 1988. After the audit, KDR determined McKee was subject to additional retailers' sales tax on unreported sales of $95,723, which was the amount of labor service to construct and install 18 in-ground outdoor swimming pools during that time period. McKee did not collect or remit sales tax for this labor service. KDR assessed additional retailers' sales tax, penalty, and interest totalling $5,820 pursuant to K.S.A. 79-3603(p). The relevant state sales tax rate was 4% for the time period in question.
All of the swimming pools are in-ground outdoor pools. None are enclosed by a building. The pools were built adjacent to previously existing homes.
K.S.A. 79-3603 provides that a retailers' sales tax shall be collected and paid upon:
"(p) the gross receipts received for the service of installing or applying tangible personal property which when installed or applied is not being held for sale in the regular course of business, and whether or not such tangible personal property when installed or applied remains tangible personal property or becomes a part of real estate, except that no tax shall be imposed upon the service of installing or applying tangible personal property in connection with the original construction of a building or facility or the construction, reconstruction, restoration, replacement or repair of a bridge or highway.
"For the purposes of this subsection:
"(1) 'Original construction' shall mean the first or initial construction of a new building or facility. The term 'original construction' shall include the addition of an entire room or floor to any existing building or facility, the completion of any unfinished portion of any existing building or facility and the restoration, reconstruction or replacement of a building or facility damaged or destroyed by fire, flood, tornado, lightning, explosion or earthquake, but such term shall not include replacement, remodeling, restoration, renovation or reconstruction under any other circumstances;
"(2) 'building' shall mean only those enclosures within which individuals customarily live or are employed, or which are customarily used to house machinery, equipment or other property, and including the land improvements immediately surrounding such building; and
"(3) 'facility' shall mean a mill, plant, refinery, oil or gas well, water well, feedlot or any conveyance, transmission or distribution line of any cooperative, nonprofit, membership corporation organized under or subject to the provisions of
K.S.A. 17-4601 et seq., and amendments thereto, or of any municipal or quasi-municipal corporation, including the land improvements immediately surrounding such facility."
Also relevant is K.A.R. 92-19-66b, the labor services provision in the regulations governing the Kansas retailers' sales tax. Subsection (a) states in pertinent part: "Each contractor, subcontractor and repairman shall be responsible for collecting and remitting sales tax on taxable services performed for others."
Subsection (e) provides in relevant part: "The service of installing or applying tangible personal property for the addition of an entire room or floor to the exterior of an existing building or facility shall not be subject to sales tax."
Subsection (f) states:
"Services of installing or applying tangible personal property to complete unfinished portions of newly constructed buildings, facilities, shopping centers and malls as space within the building, facility, center or mall is leased or sold to the first or initial tenant of that space shall not be subject to sales tax. Services performed to install or apply tangible personal property for the completion of an unfinished portion of an existing building or facility shall not be taxable when:
"(1) The service being rendered was called for in the original blue print, building plan or building specification at the time original construction of the building or facility was started, including any change orders issued during the original construction of the building or facility;
"(2) the completion of the unfinished portion of the building or facility is within a time reasonably requisite to the original construction of the building or facility;
"(3) the service rendered would have been performed at the time of the original construction of the building or facility, except for circumstances beyond the owner's control. Those circumstances shall not include instances in which the project is essentially completed and usable for the purposes intended, but the owner merely fell short of funds, or when the owner, after taking possession or occupancy of the building or facility, contracts for additional services; and
"(4) the owner or occupant is the first or initial owner or occupant of the building or facility."
McKee argued before the Director of Taxation and BOTA that the labor service to construct and install the 18 swimming pools was tax exempt as "original construction." McKee contended the projects were exempt from sales tax pursuant to K.S.A. 79-3603(p) and K.A.R. 92-19-66b(e) because they qualified as additions to existing buildings, or, alternatively, the projects were exempt from the sales tax pursuant to K.S.A. 79-3603(p) and K.A.R. 92-19-66b(f) because they qualified as completions of original, unfinished buildings.
BOTA ruled in pertinent part:
"The Board agrees with the Department of Revenue that the Taxpayer's property tax arguments are irrelevant to this matter involving a sales tax issue. There are specific statutes and regulations that apply to sales tax matters which are separate from the statutes and regulations that apply to property tax matters. The Board further finds that the construction of the swimming pools were not the first or initial construction of a new building or facility. The Board further finds that a swimming pool is not within the definition of room or floor as those terms are commonly defined. Furthermore, the Board finds that the construction of the pools did not increase the available space of the homes. Therefore, the construction cannot be considered an addition. The Board finds that the construction of the pools cannot be considered a completion because the construction does not meet the provisions of K.A.R. 92-19-
66b(f)(1-4). The Board further finds that the construction of the pools does not fit the definition of building as given in K.S.A. 79-3603(p)(2) because the pools are not an enclosure. Also the construction of the pools does not fit under the portion of K.S.A. 79-3603(p)(2) which provides that the definition of building includes 'the land improvements immediately surrounding such buildings' because the pools were constructed separately from the original construction of the homes. The evidence shows that most of the pools were constructed greater than one year after the homes were constructed. As stated by the Court in J.G. Masonry, it appears to not be within the legislative intent to exempt exterior improvements that are added to the property long after the completion date of the original building.
"The Board agrees with the Taxpayer's analysis that distinguishes J.G. Masonry from this matter in that a swimming pool is a lot more like an addition than a wall constructed around a trash area. While the Board believes that a swimming pool is within the spirit of what the statute exempts, the subject pools are not close enough within the language to grant an exemption. Therefore, the Board concludes that the Taxpayer's request to have the labor services associated with constructing the...
