The Honorable Tom Sloan

Attorney General of Kansas — Opinion
August 27, 2001

Re: Taxation — Kansas Retailers’ Sales Tax — Retailers’ Sales Tax Imposed; Rate; Exempt Sales

Water and Watercourses — Clean Drinking Water Fee — Water Sales Subject to Tax or Fee

Synopsis: House Substitute for Senate Bill No. 332, enacted by the Legislature during the 2001 Session, provides municipal and public water supply systems, such as a groundwater management district, a rural water district or a water supply district, a one-time irrevocable choice: either to pay a new clean drinking water flat fee on water sales, or “opt out” of the new fee and continue to pay State sales tax on their purchase of tangible personal property and services. The choice between the fee or the sales tax must be made by October 1, 2001, by notifying the Kansas Department of Revenue and the Kansas Water Office. If an election has not been made by October 1, 2001, the clean drinking water fee will automatically be assessed. Additionally, SB 332 prevents municipalities and public water supply systems from prohibiting the installation of a separation water meter for each dwelling unit in a building containing multiple dwelling units and the bill provides an exemption from sales tax on connection and reconnection fees, benefit unit fees, and system enhancement fees or similar fees collected by a water supplier as a condition for establishing service. Cited herein: K.S.A. 2000 Supp. 79-3603, as amended by L. 2001, Ch. 199, § 2; 79-3606, as amended by L. 2001, Ch. 199, § 3; L. 2001, Ch. 199, § 4 (to be codified at K.S.A. 2001 Supp. 82a-2201).

* * *
Carla J. Stovall, Attorney General of Kansas

The Honorable Tom Sloan State Representative, 45th District 772 Highway 40 Lawrence, Kansas 66049-4174

Dear Representative Sloan:

As State Representative of the 45th District, you request our opinion regarding the legal requirements imposed upon municipal and rural water systems by 2001 House Substitute for Senate Bill No. 332 (hereinafter SB 332).[1] Specifically, you would like us to clarify for water system operators the fiscal and legal requirements imposed by the legislation’s mandated irrevocable choice to either pay a new clean drinking water fee or “opt-out” of the new clean drinking water fee payment and continue to pay sales tax on their purchase of tangible personal property and services.

SB 332 amends both K.S.A. 2000 Supp. 79-3603 and 79-3606 and contains a new section. In relevant part, SB 332 amends K.S.A. 2000 Supp. 79-3603 as indicated in italics:

“For the privilege of engaging in the business of selling tangible personal property at retail in this state or rendering or furnishing any of the services taxable under this act, there is hereby levied and there shall be collected and paid a tax . . . upon:

. . . .

“(c) the gross receipts from the sale or furnishing of gas, water, electricity and heat, which sale is not otherwise exempt from taxation under the provisions of this act, and whether furnished by municipally or privately owned utilities but such tax shall not be levied and collected upon the gross receipts from (1) The sale of a rural water district benefit unit; (2) a water system impact fee, system enhancement fee or similar fee collected by a water supplier as a condition for establishing service; or (3) connection or reconnection fees collected by a water supplier. . . .”[2]

The 2001 Legislature excepts from the sales tax amounts collected for benefit unit fees, connection and reconnection fees, and any fee for establishing service collected by a water supplier. The law continues to impose a sales tax on the sale or furnishing of water.

SB 332 amends K.S.A. 2000 Supp. 79-3606 as follows:

“The following shall be exempt from the tax imposed by this act:

. . . .

“(s) except as provided in section 4, and amendments thereto, all sales of tangible personal property or services purchased directly or indirectly by a groundwater management district organized or operating under the authority of K.S.A. 82a-1020 et seq. and amendments thereto, by a rural water district organized or operating under the authority of K.S.A. 82a-612, and amendments thereto, or by a water supply district organized or operating under the authority of K.S.A. 19-3501 et seq., 19-3522 et seq. or 19-3545, and amendments thereto, which property or services are used in the construction activities, operation and maintenance of the district. . . .”[3]

The amendment to K.S.A. 2000 Supp. 79-3606 provides a sales tax exemption to certain public water suppliers for their purchases of tangible personal property or services, except as provided in Section 4, which states:

“(a) On and after January 1, 2002, there is hereby imposed a clean drinking water fee at the rate of 3 cents per 1,000 gallons of water sold at retail by a public water supply system and delivered through mains, lines or pipes. Such fee shall be paid, administered, enforced, and collected in the manner provided for the fee imposed by subsection (a)(1) of K.S.A. 82a-954, and amendments thereto. The price to the consumer of water sold at retail by any such system shall not include the amount of such fee.
“(b) A public water supply system may elect to opt out of the fee imposed by this section by notifying, before October 1, 2001, the Kansas water office and the department of revenue of the election to opt out. Such election shall be irrevocable. Such public water supply system shall continue to pay all applicable sales tax on direct and indirect purchases of tangible personal property and services purchased by such system.”[4]

The legislation provides that a public water supply system (a municipality, a groundwater management district, a rural water district or a water supply district) may choose to pay a clean drinking water fee. The intent was that this option be in lieu of paying the state sales tax imposed on the sale of tangible personal property and services purchased by such water suppliers.[5] Prior to passage of SB 332, there was no exemption for these sales; the exemption combined with the fee was offered as an alternative to payment of the sales tax. The choice must, however, be made by October 1, 2001. Municipalities or public water supply systems must notify both the Kansas Water Office and the Kansas Department of Revenue in writing if they choose to “opt out” and pay the sales tax, rather than the new clean drinking water fee. If no choice is made by October 1, 2001, the new clean drinking water fee will be automatically assessed.

At first glance, the amendments to K.S.A. 2000 Supp. 79-3606(s) and Section 4 may appear to contradict each other.

When there is uncertainty, legislative intent governs the construction of a statute and may be gleaned from the historical background of the enactment.[6] The Committee Conference Reports on SB 332[7] indicate that the provisions of proposed 2001 House Bill No. 2006, exempting publicly owned water utilities from sales tax,[8] were inserted into proposed 2001 Senate Bill No. 332 after it was gutted of its original provisions,[9] and combined with new section four that developed as a compromise fee to offset the fiscal impact to the State.[10]
Consequently, the provisions of the legislation in question, SB 332, were clearly intended to provide a choice, not to alleviate any obligation to pay either the fee or the tax.

In conclusion, House Substitute for Senate Bill No. 332, enacted by the Legislature during the 2001 session, provides municipal and public water supply systems a one-time irrevocable choice to either pay a new clean water drinking flat fee on water sales or “opt-out” of the new clean water drinking flat fee and continue to pay State sales tax on their purchase of tangible personal property and services. The choice between the fee or the sales tax must be made by October 1, 2001 by notifying the Kansas Department of Revenue and the Kansas Water Office. If no election is made by October 1, 2001, the water fee will automatically be assessed. Additionally, SB 332 prevents municipalities and public water supply systems from prohibiting the installation of a separate water meter for each dwelling unit in a building containing multiple dwelling units, in lieu of installation of a master meter for the entire building[11] and second, provides an exemption from sales tax upon the gross receipts from the sale of a rural water district benefit unit, from a water system impact fee, system enhancement fee or similar fee collected by a water supplier as a condition for establishing service, and from any connection and reconnection fees collected by a water supplier.[12]

Very truly yours,

CARLA J. STOVALL Attorney General of Kansas
Guen Villarreal Easley Assistant Attorney General

CJS:JLM:GE:jm

[1] L. 2001, Ch. 199, §§ 1 through 4.
[2] K.S.A. 2000 Supp. 79-3603, as amended by L. 2001, Ch. 199, § 2 (c).
[3] K.S.A. 2000 Supp. 79-3606, as amended by L. 2001, Ch. 199, § 3(s).
[4] L. 2001, Ch. 199, § 4 (to be codified at K.S.A. 2001 Supp. 82a-2201).
[5] K.S.A. 2000 Supp. 79-3603, as amended by L. 2001, Ch. 199, § 3(c).
[6] In re Adoption of BMW, 268 Kan. 871, 877 (2000).
[7] Journal of the House 1208, May 7, 2001; Journal of the Senate 1098, May 7, 2001.
[8] Minutes of the House Assessment and Taxation Committee, January 21, 2001.
[9] Minutes, House Committee on Taxation, April 27, 2001; Minutes, Senate Assessment and Taxation Committee, March 22, 2001.
[10] Minutes, Senate Assessment and Taxation Committee, March 22, 2001; Hansen, Water Sales Tax Bill: Opting In or Out, 87 Kansas Government Journal 164 (2001).
[11] L. 2001, Ch. 199, § 1(b).
[12] K.S.A. 2000 Supp. 79-3603, as amended by L. 2001, Ch. 199, § 2 (c).