Opinion ID: 2600175
Heading Depth: 1
Heading Rank: 3

Heading: Interdepartmental Transfers

Text: The City's internal auditor from 1994 to 2001, Jeanne Hernandez, testified that the various operating departments of the City, including the water department, shared services for the sake of efficiency. The data center fully costs itself, and then those charges are allocated to the user department for those services. This transaction occurs as a journal entry in the financial accounting system where it is an allocation of those expenses to the water department. The City argues that BOTA erred in concluding that the following four categories of interdepartmental transfers were taxable: Interdepartmental Transfers Tax Data Center Charges $37,692 PBX Instrument Charges $ 5,256 Long Distance Pagers $ 1,728 Photocopy Charges $ 972 Data center charges were characterized as payments for professional services such as billing, accounting, training, personnel, and payroll and for purchases of equipment or other tangible personal property by the City. The PBX instrument charges are the instrument charges for phones, actual phone lines, and equipment for the water department. The long distance pagers charges were allocations for pager and long distance services. The photocopy charges are accumulated by the data center's dictionary stores and its operation and allocated to the individual departments. Any equipment purchased in connection with these charges is purchased by the data center, and the cost is transferred to the water department. Some of the expenses constitute a monthly, recurring charge, which is not recalculated each month and is simply an automated journal entry in the accounting system that transfers the expense to the water department. Some charges, like photocopying and long distance services are not automated charges and are calculated each month based on actual use. Money does not change hands, as the water department has an account number in the accounting system to which the expenses are charged. As the water department does not have its own separate bank account, the money collected from customers, i.e., the receipts from selling and furnishing of water, are deposited into the City's bank account. The expenses attributable to the water department are then noted as accounting debits and credits. When the allocations to the water department are made, the bundle of costs for the data center charges are classified in the following categories: equipment charges, including software application fees for software such as the payroll and billing software utilized by the water department; replacement reserves for future purchases of equipment; license fees; personnel; training services; and strategic planning. When asked if the Revenue Department's audit made any effort to segregate these costs based on their taxability, Hernandez responded that the Revenue Department took out all of the labor services from the interdepartmental transfers but did not make an effort to segregate any of the other costs listed. BOTA concluded that the interdepartmental transfers constituted taxable sales: 62. The Board finds that the subject `interdepartmental transfers' as they are referred to by the parties constitutes sales of tangible personal property or services. Although the consideration was recorded by journal entry, the Board finds that there was an exchange of tangible personal property for a consideration. 63. The Board finds that implicit in K.A.R. 92-19-72 is the fundamental assumption that the initial purchase by the single legal entity is subject to sales tax or that all the various departments are independently exempt from sales tax. Administrative rules and regulations must be appropriate, reasonable, and not inconsistent with the law to be valid. Pemco, Inc. v. Kansas Department of Revenue, 258 Kan. 717, 720, 907 P.2d 863 (1995). To interpret K.A.R. 92-19-72 to allow a city to purchase property and services exempt from sales tax and then simply transfer the property to a taxable department, such as the water department, would be inconsistent and unreasonable with the law of K.S.A. 79-3606(b), and amendments thereto. As a result, the Board concludes that the subject `interdepartmental transfers' are taxable, and the Department's assessment is sustained. 64. The Board notes that if it were to adopt the Taxpayer's assertion that the interdepartmental transfers were not `sales,' the initial exempt purchases by the City may need to be evaluated to determine whether they were properly exempt pursuant to K.S.A. 79-3606(b), and amendments thereto. Based upon the facts presented, the property and services were used or proposed to be used in part by the political subdivision in the business of furnishing waters to others. Pursuant to K.S.A. 79-3606(b), the initial purchases by the City may not be exempt from sales tax. The Board does not believe that this is the result intended by the Taxpayer.