Connecticut Sales and Use Taxation of Services CBIA’s 2012 Connecticut Tax Conference June 1, 2012 Presented by: Doug Joseph and Tony Switajewski BlumShapiro & Company, P.C. West Hartford, CT
Agenda • Requirement to Collect Sales Tax (Nexus) • Basics of Sales and Use Taxation • Taxation of Services and Sourcing • Specific Services Discussed • Advertising • Business and Human Resource Management • Computer and Data Processing • Personnel • Real Property • Key Points to Keep in Mind • Action Steps
Disclosure Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service or State Tax Authorities, (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to market or promote any transaction or matter addressed herein without the express and written consent of Blum Shapiro & Company, P.C., (3) Blum Shapiro & Company, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (4) any fees otherwise payable to Blum Shapiro & Company, P.C. in connection with this written tax advice are not refundable or contingent on your realization of tax benefits from the advice contained herein. This presentation is intended to provide general information and no tax advice is intended to be given.
Sales Tax Nexus • Nexus for service providers: • Generally, “physical presence” in a state by a service provider is required: • Property in a state (e.g., office, inventory) • Sales personnel or independent representatives visit customers • Scholastic Book Clubs, Inc. • Performing services within a state • Attribution nexus (e.g., click-through nexus) • “Amazon.com” Use Tax Collection Legislation • Once a business has nexus in a state for sales or use tax collection responsibilities, it is likely subject to other state taxation.
Services Subject to Tax • The Basics of CT Sales Taxation on Services • Only listed taxable services are taxable(“enumerated services”) • Sales tax is legally imposed on the retailer (seller) • Retailer is to collect the tax from the consumer and it is a debt from the consumer to the retailer when added to the sales price. • Seller must pay sales tax to CT whether or not it collected the tax from its customer. • What happens when you should have charged sales tax but didn’t – can you go after your customer for the tax?
Listing of Taxable Services (not all inclusive) Advertising Credit information and reporting Computer and data processing Employment agencies and personnel services Private investigation, protection, patrol work, watchman, armored car Telephone answering Services to industrial, commercial or income-producing real property Business analysis, management, management consulting Public relations Miscellaneous personal services Repair and maintenance service to tangible personal property Producing, fabricating, processing, printing or imprinting of TPP Telecommunication
Reimbursable Expenses • Reimbursable expenses are taxable when the service is taxable • Separately stated reimbursed expenses are still taxable if related to taxable service • Reimbursed expenses generally become part of the gross receipts of the sale
Sourcing of Services • Sourcing of services: • Sourcing is very important because CT taxes manyservices not taxed by other states • CT DRS position has always been “where the benefit of the service is enjoyed” is where the service is taxable • Easy when service is to real property, e.g., because it is stationary (service to CT real estate is taxable in CT) • Difficulty is when services cross state lines or service benefit is received outside CT and “brought back” to CT • Multiple points of use
Important Service Exemptions • Services to Identically Owned Affiliates • Applies to any types of business organizations (was once only applicable to corporations) • Services Rendered to Qualifying Exempt Organizations • State of Connecticut and municipalities • U.S. Government • 501(c)(3) or (13) Organizations • Nonprofit Charitable Hospitals • Resale of Services • Buying a taxable service that you will resell - must be an integral and inseparable component part of a service to be resold to an end consumer (often seen in the construction industry).
Sales of Services for Resale • Who May Issue a Resale Certificate for Services • Intend to resell the service • To resell a service it must be enumerated in Conn. Gen. Stat §12-407(a)(37) and become an integral and inseparable part of services enumerated under Conn. Gen. Stat. §12-407(a)(37)
When to Report a Sale Accrual basis — general rule (when services are rendered) Cash basis — exception for sellers of services filing Federal income tax returns on cash basis. Handling bad debts
Calculating Sales and Use Taxes • Tax Added vs. Tax Included • Tax Added • Separately stated in tax line or box • Amount stated must be remitted • “Unjust Enrichment” • Tax Included • Must be notated on invoices • Mention in contract not enough • Divide invoice x 1.0635
Use Tax • Taxable purchases made where sales tax was not collected • Services that are not subject to Connecticut Sales tax are not subject to the use tax • Pay use tax on Form OS-114, Sales and Use Tax Return
Advertising Or Public Relations Services NOT RELATED TO THE DEVELOPMENT OF MEDIA ADVERTISING OR COOPERATIVE DIRECT MAIL ADVERTISING • CT is highly unusual to tax advertising services • What Advertising is taxable? • Non-media advertising • Creation, preparation, production, dissemination • Consulting and advice • Layout, art direction, graphic design, mechanical preparation, production supervision • Does not include marketing • Does not include cooperative direct mail advertising
Advertising or Public Relations (continued) Marketing is excluded. What is Marketing? • Testing, research or analysis of existing or potential consumer markets in connection with the development of particular products, property, goods or services • Includes consulting in connection with marketing
Advertising or Public Relations(continued) • What is Media Advertising (per SN 2003(6))? • Sale of time or space • In or on pre-existing medium • For broadcast or dissemination to all or segment of public • Examples of media: • Newspapers, including advertising inserts and coupon inserts distributed inside newspapers • Magazines • Radio, TV, Cable TV • Billboards, Buses, Taxis • Trade or Campus Directories • Restaurant Placemats • Cash Register Tapes • Does not include ads devoted to one particular advertiser • Catalogs • Flyers • Brochures • Posters
Advertising or Public Relations(continued) • When taxable, what charges are taxable? • Hourly Fees • Vendor Costs • Commissions • Markups • Reimbursable Expenses, including mailing services and postage • Collateral items (e.g., printed materials) are sales of tangible personal property
Advertising or Public Relations(continued) • Resales of Services by Ad Agencies • Writing, copywriting • Layouts • Art Direction • Graphic Designs • Mechanical Preparation • Typeset Copy • Production Supervision • Placement • Models
Advertising or Public Relations(continued) • Ad agency is consumer of tangible personal property and services • Paint, tools supplies, etc. • Original photos, artwork, video and audio tapes are considered non-taxable intangibles if fee is only for right to change, reproduce or market design • May also be taxable component if separately stated fee for services of graphic designer and if related to taxable advertising services • If fees are not separately stated, entire charge is presumed to be taxable
Advertising or Public Relations(continued) • Advertising sourced to where campaign occurs or where materials are disseminated • May need to be allocated between states if multistate campaign • For printed materials, allocation of service charge is based on the circulation data for the print media or publication. • Printed materials themselves follow this same allocation approach. Printed materials exemption certificate may be required. • May result in use taxes in other states where the service provider has nexus, even if advertising services are exempt.
Business Management Services • Includes: • Business Analysis • Examination of data, making of recommendations • Business Management • Provision of general or specialized day-to-day management • Business Management Consulting • Furnishing of advice or assistance on matters pertaining to management • Business Public Relations • Preparation of materials designed to influence the general public or other groups by promoting interests of service recipient
Business Management Services(continued) • Does Not Include: • Valuation or appraisal of property (unless in connection with business analysis services) • Insurance services • Investment Banking—see PS 92(9) • Environmental Consulting • Marketing
Business Management Services (continued) • It’s not what the services are “called” that determines whether or not taxable • Reg. Sec. 12-407(2)(i)(J)-1(c)(1) • Look at nature of services rendered • Message Center Management, Inc. v. Commissioner, affirmed by CT Supreme Court 6/19/07 • Management in the service provider’s name plus management agreements with clientsbut services were held nontaxable • Good idea not to mislabel services to avoid confusion
Business Management Services (continued) • Must be rendered to service recipient’s • Core business activities • Human resources management activities
Business Management Services(continued) • Core business activities—activities directly related to service recipient’s lines of business, its capital structure, its budgeting and strategic planning • Non-Core Business Activities • Administration of: • Payroll • Employee insurance claims • Pension funds • Food service operations • Employee health services • Mailroom delivery functions • Plants & grounds maintenance • Insurance claims against service recipient in capacity as insurer • Self-insured claims • Investment advice • Particular interests of service recipient’s members, shareholders or partners
Business Management Services (continued) • Human Resource management activities • Hiring • Development • Job-related Training • Compensation • Personnel Management • Employee Relations • Design & Implementation of Employee Benefit Plans
Business Management Services (continued) • Exclusions • Separately stated compensation, fringe benefits, workers compensation, and payroll taxes paid to or on behalf of employees of service provider who has contracted to manage a service recipient’s property or business premise • Employees must perform services solely at recipient’s premises
Business Management Services (continued) • Exclusions (continued) • General Partner Services Rendered To A Limited Partnership: C.G.S. §12-407(a)(37)(DD) • Provides that services are only taxable if: • 1. Compensation is other than via distributive share of partnership profits • 2. General partner (or affiliate) offers such management services to others, including any other partnership. • Presumably, otherwise, general partner management services for LP’s are nontaxable • Caveat: does not necessarily apply to LLC’s!
Personnel Training Services • PS 2000(4) • Falls under Business Management Consulting Services • Pertains to Human Resource Management Activities • Applies to job-related training • DRS longstanding position has been that services are sourced to where employee is based rather than where training occurs • See discussion re Key Air decision
Personnel Training Services (continued) • Topics must be directly related to employee’s job skills • Indirectly related and unrelated are non taxable • Courses provided by institution of higher education licensed or accredited by Connecticut Board of Governors are non taxable
Personnel Training Services(continued) • General education seminars are non- taxable • Refresher courses • Courses on current developments in particular field • Courses for continuing education credits • Service provider is consumer of course materials and meals included in training price
Computer & Data Processing Services (“CDP”) Connecticut Policy Statements 2006(8) and 2004(2) • PS2004(2) – Internet access and online sales of goods and services • Internet access is fully exempt • However…ASP’s don’t come under exemption • Internet access is sourced to home base of purchaser’s computer terminal • Electronically delivered software or digitized property is CDP taxed at 1%--must separately state from any associated TPP • True object is always key • Creation and maintenance of websites is non-taxable
Computer & Data Processing Services (continued) • PS2006(8) – Computer-related services and sales of tangible personal property • CDP Includes: • Programming, code writing and modification of existing programs • Implementation of software in connection with development, creation, production of canned or custom software or license of custom software • Providing computer time, storing and filing information, retrieving or providing access to information • Data scanning, creating custom software, computer training, and online access to information
Computer & Data Processing Services (continued) • PS2006(8) – Computer-related services and sales of tangible personal property (continued) • Taxed at 1% • Hardware and other tangible personal property is taxed at 6.35% • Separately state or unbundle. Otherwise everything is taxed at 6.35% • Separately stated hardware installation is exempt (unless hardware is leased rather than sold/purchased) • Repair and maintenance of hardware taxed at 6.35% • Canned software is tangible personal property taxed at 6.35% (unless delivered electronically-taxed as CDP @1%)
Computer & Data Processing Services (continued) • Custom Software • For particular needs of a customer • Must bear little resemblance to any but basic functions of canned software on which it was based • Taxed as CDP service at 1% • License fees for mere use and possession of custom software are not taxed if separately stated
Computer & Data Processing Services (continued) • Software installation, maintenance, support and upgrades • Regardless of whether canned or custom • Software maintenance and warranty contracts are CDP whether canned or custom • Upgrades of canned software • Sale of tangible personal property – 6.35% • Delivered electronically – CDP service – 1% • Maintenance and warranty contracts providing for phone support and tangible personal property upgrades are taxable at 6% unless charges separately stated
Computer & Data Processing Services (continued) • Computer Training • If job related, taxable at 6.35% • If not job related (e.g., attorneys learning how to use e-mail), taxable as CDP service at 1% • Computer personnel services taxable at 6.35%. See following slides and PS 2007(7) for details of personnel services rules
Computer & Data Processing Services (continued) • Software as a service (SaaS) - Cloud • Connecticut – Taxable (1%) • New York – May be Taxable • Massachusetts – May be Taxable
Employment Agencies and Agencies Providing Personnel Services • PS 2007(7) • Employment Agencies – Brings together an employer and employee for a fee or commission • Doesn’t apply to procurement of jobs on one-time or short-term basis for independent contractors • Service is taxable at 6.35%
Employment Agencies and Agencies Providing Personnel Services (continued) • Personnel Agencies – Furnish temporary or part-time help • Agency is employer • Any business can be considered a “Personnel Agency”, even a related entity • Doesn’t have to be in business of furnishing help • Service recipient controls work of agency’s employee • Similar to employee – independent contractor analysis • Degree of prearrangement of services by agency is key • If no prearrangement, will be personnel service • All gross receipts are taxable at 6.35%, not just agency’s commission
Employment Agencies and Agencies Providing Personnel Services (continued) • Leased Employees Exception • Defined by IRC Section 414 • Employee works substantially full-time for service recipient for at least one year • Must be agreement between service provider and service recipient • Services must be of type historically performed by employees • If 75% of agency employees under contract meet definition at commencement, all employees under contract qualify for exclusion, including those that are subsequently added to workforce • Exclusion is for all compensation and employment related expenses of leased employees
Employment Agencies and Agencies Providing Personnel Services (continued) • Similar exclusion (to that for leased employees) applies to worksite employees under professional employer agreement between professional employer organization (“PEO”) and service recipient • Also, similar exclusion for a “media payroll services company” • Relates to CT’s initiative to attract production companies to CT
Services to Real Property • A contractor’s labor (or service) is subject to tax when the service is to: • Existing commercial real property; • Existing industrial real property; • Existing income-producing real property
Services to Real Property (continued) • A contractor’s labor (or service) is not subject to tax when the service is to: • New construction; • Owner-occupied residential property; • Charitable or religious organizations; • Qualifying governmental agencies or their agents; • Real property owned by federally recognized Indian tribes when the service is performed in federally recognized Indian country; • Low and moderate-income housing; • Contracts performed out-of-state; • Hospitals and certain other exempt entities; or • Real property located within a public right-of-way.
Services to Real Property(continued) • Contractors are the consumers of materials and supplies used in fulfilling their construction contracts. • Contractor pays tax on purchases of physically incorporated materials. • Generally, a resale certificate cannot be used when contractor purchases materials.
Services to Real Property(continued) A contractor’s service (labor) charge, is determined by subtracting the cost of materials (including tax paid on materials) from the total contract price. • Every cent above the contractor’s cost of materials that are physically incorporated into the real property AND already-taxed subcontractor services, plus the tax paid on those materials and services, is considered the service charge.
Services to Real Property (continued) • The charge for labor (or service) includes: • The actual labor charge; • Any markup or profit on labor; • Any markup or profit on materials; • Overhead expenses; • Tool or equipment purchase or rental, including tax paid on the rental; and • Reimbursed expenses incorporated into the bill (whether or not the charges are separately stated).
Services to Real Property (continued) • Tax Held in Trust • It has been the incorrect practice of some contractors to reimburse themselves for tax they paid on materials out of the tax they collect from their customers. Conn. Gen. Stat. §12-408(2) provides that tax collected by a retailer is held in trust for the state, and the entire amount of tax collected must be remitted to DRS or refunded to the customer. • DRS calls this “unjust enrichment” when contractors follow this erroneous practice.
Services to Real Property (continued) • Tax held in trust (cont.) Example: Contractor buys materials for $100 plus $6.35 CT sales tax. Contractor performs taxable services to customer’s real property and charges $1,000 for labor and materials (either in lump sum or with materials and labor shown separately) and adds $63.50 of sales tax. To avoid “double taxation”on the $100 of purchased materials and to tax only the labor portion of the job, contractor deducts $6.35 of materials tax on sales tax worksheet and remits $57.15.
Services to Real Property(continued) Tax Held in Trust (continued) What is wrong with this? • Contractor MUST remit what he charges as “tax” (i.e., $63.50). • Correct approach: Contractor bills $1,000 plus $56.75 of sales tax ($1,000 less materials cost of $106.35 x 6.35%). • Can show the $1,000 as lump sum or could show materials cost as $106.35 plus labor charge of $893.65 plus sales tax on services of $56.75. • Under “erroneous” approach, customer could apply for refund for being taxed on materials.