Connecticut Tax Issues An Overview for Property Developers and Managers

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1 Connecticut Tax Issues An Overview for Property Developers and Managers Felicia S. Hoeniger, Esq. Robinson & Cole Michael J. O Sullivan, Assistant Director, Appellate Division Connecticut Department of Revenue Services

2 Introduction Purchase or Sale of a Business Constructing Real Property Dealing with Contractors Sales Tax, Exceptions and Exemptions Property Taxes Managing Real Property Current Developments and Q&A

3 Purchase or Sale of a Business Choice of Entity Income Tax Considerations Form of Ownership Corporation LLC Partnership Sole proprietor

4 Purchase and Sale Considerations (Continued) Conveyance Tax Due when A Deed Conveys real property Consideration of $2,000 or more Does not apply to Contracts of sale and options that do not convey legal title Assignments of such contracts and optiosn Deeds deposited in Escrow

5 Real Estate Conveyance Tax - Exemptions Exemptions from the Real Estate Conveyance Tax include: Deeds made pursuant to corporate merger Conveyance to a corporation in exchange for shares of stock Leases for a term of less than 99 years Transfers to effectuate a mere change in the identity or form of ownership where there is no change in beneficial ownership.

6 Controlling Interest Transfer Tax Controlling Interest Transfer Tax is intended to impose tax on transfers of real property when the Real Estate Conveyance Tax doesn t apply Transfer of a controlling interest, defined as more than 50% In an entity that has an interest in real property

7 Controlling Interest Transfer Tax Exceptions Does not apply to property located in an enterprise zone Only other exception is for transfers that effect a mere change of identity or form of ownership where there is no change in beneficial ownership.

8 Sales Tax Issues Transfer of Personal Property A developer buys a commercial apartment building including furniture and fixtures Casual and Isolated Sales are exempt from Connection Sales and Use Taxes But note, special rules for certain items, e.g. vehicles

9 Sales Tax Issues Successor Liability The purchase of a commercial property may subject the purchaser to SUCCESSOR LIABILITY Conn. Gen. Stat : If any person liable for an [sales and use] tax sells out his or her business... Or quits the business, such person s successors or assigns shall withhold sufficient of the purchase price to cover such amount until the former owner produces a receipt from the commissioner showing that it has been paid or a certificate stating that no tax is due. Purchaser is assigned liability up to the purchase price of the business

10 Successor Liability How to Avoid It To avoid successor liability The purchaser must obtain a Tax Clearance Certificate from the DRS Follow the procedures outlined in IP 2002(16) Can take up to 60 days The Tax Clearance Certificate will either state that no tax is due or specify the amount of tax due If DRS does not issue Certificate with 60 days, purchaser is relieved of liability If DRS specifies an amount of tax due, purchaser must withhold that amount from the purchase price

11 Status Letters Tax Clearance Certificate only applies to sales and use tax, not corporation business tax or other taxes For comfort on those other taxes, buyer may request a Status Letter Indicates tax types that the business is registered for Filing frequency Most recent returns Delinquent returns Extensions Outstanding accounts receivable balances

12 One More Tax Issue Created by the Purchase of Commercial Property Registration Acquisition of a commercial property will require that the owner register for certain Connecticut taxes Form Reg-1 Sales and Use Taxes Business Entity Tax Withholding Tax

13 Construction Issues Construction services are taxable when rendered to commercial, industrial and income-producing real property. Conn. Gen. Stat (a)(37)(I) General Rule Contractor pays tax on Materials Property owner pays tax on the labor

14 Construction Issues - Continued Why should the property owner care about the specifics? Construction Contracting is one of the most complicated sales and use tax areas. The contractor may not get it right and you could be left holding the assessment Pay attention to Contractor s bills

15 Non-Taxable Construction or Exceptions to the General Rule New Construction New building New addition that adds square footage Complete replacement of entire internal structure Note, this is very unusual New Site Improvements For example, new parking lot, but note, new lights to an existing parking lot will not qualify because not a new use Initial fit-out or finish work to the interior of a new building

16 Non-Taxable Construction or Exceptions to the General Rule -2 Substantial rehabilitation of a certified historic structure Low and Moderate Income Housing Environmental Exception Condo Associations Residential construction is not subject to tax The issue arises when some condo units are leased out by the owner Use Cert-103 to establish the percentage taxable and non-taxable and provide this certificate to contractors

17 Non-Taxable Construction: Exemptions Based on the Identity of the Owner United States Government and its agencies, State of Connecticut and Connecticut agencies, municipalities Indian Tribes Certain charitable, religious or exempt organizations Issues: Is the exempt entity the contracting party? Single member LLCs

18 Non-Taxable Construction: Exemptions Based on the Nature of the Project Manufacturing facilities Water Pollution Control Air Pollution Control Solid Waste-To-Energy Turnkey Contracts AN 2006(7)

19 Special Rules for Non-Resident Contractors Can Create Liability for Property Owners Non-Resident Contractor ( NRC ) Rule: Any person that contracts with an NRC must receive a certificate of compliance from NRC indicating that NRC has posted a bond with DRS If no certificate of compliance owner must withhold 5% of contract price and remit to DRS If owner does not get certificate of compliance and does not withhold, owner is liable for all tax liabilities of the NRC.

20 Real Property Tax Issues Valuation questions may arise if a project is under construction as of the assessment date

21 Property Managers Taxable Property Management Services Property management Services are subject to tax as services to commercial, industrial and income producing property What is the base of the tax? All gross receipts of property manager Including cost reimbursements

22 Taxable Property Management Services: Exemptions and Exclusions Exclusions: Management fee may be reduced by wages and wage-related expenses of certain employees Employee must be assigned to a single business location Meet the definition of an employee length of service Costs must be separately stated Exemptions Paid to a related entity with identical ownership Paid to a partner/member of a partnership/llc Policy Statement 92(6) Low and Moderate Income Housing and Tax Exempt entities Make sure you have proper exemption certificates Based on property location indian reservation, out of state Condo Associations based on a the percentage of owneroccupied residential units to leased units CERT-103

23 Purchases by Property Managers Real Property Services generally subject to tax E.g. locksmithing, janitorial, maintenance, exterminating, window cleaning, landscaping, refuse removal Services that become an integral and inseparable component of the management service can be purchased on resale Other services Be careful of temporary help services, repair services to the property manager s equipment, any back office services

24 Tangible Personal Property Purchases of tangible personal property by the property manager on behalf of the property owner are subject to tax Property manager cannot use a resale certificate because it is not a retailer Establishing an agency relationship and agency account can overcome this

25 Problem Areas and Common Errors Document shredding services used to not be taxable, now they are? A single member LLC, the single member of which is an exempt entity, is not necessarily an exempt entity? Reimbursements for nontaxable services, e.g. accounting

26 Current Developments and Q&A DRS Voluntary Disclosure Successor Liability How far back can it go? What about the sale of a part of a business? Non-resident contractors DRS/private sector initiative Questions