CT SALES AND USE TAX FOR THE SERVICE INDUSTRY

Transcription

1 CT SALES AND USE TAX FOR THE SERVICE INDUSTRY Presented by: Douglas A. Joseph BlumShapiro West Hartford, CT Felicia S. Hoeniger Robinson & Cole LLP Hartford, CT CBIA s Connecticut Tax Conference May 20, 2011

2 Update re 2011 tax legislation The 2011 CT General Assembly passed major tax legislation effective 7/1/11 affecting sales and use tax statutes Signed by Governor Malloy on 5/4/11 and codified as Public Act 11-6 Includes rate changes, new services, and repeals of exemptions 2

3 Sales tax rate changes effective July 1, 2011 General sales tax increase from 6% to 6.35% 30 day or less rentals/leases of motor vehicles increase from 6% to 9.35% Room occupancy increase from 12% to 15% Luxury items increase from 6% to 7% 3

4 New Services Subject to Tax As of July 1, 2011 motor vehicle storage packing and crating motor vehicle towing and road services (excluding repairs) intrastate transportation via livery services (excluding taxi, bus, funeral, ambulance), pet grooming, pet boarding, pet obedience classes cosmetic medical procedures (except reconstructive surgery) manicure and pedicure services spa services

5 Exemptions Eliminated Effective July 1, 2011 Services for the voluntary evaluation, prevention, treatment, containment or removal of hazardous waste or other contaminants of air, water, or soil Yoga instruction Airport valet parking services. Nonprescription medicines. Clothing and footwear under $50. Property or services used in operating solid waste-toenergy facilities. Smoking cessation products. Cloth or fabric for noncommercial sewing.

6 What are luxury items in the new law? 7% rate imposed on the full sales price of: Motor vehicles if $50,000 or more Vessels if $100,000 or more Jewelry if $5,000 or more Clothing, footwear, handbags, luggage, umbrellas, wallets or watches if article $1,000 or more 6

7 Sales Subject to Tax Sale, lease, rental of goods unless there is an exemption Only listed taxable services ( Enumerated Services ) Sales tax is legally imposed on the seller Seller must pay sales tax whether or not it collected the tax from its customer 7

8 Use Tax Taxable purchases made where sales tax was not collected Goods and 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 8

9 Services In General (cont d) Enumerated services are listed in C.G.S. Section (a)(37)(A) through (FF) Services are not subject to tax unless specifically enumerated as taxable Services to identically owned affiliates are exempt Applies to any types of business organizations (was once only applicable to corporations) Profit intent is not relevant (as it once was) IRC section 267 attribution counts toward identical ownership 9

10 Services In General (cont d) Sourcing of services: DRS position has always been where the benefit of the service is enjoyed Easy when service is to real property, e.g., because it is stationary Difficulty is when services cross state lines or service received outside CT and brought back to CT Key Air decision court questioned DRS position DRS is now more open to taxpayer proposals for sourcing of services Sourcing is very important because CT taxes many services not taxed by other states 10

11 Services In General (cont d) Nexus for service providers: Generally, physical presence in CT by service provider is required Once a business has nexus in CT for sales tax, likely for withholding tax and business income tax, too, plus business entity tax (for LLC s, LP s and S corps.) If service provider has several business lines, there may be incentive to carefully structure different entities to limit nexus for only the business line with physical presence in CT 11

12 ADVERTISING OR PUBLIC RELATIONS SERVICES NOT RELATED TO THE DEVELOPMENT OF MEDIA ADVERTISING OR COOPERATIVE DIRECT MAIL ADVERTISING 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 12

13 Advertising or Public Relations (cont d) 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 13

14 Advertising or Public Relations 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 14

15 Advertising or Public Relations When taxable, what charges are taxable? Hourly Fees Vendor Costs Commissions Markups Reimbursable Expenses Collateral items are sales of tangible personal property 15

16 Advertising or Public Relations Resales of Services by Ad Agencies Writing, copywriting Layouts Art Direction Graphic Designs Mechanical Preparation Typeset Copy Production Supervision Placement Models 16

17 Advertising or Public Relations 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 sourced to where campaign occurs May need to be allocated between states if multistate campaign 17

18 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 18

19 BUSINESS MANAGEMENT SERVICES (cont d) 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 19

20 BUSINESS MANAGEMENT SERVICES (cont d) It s not what the services are called that determines whether or not taxable Reg. Sec (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 clients but services were held nontaxable Good idea not to mislabel services to avoid confusion 20

21 BUSINESS MANAGEMENT SERVICES (cont d) Must be rendered to service recipient s Core business activities Human resources management activities 21

22 BUSINESS MANAGEMENT SERVICES (cont d) Human Resource management activities Hiring Development Job-related Training Compensation Personnel Management Employee Relations Design & Implementation of Employee Benefit Plans 22

23 BUSINESS MANAGEMENT SERVICES (cont d) 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 23

24 BUSINESS MANAGEMENT SERVICES (cont d) 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 See Renaissance Management case Affirmed by Connecticut Supreme Court 12/30/03. o Must be solely for one service recipient at a single location 24

25 BUSINESS MANAGEMENT SERVICES (cont d) Exclusions (continued) General Partner Services Rendered To A Limited Partnership: C.G.S (a)(37)(DD) Provides that services are only taxable if: o o 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! 25

26 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 26

27 Personnel Training Services (cont d) 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 27

28 Personnel Training Services (cont d) General education seminars are nontaxable 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 28

29 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 29

30 Computer & Data Processing Services (cont d) 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 30

31 Computer & Data Processing Services (cont d) PS2006(8) Computer-related services and sales of tangible personal property (continued) Taxed permanently at 1% Hardware and other tangible personal property is taxed at 6% Separately state or unbundle. Otherwise everything is taxed at 6% Separately stated hardware installation is exempt (unless hardware is leased rather than sold/purchased) Repair and maintenance of hardware taxed at 6% Canned software is tangible personal property taxed at 6% (unless delivered electronically-taxed as 31

32 Computer & Data Processing Services (cont d) 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 32

33 Computer & Data Processing Services (cont d) 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% 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 33

34 Computer & Data Processing Services (cont d) Computer Training If job related, taxable at 6% If not job related (e.g., attorneys learning how to use ), taxable as CDP service at 1% Computer personnel services taxable at 6%. See following slides and PS 2007(7) for details of personnel services rules 34

35 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

36 Employment Agencies and Agencies Providing Personnel Services (cont d) 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%, not just agency s commission 36

37 Employment Agencies and Agencies Providing Personnel Services (cont d) 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 37

38 Employment Agencies and Agencies Providing Personnel Services (cont d) 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 38

39 Lobbying or Consulting Services Reg. Sec (2)(i)(R)-1 Communicating directly or soliciting others to communicate With any official or staff thereof o o In Executive Branch or Legislative Branch Of Connecticut State or local government For purpose of influencing executive or administrative action Includes consulting by lobbyist 39

40 Lobbying or Consulting Services (cont d) Does not include: Actions directed at o o o U.S. Government Another state Another country Only registered lobbyists render taxable services Services are sourced to location of seat of government being lobbied 40

41 Repair Services to Motor Vehicles and Other Tangible Personal Property Reg. Sec (2)(i)(M)-1 (Motor Vehicles) Sales of repair services and sales of integral parts are taxable to consumer Integral parts retain separate identity after being installed Non-integral parts Regulations provide long list of examples either the item: Is not installed (rags, tools) Loses its identity in installation (paint, solder, sealants) 41

42 Repair Services to Motor Vehicles and Other Tangible Personal Property (cont d) Integral parts can be purchased for resale Non-integral parts are consumed by repairer Creates Double tax if passed on as part of repair service charge Special resale rule If tangible personal property is purchased solely for a particular customer o If charge to customer is separately stated from repair services 42

43 Repair Services to Motor Vehicles and Other Tangible Personal Property (cont d) Vehicles in inventory Repairs can be purchased for resale Services are sourced to where repair is made except that if vehicle is picked up or delivered from outside Connecticut and then is shipped back outside Connecticut after repair, services are nontaxable in Connecticut 43

44 Repair Services to Motor Vehicles and Other Tangible Personal Property (cont d) Reg. Sec (2)(i)(DD)-1 (Tangible Personal Property in General) Sales, renewals or extensions of maintenance, repair and warranty contracts Sale of original contract is taxable (if repair would be taxable by CT) If warrantor later reimburses repair charges for parts and labor, reimbursement is nontaxable o Tax is deemed to have been paid at time of contract purchase Repairer can purchase third-party repairer s services on resale basis 44

45 Repair Services to Motor Vehicles and Other Tangible Personal Property (cont d) Sale of contract with sale of tangible personal property is sourced to state where property was sold Sale of contract after sale of tangible personal property is sourced to business location of purchaser Sale of contract to Connecticut nonresident purchaser or motor vehicle, aircraft or vessel at time of purchase is taxable in Connecticut 45

46 Maintenance Services Reg. Sec (2)(i)(X)-1 Includes: House washing Cleaning gutters Chimney sweeping Snow removal Driveway sealing Awning services Pond dredging 46

47 Maintenance Services (cont d) Sourced to location of real property Casual sale if 3 or fewer residences per year 47

48 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 48

49 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; Industrial, commercial, or income-producing real property when the service is for the voluntary evaluation, prevention, treatment, containment, or removal of hazardous waste or other contaminants of air, water, or soil [Note: repealed effective 7/1/11]; or Real property located within a public right-of-way. 49

50 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. 50

51 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. 51

52 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). 52

53 Services to Real Property (continued) The general contractor has two options to choose from when billing the final customer. Option One The general contractor breaks the bill to the property owner into three components: o o o Materials consumed, including tax paid on the materials; Service charges, including markup on materials, overhead expenses, labor charges, and profit; and Sales tax on the service portion of the bill, if applicable 53

54 Services to Real Property (continued) Option Two The general contractor does not break the bill down. Only a total charge is shown on the bill. The bill includes: o o Materials consumed, including tax paid on the materials; service charges; and The words sales tax included on services, if applicable. Sales tax on the service portion of the bill may be backed out by multiplying the entire service charge by.943 (or, beg. 7/1/11, 1/1.0635). The result equals gross receipts from services. Subtract the gross receipts from services from the entire service charge. 54

55 Services to Real Property (continued) Regardless of the option chosen, the general contractor must keep accurate records of the actual costs of materials and service, including all subcontracting costs. The general contractor charges tax to the final customer only on the service portion of the contract. 55

56 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 (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. 56

57 Services to Real Property (continued) Tax held in trust (cont.) Example: Contractor buys materials for $100 plus $6 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 $60 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 of materials tax on sales tax worksheet and remits $54. 57

58 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., $60). Correct approach: Contractor bills $1,000 plus $53.64 of sales tax ($1,000 less materials cost of $106 x 6%). Can show the $1,000 as lump sum or could show materials cost as $106 plus labor charge of $894 plus sales tax on services of $ Under erroneous approach, customer could apply for refund for being taxed on materials. 58

59 Services to Real Property (continued) TOOLS OF THE TRADE The contractor must pay tax on the purchase, lease, or rental of all the tools used in the contractor s trade. This includes hand tools, power tools, sandpaper, ladders, scaffolding, and other equipment. Generally, if a used item is traded in on the purchase of a new item of the same kind, tax is calculated on the selling price, after allowing for the trade-in credit, provided the retailer intends to resell the item traded. 59

60 Services to Real Property (continued) EQUIPMENT RENTAL OR SERVICE CONTRACT? The rental of equipment is a taxable transaction, whereas only certain services are taxable. The terms of the contract, not the billing method, determine if the transaction is for equipment rental or for a service. Service Contract A contract is for service if the equipment owner: Is hired to do a specific job; Maintains complete control over the equipment; and Retains discretion over how and when to perform the job. Equipment Rental When the owner is merely supplying equipment, with or without operators, to a certain site, and the customer controls how and when to perform the contract, the contract is for the rental of equipment. 60

61 Services to Real Property (continued) NONTAXABLE CONTRACTS Purchasing Materials When a construction contract is with an exempt entity, the contractor may purchase materials and supplies installed or placed in the project exempt from tax. The materials and supplies must be installed or placed in the project and remain in the project after its completion. To purchase materials and supplies exempt from tax, the contractor issues a Contractor s Exempt Purchase Certificate (CERT-141) to its vendor. 61

62 Services to Real Property (continued) Purchasing Services When a contractor purchases a service while engaged in a contract with an exempt organization, the contractor must determine if the service will be consumed or resold. Do not assume a contract with an exempt entity means all services can be bought exempt from tax. Only those services resold by the contractor can be purchased exempt from tax. To purchase services for resale, contractor must issue a resale certificate to the service provider. 62

63 Services to Real Property (continued) Purchasing Services (continued) Services can only be resold if they become an integral and inseparable component of the service being resold to the exempt entity. Services consumed by the contractor cannot be purchased for resale. If the contractor is purchasing and consuming a taxable service, the contractor must pay tax to the seller of the service. Labor When the construction contract is with a qualifying exempt entity, the contractor s labor is not subject to tax. The qualifying exempt entity must issue the proper exemption certificate to the contractor 63

64 Services to Real Property (continued) INSTALLATION VERSUS REPAIR OR MAINTENANCE OF TANGIBLE PERSONAL PROPERTY This section covers services rendered to the following types of systems and units: alarm systems central air conditioning units central vacuuming units furnaces (boilers and burners) modular lighting units pumps refrigeration units tanks water heaters 64

65 Services to Real Property (continued) INSTALLATION VERSUS REPAIR OR MAINTENANCE OF TANGIBLE PERSONAL PROPERTY (continued) These services may include installation of the units or systems into the real property or may include repair or maintenance of these units, including their electrical or electronic devices. Most contractors provide both types of services: they install systems, and they repair and maintain them. Different tax rules apply depending upon which type of job is being done. 65

66 Services to Real Property (continued) Installation of Systems The installation of systems is a service to real property. Contractors are the consumer of the materials used when installing these systems and, therefore, must pay tax on their purchases. Contractors do not charge tax when installing the above-mentioned systems in: New construction Owner-occupied residential property Contractors must charge tax when installing the previously mentioned systems in: Existing commercial real property Existing industrial real property Existing income-producing real property 66

67 Services to Real Property (continued) Repair or Maintenance of Tangible Personal Property (Units) Repairing or maintaining units, or their electrical or electronic parts, is a taxable service to tangible personal property. Contractors providing repair or maintenance services must separately state the charge for integral parts and the charge for maintenance or repair services on the bill to the customer. Any fees, such as service call charges, minimum charges, hourly or flat rates, mileage charges, or pickup or delivery charges, are taxable as charges for repair or maintenance services to tangible personal property. The total bill is taxable. 67

68 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS Note re 2011 proposed legislation: The following discussion analyzes the law as currently in effect. Substitute Senate Bill No. (SB) 1214 of the 2011 General Assembly proposes significant changes, in the nature of reform and simplification, to these rules. If enacted, the new rules would take effect 10/1/11. 68

69 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS SN 2005(12) Nonresident contractors or persons doing business with nonresident contractors may use one of two options to satisfy the requirements for posting security to ensure a nonresident contractor pays all Connecticut taxes: 1. A nonresident contractor may furnish DRS a guarantee bond for 5% of the total contract price within 120 days of the commencement of the contract; or 2. Persons doing business with nonresident contractors must withhold 5% of the total contract price and deposit it with DRS no later than 30 days after the completion of the contract. 69

70 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS SN 2005(12) Depositing a withheld payment: Customer of a nonresident contractor must withhold payment in an amount of 5% of the total contract price Remit the amount as a deposit to DRS not later than 30 days after the completion of the contract Deposit cannot be made beyond two years from the later of the date the contract was signed, or work on the project commenced 70

71 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS SN 2005(12) Guarantee Bonds: A nonresident contractor has the option of filing a guarantee bond with DRS instead of the customer making a deposit with DRS. Under this option, the nonresident contractor has 120 days from the commencement of the contract to file a guarantee bond with DRS. DRS has issued Form AU-766, Guarantee bond which must be used to post a bond If the deadline for the customer to withhold and remit a deposit to DRS is before the deadline for the nonresident contractor to post a bond, DRS will accept the earlier of the deposit or the bond. 71

72 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) The nonresident contractor must use Form AU-766, Guarantee Bond, to post a bond. The customer of a nonresident contractor must use Form AU-764, Deposit by a Person Doing Business With a Nonresident Contractor, to make a deposit. The requirement to either post a bond or make a deposit applies to all contracts with nonresident contractors, regardless of the nature of the real property affected or the tax-exempt status of the property owner. 72

73 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) Nonresident contractor means a contractor who does not maintain a regular place of business in Connecticut. Person doing business with a nonresident contractor means any person who enters into a contract with a nonresident contractor, and includes, but is not limited to, property owners, governmental, charitable or religious entities, and resident or nonresident general contractors or subcontractors. 73

74 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) Regular place of business: Any bona fide office, factory, warehouse, or other space in Connecticut at which a contractor is doing business in its own name in a regular and systematic manner; and Which place is continuously maintained, occupied, and used by the contractor in carrying on its business through its employees regularly in attendance to carry on the contractor s business in the contractor s own name 74

75 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) A regular place of business does not include: A place of business for a statutory agent for service of process or a temporary office whether or not it is located at the site of construction; Locations used by the contractor only for the duration of the contract, such as short-term leased offices, warehouses, storage facilities, or facilities that do not have full time staff with regular business hours; or An office maintained, occupied, and used by a person affiliated with a contractor is not considered a regular place of business of the contractor 75

76 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) Person doing business with nonresident contractor (customer): Any person who enters a contract with a nonresident contractor (including): Property owners Governmental, charitable or religious entities, and Resident or nonresident general contractors or subcontractors Commencement of the contract: The time when the nonresident contractor signs the contract, but no later than when the work actually starts. If a change order is made after the commencement of the original contract, it commences when it is signed by the nonresident contractor, but no later than when the work under the change order actually starts Completion of the contract: The time when the nonresident contractor makes the final periodic billing for the contract. Note that the final periodic billing may be due before payment of any retainage becomes due. If a change order is made after the final periodic billing for the original contract, the change order is complete when the nonresident contractor bills for the change order 76

77 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) If the customer fails to make a timely deposit of the withheld amount, the customer will be jointly and severally liable for any taxes due the State of Connecticut arising from the contract with the nonresident contractor and may face civil or criminal prosecution, or both. 77

78 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) A customer that fails to withhold and timely remit a deposit may be held responsible for any liability related to these taxes, which may exceed 5% of the total contract price. Nonresident contractor seeks refund from DRS by requesting an audit. 78

79 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) The nonresident contractor s tax liability includes sales and use taxes, withholding tax, personal income tax, corporation business tax, motor fuels tax, business entity tax, and any other applicable Connecticut taxes arising from the project for which the deposit was made. 79

80 Services to Real Property (continued) BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS (continued) Rainforest Café, Inc. vs. Commissioner CT Supreme Court, 4/20/09 Nonresident contractor collected sales tax from CT real property lessee at Westfarms Mall Nonresident contractor did not remit the collected sales taxes CT lessee did not obtain bond nor did they withhold 5% Result: CT lessee was not responsible for unpaid taxes 80

81 Exemptions from Sales and Use Taxes Certain goods exempt by statute Specific services exempt by statute Purchaser is exempt from paying tax 81

82 Record Keeping for Exemptions (cont d) When an exemption is not assigned a Certificate Purchaser presents a statement to the seller certifying under penalty of false statement that the purchaser is claiming an exemption under the specific statute number 82

83 Good Faith? Good Faith of the purchaser A purchaser should issue an exemption certificate only if it can claim in good faith that the statements made on the certificate are true and accurate. A purchaser who gives a false or fraudulent exemption certificate is subject to the payment of the tax, plus penalties and interest, and may also be subject to civil and criminal penalties. 83

84 Good Faith (cont d) Good Faith of the Seller A seller should accept an exemption certificate only if it can accept in good faith that the statements made by the purchaser are true and accurate. If the seller has reason to believe that the information on the certificate is incorrect and the seller does not charge the tax, the seller is liable for payment of the tax, plus penalty and interest. 84

85 Exemptions from Sales and Use Taxes Example: Medical goods and equipment Prescription medicines, syringes and needles Oxygen, blood or blood plasma Artificial devices, individually designed, constructed or altered that become a brace, support, supplement, correction or substitute for a bodily function or structure Hearing aids, canes, crutches, walkers and wheel chairs Vital life support equipment Certain nonprescription drugs and medicines (repealed effective 7/1/11) Diabetic supplies 85

86 Exempt Organizations General Rules Purchase made for the exclusive use of the organization Purchase must be accompanied by a properly completed exemption certificate Payment made from the organization s own funds No cash (unless $10 or less) No gift card purchases No personal checks No personal credit cards 86

87 Exempt Organizations (cont d) Qualifying Exempt Organizations State of Connecticut including cities and towns, CERT-134 United States government, CERT-134 Qualifying exempt organizations, CERT-119 Nonprofit hospitals, CERT-113 Nonprofit nursing homes and rest homes, CERT- 113 Federally recognized Indian Tribes, CERT-127 Contractors exempt purchases of materials, CERT

88 Sales for Resale Who May Issue a Resale Certificate Engaged in the business of selling tangible personal property or selling a taxable service Hold a Sales and Use Tax Permit Intend to resell the goods or services in the regular course of business or physically incorporate them into another product or service to sell To resell a service it must be enumerated on Conn. Gen. Stat (a)(37) and become an integral and inseparable part of services enumerated under Conn. Gen. Stat (a)(37) 88

89 Sales for Resale (cont d) Resale certificates from other states are not acceptable Connecticut Resale Certificate is used by the out of state retailer Multistate Tax Commission s Uniform Sales and Use Tax Certificate Multijurisdiction Tax registration number is NOT a resale certificate 89

90 Responsibility of Seller Identify type of business the purchaser is engaged in Accept Resale Certificate in good faith 90

91 Responsibility of Purchaser Intend to resell in the regular course of business Separate resale items from items not for resale Items removed from inventory for business or personal use are subject to 6% use tax 91

92 Calculating Sales and Use Taxes Tax Added vs. Tax Included Tax Added Separately stated in tax line or box Amount stated must be remitted o Unjust Enrichment Tax Included Must be notated on invoices o Mention in contract not enough Multiply invoice x.943 ( ) or, beginning 7/1/11,

93 Shipping & Delivery Charges Treated as part of gross receipts Taxable if part of taxable sale Nontaxable if part of nontaxable sale U.S. postage is treated the same as any other charge Rule regarding title transfer has been gone for more than 15 years Freight and shipping is not a taxable service However, effective 7/1/11, packing and crating ARE taxable services 93

94 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 94

95 Reimbursable Expenses (cont d) Example: A business management consultant renders its taxable services to a company located in Connecticut and presents the following bill: Management consulting services $10,000 Travel 1,000 Meals 300 Lodging 900 Total $12,200 The entire bill of $12,200 is subject to the 6% sales tax. 95

96 When to Report a Sale Accrual basis general rule Cash basis exception for sellers of services under CGS Sec (a)(37) filing Federal income tax returns on cash basis. Bad debt Policy Statement PS-2001(1) Daimler Chrysler Case 96

97 Sales and Use Tax Returns Late Filed Returns Penalty is $50 or 15% of the tax due whichever is greater Interest is 1% per month Amended Sales and Use Tax Return Check amended box and write amended on the return Proof of refund to the customer Attach back up documentation Written explanation File within 3 years of the original due date 97

98 Managed Audit IP 2004(11) Variation of traditional field audit Eligibility is at discretion of DRS Taxpayer does more of a self audit than normal Benefits first $10,000 of interest plus 10% of excess over $10,000 is waived 98

99 Voluntary Disclosure Agreements ( VDAs ) IP 2010(18) Open to taxpayers who haven t been in compliance Unless already under audit or if taxpayer has an outstanding tax bill with DRS Apply anonymously using accountant or attorney Application must be in writing After agreement reached, taxpayer identity is revealed Benefits to taxpayer Penalties waived Filing with limited look back period 99

100 Voluntary Disclosure Agreements (cont d) Compare to Amnesty Amnesty has to be enacted by legislation, usually available during a limited time frame. Voluntary disclosure is available everyday of the year/every year. Same penalty abatement Amnesty often provides for reduced interest Amnesty generally does not limit filing periods Choose VDA if there are many years of non-compliance 100

101 Preparing for an Audit Availability of Records Meeting with Examiner Filling out forms Audit Letter of Understanding Your Rights as a Taxpayer Waiver, POA, Test Periods Request a TAM Extrapolation 101

102 Preparing for an Audit (cont d) Work papers Strategy Lines of Defense, Meetings and Informal Process Appellate Process 102

103 For Further Information Douglas A. Joseph BlumShapiro 29 South Main Street, PO Box West Hartford, CT Phone: Fax:

104 For Further Information Felicia S. Hoeniger Robinson & Cole LLP 280 Trumbull Street Hartford, CT Phone: Fax: