Survey of 1989 Connecticut Tax Developments
| Jurisdiction | Connecticut,United States |
| Publication year | 2021 |
| Citation | Vol. 64 Pg. 11 |
| Pages | 11 |
64 CBJ 11. Survey of 1989 Connecticut Tax Developments
The Connecticut tax scene in 1989 was overshadowed by fiscal storm clouds and the challenge to the General Assembly to close the projected budget shortfall for both the 1989 and 1990 fiscal years. The principal tax legislation occurred in two stages: first, a "Mini-Tax" package (fn1) adopted in March to address 1989 needs and, second, the "Omnibus" tax act (fn2) adopted at the end of the session. The second enactment was designed to raise almost one billion dollars in revenue for the 1990 fiscal year.
This article will review the principal Connecticut tax legislation passed in 1989 and significant administrative developments. It will also survey the more important court decisions and pending litigation involving Connecticut state level taxes.
A. Sales and Use Taxes
The Mini-Tax package made no changes in the sales and use taxes, although an earlier proposal for a broad-based business-to-business service tax was considered by the legislative leadership and rejected prior to adoption of the package. With the exception of technical legislative changes, (fn3) the only sales and use tax changes of note were adopted at the end of the legislative session as part of the Omnibus Act. When the Governor approved the Omnibus Act, on May 31, the rate of tax under the sales and use taxes rose to eight percent, (fn4) the highest state-level tax in the nation. For practitioners, however, the real impact of this legislation lies in the expansion of the tax base to almost twenty new service activities. The Act also raised revenue by eliminating certain exemptions from the tax, and added a provision requiring out-of-state mail order firms to collect the use tax from Connecticut residents.
Most of the new service tax categories involve services rendered to property, all of which were effective on July 1, 1989:
- Architectural, building engineering, and building planning or design services. (fn5)
- Land surveying.
- Motor vehicle parking (fn6) and car washing.
- Radio and television repair.
- Motor vehicle repairs for a person engaged in a trade or business.
- Furniture reupholstering and repair.
- Repair of electrical or electronic devices including refrigeration and air-conditioning equipment.
- Locksmith services.
- Landscaping and horticultural services.
- Window cleaning.
- Exterminating services.
- Maintenance services.
- janitorial services.
- Swimming pool cleaning and maintenance services.
- Repair or maintenance services with respect to any item of tangible personal property except motor vehicles. (fn7)
Perhaps the most important change affecting real property services was the removal of maintenance, janitorial, landscaping and exterminating services from the category of taxable services rendered to industrial, commercial or income-producing property. Instead, these services and several other new property services are taxable without regard to whether they are rendered to income-producing property. As amended, the tax upon services to industrial, commercial and income-producing real property includes, but is not limited to "such services as management, electrical, plumbing, painting and carpentry." (fn8)
With "maintenance services" transferred to a discrete subsection of the statutes, (fn9) it might appear that maintenance of any kind of property is now taxable. Nevertheless, it is clear from the structure of the amendments and the references to maintenance of specific kinds of personal property in other subsections, that it is only the maintenance of real property, which was intended to be taxed under the general statutory category of maintenance. (fn10) Adopting this interpretation, the Department of Revenue Services (hereinafter the "Department") has defined maintenance to mean scheduled periodic work on buildings, structures and grounds, including "house-washing, chimney sweeping, carpet cleaning, snow removal, awning service and driveway sealing." (fn11)
While the category "maintenance services" refers only to the maintenance of real property, the Omnibus Act also taxes "repair or maintenance services with respect to any item of tangible personal property except motor vehicles," (fn12) and repairs to motor vehicles used in a trade or business. (fn13) The Department has issued a Special Notice addressing the general category of repair and maintenance services. (fn14) The notice indicates that a transaction can involve both a service component and a separate sale of tangible personal property such as repair parts, thus contemplating that such property can be purchased by the service provider without tax on a resale basis. (fn15) Property sales are sourced under the notice within or without Connecticut depending upon where the repaired property is delivered. Sourcing of services for tax purposes, however, is dependent upon where the repaired property is used.
Another Special Notice issued by the Department addresses the distinction between contracts for the maintenance or repair of personal property and contracts, which are in essence a warranty on goods sold. Maintenance or repair contracts are taxable, while the notice indicates that warranty contracts that provide for repair services only in the event of a future malfunctioning of property are deemed nontaxable. (fn16) Although similar distinctions and sourcing rules apply in the case of repair services to business vehicles, the application of the statute in that respect is complicated by its reference only to repairs and not maintenance, its application only to business vehicles and, of course, the mobility of vehicles themselves. (fn17)
It is apparent from the distinctions drawn in the statute and those evident in the Department's interpretive releases that these and the other categories of service to property will prove difficult both in terms of administration and compliance. Moreover, the extension of tax to certain services to non-income producing property will require the Department to attempt enforcement of the tax against many small providers of personal services, rather than concentrating on the high-dollar-volume sales and use tax audits of large commercial contractors, property managers and business property owners.
Another major change eliminated the prior exclusion from tax for services to real property in connection with "renovations when capitalized for federal income tax purposes." (fn18) This has the effect of taxing any renovation of income-producing property, but leaving new construction untaxed. In a Special Notice issued in June, the Department, consistent with its prior posture, reiterated that services involved in the construction of new buildings or structures or additions to existing buildings remain nontaxable. (fn19) This position derives not from any specific statutory exemption for new construction, but from the fact that what is new has not yet begun to produce income and thus the services rendered to it are not rendered to income-producing property. Left unresolved at this writing is the point of demarcation between nontaxable new construction and renovation of an existing structure which has not recently been used for income-producing activity, e.g., renovation of a long-vacant building. (fn20)
In addition to amending the taxable services to real and personal property, the Omnibus Act made several other changes to the tax on services. The following new categories of taxable services were added, generally effective July 1, 1989 except where noted:
- Health and athletic club services except dues subject to the admissions, dues and cabaret tax. (fn21)
- Lobbying or consulting services for purposes of representing a client in relation to the functions of any governmental entity or instrumentality.
- Services of an agent in relation to the sale of tangible personal property. (fn22)
- Advertising or public relations services, except to the extent directed toward media advertising.
- Telecommunications and community antenna television services (effective January 1, 1990).
In addition, the former category of business analysis and management services was expanded to include public relations and consulting.
The new tax on advertising services represents a substantial step in bringing to conclusion the Department's effort over several years to develop comprehensive rules for this industry. (fn23) Previously, the Department took the position that an advertising agency's activities were primarily directed toward the production of tangible personal property: the camera-ready mechanicals, printed material, tapes, and so forth, normally provided an agency's clients. This position made for fine distinctions between the property aspect of an agency's business and the provision of consulting and marketing services. The new legislation, however, firmly characterizes advertising as a service and it taxes only those efforts, which are not directed toward producing advertisements for the media. Left un-addressed by the legislation is the scope of the media exception and the extent to which it involves such things as billboards, direct mail or other means of disseminating an advertising message.
In some instances, the most difficult task facing the Department may well be in defining what a service tax category does not include. For example, the addition of consulting to business analysis and management services raises the questions of how this tax category differs from its pre-July 1, 1989 form, whether consulting was taxable under any theory prior to that date, and whether the tax category as it now stands is itself tantamount to the broad business-to-business service tax considered...
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