Survey of 1990 Connecticut Tax Developments
| Pages | 10 |
| Publication year | 2021 |
65 CBJ 10. SURVEY OF 1990 CONNECTICUT TAX DEVELOPMENTS
Connecticut's fiscal difficulties provided a backdrop to legislative activities and the work of the Department of Revenue Services in 1990. In part because of the impending gubernatorial election, however, the 1990 session of the General Assembly did not produce significant tax legislation comparable to the service tax changes adopted in 1989, though there were several technical changes of interest. Administratively, the Department of Revenue Services launched the state's first tax amnesty program, garnering more than $50 million in collected taxes. There were also changes at the top of the Department during the course of the year, with James F. Meehan replacing Timothy F. Bannon as Commissioner in January after Bannon moved to the Governor's office, and following Meehan's resignation after the November election with Edward J. Bajorski appointed to serve as Acting Commissioner.
This article will review the principal 1990 Connecticut tax legislative and administrative developments. It will also survey the more important court decisions and pending litigation involving Connecticut state-level taxes.
A. Sales and Use Taxes
1. Legislative Activity. As in prior years, there were more new developments involving the sales tax than any other tax. The General Assembly persisted in its campaign to require out-of-state mail order sellers to collect the Connecticut use tax on sales made into the state. The definition of retailer was amended to include those making sales from outside Connecticut who are owned and controlled directly or indirectly either by a retailer engaged in Connecticut in the same or a similar line of business as the out-of-state seller or by the same interests owning or controlling such a Connecticut retailer.(fn1) The constitutional issues involved in this attributional nexus approach are explored later in this article in connection with the SFA Folio Collections case, which involves an attempt by the Department of Revenue Services (hereinafter
the "Department") to use the concept of attributional nexus prior to the effective date of the 1990 statute.(fn2)
An open question in the service tax area has been the extent to which, if at all, otherwise taxable services can be purchased for resale. Since the sales tax has its origin in the concept of a single tax imposed on the sale of tangible personal property to the ultimate consumer, the absence of an express resale exception applicable to services presents the potential for multiple taxation of the same service, referred to as tax pyramiding. Conversely, too liberal a pass-through policy for services could erode the tax base. Effective July 1, 1990, the General Assembly has made the resale exception available with respect to a taxable service which is an integral, inseparable component part of another taxable service which the purchaser will resell to an ultimate consumer.(fn3) The statute requires that the purchaser of the service for resale separately state on the invoice to the ultimate consumer both the service being resold and its cost. It should be noted that the statute applies only to purchases for resale made on or after July 1, 1990.(fn4) Left unresolved is the question whether services purchased before that date for purposes of resale are nontaxable because of the general limitation of the tax to retail transactions.
Despite the fiscal pressures there were two new exemptions enacted and a third modified to assist taxpayers. One exemption applies to equipment for climate and air quality control when used directly in the production and cleaning of computer discs.(fn5) An exemption was also provided to metal casting foundries for their purchases and sales of molds, dies, patterns and sand handling equipment and to pattern shops for their sales and purchases or use of molds, dies or patterns in connection with sales made either to metal casting foundries or to their customers for use in foundries of molds, dies and patterns.(fn6) The broadcasting production exemption was also amended to include materials which become
an ingredient or component part, or equipment used directly in the production, of finished programs for accredited medical or surgical training.(fn7)
The General Assembly also raised from $5.00 to $20.00 the limit on the cost of items sold by nonprofit and youth groups in exempt fund-raising efforts(fn8) This change has had the effect of defusing the issue whether sales by wholesalers to such groups for fundraising will be recognized as sales for resale.(fn9) Another change grants cash basis taxpayers a right previously available only to those on the accrual method to deduct from gross receipts the amount of un-collectible debts arising from taxable sales made on or after July 1,1989.(fn10)
Along with these changes, the General Assembly enacted two new exceptions to the sales and use tax. The first of these reverses slightly the expansion of taxable services in 1989 to include the services of an agent in the sale of tangible personal property by excluding therefrom the services of a consignee selling works of art or articles of clothing which are themselves exempt from tax.(fn11) This change permits at least some casual sales to be made through a consignee free of tax. The other legislation creates an exception to the tax on room occupancy. The definition of lodging house in section 12-407(17) of the statutes was amended to exclude facilities operated in the name of a nonprofit charitable organization if the income from accommodations at the facility is exempt from federal tax.(fn12)
"Business analysis and management services" have been taxable since 1975 and in 1989 the General Assembly added the term 11 consulting" to this tax category.(fn13) Because of uncertainty regarding the scope of the latter change, this service tax category was amended again in 1990 to modify "consulting" with the term 44 management," making the tax applicable to "business analysis, management and management consulting services.(fn14)
The Department has indicated that the change has a limiting effect and that, as a result, management consulting services such as investment banking are not subject to tax.(fn15)
Aside from the new attributional. nexus statute, the only revenue-raising action under the sales and use tax was to raise the interest rate on unpaid tax to 20 percent per year and to increase each of the 10 percent penalties to 15 percent.(fn16) This change, however, simply brings the interest and penalty provisions for this tax into parity with the other principal taxes.
2. The Proposed Regulations. In 1989, the Department began an ambitious effort to improve and update its regulations. This regulations project has resulted in the formal proposal of three regulations for which the approval process began November 6, 1990, with publication for public comment. The three areas addressed are the manufacturing exemptions,(fn17) services to real property,(fn18) and the category of business analysis, management, management consulting and public relations services.(fn19) If the proposals are adopted, it is expected that the Department will, in general, apply these regulations only prospectively. This raises the issue whether a regulation which is presumed to be an accurate interpretation of a pre-existing statute can be treated as not applying from the effective date of the statute.
Two proposed regulations would address the exemptions for production materials and machinery used in a manufacturing production process.(fn20) These proposed regulations treat the "ingredient or component part" language of section 12-412(18) of the statutes as being more appropriate to the resale exception than to the manufacturing exemption. They focus instead on providing precise definitions of the terms necessary for application of the exemptions themselves. The most significant features of the proposals are the first comprehensive definition of fabrication and an expanded definition of manufacturing. Fabrication is generally
defined as an operation or integrated series of operations which alter or modify a manufactured product or raw materials without necessarily producing, the change in identity required to qualify as manufacturing.(fn21) The definition of manufacturing-whether there has been a transformation of the form, composition or character of materials into a new product-is approached through guidelines which focus on the results of the process.(fn22) Thus, a process resulting in a chemical change in raw materials is more likely to be treated as manufacturing than one resulting in physical change, and production of standardized items in multiple quantities is more likely to be considered manufacturing than the production of individually unique items.
Under the manufacturing exemptions proposals, machinery would qualify for the exemption when used exclusively to control or monitor a production activity, to design a product or to control or monitor such an activity if it is directly linked to machinery satisfying the direct effect standard.(fn23) This may constitute a step back by the Department from its victory in Plastic Tooling Aids,(fn24) and CAD/CAM equipment would now apparently qualify for exemption if hard-wired or otherwise directly connected to a machine used directly in the production process.
The proposed regulations addressing services to industrial, commercial and income-producing property were necessitated by the major changes wrought by the 1989 legislation.(fn25) The most significant of these changes was the deletion of capitalized renovation projects...
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