Connecticut Bar Journal
65 CBJ 399.
NEW SALES TAX ON TAX PREPERATION SERVICES
399NEW SALES TAX ON TAX PREPERATION SERVICESBy FRANK S. BERALL(fn*) Connecticut's 6% sales tax was extended to "tax preparation services" performed after September 30, 1991.(fn1) The tax is due at the end of the month following each monthly period after payment is received, provided the tax preparer is on the cash basis for federal income tax purposes(fn2) Quarterly filing is permissible if 11 total tax liability for the year ending on the preceding September 30 was less than $4,000.(fn3) Thus, at least until after October 31, 1991, only quarterly returns must be filed.
The tax must be collected from the client,(fn4) and a sales tax return must "show the gross receipts of the seller during the preceding reporting period . . ., the amount of the taxes for the period covered by the return ... and such other information as the Commissioner deems necessary . . . . "(fn5) Gross receipts are "the total amount ... received for any service . . ."(fn6)
Tax Preparation Service Provider
Department of Revenue Services (hereafter "D.R.S.") Special Notice (SN) 91(17), Sales and Use Taxes on Tax Preparation Services (hereafter "Notice"),(fn7) defines a tax preparation service provider as any person performing paid tax preparation services in or out of Connecticut.(fn8)
Tax Returns And Taxes to Which The Tax Applies
The statute does not restrict the sales and use tax to preparation of a particular tax form, nor does it describe adequately the preparation of which returns are taxed. Instead, the Notice expressly exempts "declarations of estimated tax, [exempt organization] forms in the 990 series; payroll taxes, and any tax or informational returns other than those described above."
Those "described above" are "Federal or Connecticut [ones] including ... extension [requests], tentative and amended returns (and any schedules, attachments or addenda thereto), plus [Connecticut and Federal partnership and corporate returns]. . (fn9)Although this broad interpretation may be arguably justified by the statutory language, it seems contrary to legislative intent.
In the author's opinion, the General Assembly's intent as to the scope of the tax was much narrower than the D.R.S. interpretation. It was limited to income tax preparation.
According to Rep. Leslie T. Young, Republican Minority Leader of the Joint Senate-House Finance Committee: There is no question in my mind that the legislature intended mthmig beyond taxing the preparation of income tax returns or individuals. The intended tax was aimed only at personal tax return preparation services normally provided by accounting firms and by businesses similar to H & R Block.(fn10) Finance Committee Co-Chairman, Rep. Richard Mulready, said: When we discussed with Committee members and a variety of other legislators and advisors the scope of the tax bill, it was clear that the tax was intended only for individual income tax return preparers. We did not even consider estate and trust tax returns.(fn11)
Similar oral statements have been made from time to time by other Finance Committee members. Furthermore, section 16(S) of a Technical Corrections Bill(fn12) would have amended section 12407(2)(i)(GG)(fn13)to clarify that the returns subject to the tax on tax preparation services meant only income tax returns.
The Meaning of "Tax Return Preparation Services"
The D.R.S.'s position
The Notice, going far beyond legislative intent, in the opinion of the author, will create serious allocation problems for tax preparers who do work besides return preparation for the same client, particularly those administering estates. It includes as taxable: (a) preparation of all or a substantial portion of a tax return or (b) furnishing sufficient advice so that preparation is mostly clerical or (c) advice with respect to a significant entry on a return or (d) reviewing all or a substantial part of an already prepared return prior to its filing.(fn14)
The tests, of whether a substantial portion of a return is being prepared or whether the information or advice is directly relevant to the former, are incorporated by reference from the I.R.S.'s tax return preparer regulations.(fn15)
Tax preparation services done prior to the end of the taxable year of the return or before death are exempt.(fn16) Besides exclusion of these, as well as tax advice, research and premortem estate and tax planning, neither advice and preparation of documents for the probate court (except succession tax returns), nor tax audits and litigation are taxable services.(fn17)
There is no question that entering data on a tax return which itself is subject to the tax is a taxable transaction.(fn18) However, the D.R.S. applies the tax to services other than mere calculation of tax liability, going far beyond legislative intent.
Fortunately, it will not tax the furnishing of tax advice, either as part of other general legal advice in connection with a given transaction, or exclusively on tax matters,(fn19) nor the preparation of probate inventories and accounts.(fn20) However, serious allocation problems may arise when a tax preparer is entering data on a computer for use not only to prepare probate documents, but also the federal and Connecticut death and income tax returns.
Client conferences and questions about tax preparation, compiling and entering data on returns, reviewing the latter and related charges are all taxable.(fn21) It can be argued that compiling and entering data is nontaxable bookkeeping done before a return can even be started. While assembling and sorting a client's records appears nontaxable, to the extent this work is reasonably attributable to tax return preparation it will be taxed.(fn22) Thus, another allocation problem arises. Also, tax is imposed on legal research to figure out how to prepare various portions of the return.(fn23)
Furthermore, furnishing legal advice to enable a client to prepare his or her tax return or to give guidance to a tax return preparer in a lawyer's or accountant's office and the review of a return which has already been prepared is taxable.(fn24) Again, in the author's opinion, not only is this D.R.S. position contrary to legislative intent, but it, too, will create allocation problems. When conferring with the client about his or her tax return and other legal matters, a division of the time must be made, with part of the conference taxable.
The review of a return after it has been filed, such as while preparing for an audit by the I.R.S. or the D.R.S., is not tax preparation(fn25) because the return in question has already been prepared and filed. The D.R.S. also considers correspondence and representation of a client during an audit and any subsequent tax litigation not to be tax preparation services.(fn26)
While disbursements for travel, meals and lodging are taxable,(fn27) notwithstanding the D.R.S. position that charges for reproduction and mailing are also taxable,(fn28) postage and duplicating costs should be exempt because they are not services. Phone, fax and similar charges are not specified as taxable and thus should not be taxed.
Broad Interpretations of Sales Tax Audits of Tax Preparers Can Cause Ethical...