Survey of 1991 Connecticut Tax Developments
| Pages | 10 |
| Publication year | 2021 |
66 CBJ 10. Survey of 1991 Connecticut Tax Developments
After the most contentious legislative debate in recent memory, and on the heels of Governor Weicker's veto of two earlier budget bills, on August 22, 1991 the General Assembly passed and the Governor signed Public Act 91-3 of the June Special Session (hereinafter referred to as the "Appropriations Act") (fn1) representing the State's budget for the 1991-92 fiscal year. The legislation had as its centerpiece the State's first broad-based tax on the income of individuals since the shortlived income tax adopted in 1971. Efforts to repeal the income tax in the November Special Session failed to gain a veto-proof majority. The tax is effective for all of 1991 at a reduced rate and will apply at 4.5% of adjusted gross income beginning in 1992. The capital gains, dividends and interest tax is applied at reduced rates for 1991 and repealed for 1992 and thereafter. The Appropriations Act also made significant changes to the sales and use taxes and the corporation business tax and enacted a new gift tax.
The October 1991 issue of the Connecticut Bar Journal was devoted completely to a symposium on the new tax law, covering in detail the new income tax on individuals, trusts and estates as well as the gift tax and the new sales tax on tax preparation services. (fn2) Given that coverage, readers should resort to the October symposium for treatment of the tax legislative changes applicable to individuals and this survey will be confined to legislative changes to the state business taxes and to litigation and administrative developments affecting state taxes.
A. Sales and Use Taxes
For the general public, the most important feature of the Appropriations Act affecting the sales and use tax was the general
reduction of the tax rate to 6%, effective October 1, 199V A corresponding reduction was not made to the 5.5% tax on repair and replacement parts for manufacturing machinery. (fn4) The Act also raised to 12% the rate of tax on the occupancy of a room in a hotel or lodging house, (fn5) a rate differential which has introduced uncertainty in the rate of tax to be applied to various goods and services provided by hotels to their guests which might be subject to the 6% tax rate. The Department of Revenue Services' ("DRS") Legal Division is in the process of addressing the issues this presents. In a further change effective September 19, 1991, the rate of tax for sales of boats to nonresidents was changed to the lesser of 6% or the rate in effect in the purchaser's state of residence, provided that the boat is registered in that state within ten days of the sale and the retailer obtains the required documentation. (fn6)
Along with the changes in tax rates there was an expansion of the tax base by the inclusion of services not previously taxed and by the elimination or modification of certain exemptions applicable to property sales. The following service categories were added to the tax base by section 103 of the Act:
* Renovation and repair services to existing nonbusiness real property in the nature of paving, painting, staining, wallpapering, roofing, siding and exterior sheet metal work.
* Tax preparation services. (fn7)
* Area code 900 and international phone calls. (fn8)
* Photographic studio services.
* Rental of space for the storage or mooring of noncommercial vessels. (fn9)
* Warranty contracts for any item of tangible personal property
* Passenger transportation service, excluding those provided on a regular, scheduled route and taxi service. (fn10)
* Amusement, recreation and entertainment services included in Standard Industrial Classification ("SIC") Industry Group 79, excluding services provided by governmental entities, non-profit charitable hospitals and the non-profit charitable, religious or educational organizations that hold a DRS exemption permit. (fn11)
* Miscellaneous personal services included in SIC Major Group 729. (fn12)
* Repair and maintenance services to motor vehicles for personal use. (fn13)
* Motor vehicle parking services in a lot or garage having 30 or more spaces, except metered space and space in a seasonal parking lot provided by a governmental or nonprofit agency exempt from paying sales tax. (fn14)
* Cooperative direct mail advertising, except for media advertising subject to
the sales and use tax.
* The provision of outdoor advertising space.
It should be noted that transportation services, outdoor advertising space, and vessel mooring, are not included within the services listed in subdivision (2)(i) of section 12-407 of the Statutes. Because the statutory provision for the nontaxable sale of services for resale is limited to subdivision (i) services, the DRS will likely take the position that transportation, outdoor advertising and mooring services cannot be acquired for resale. (fn15)
The sales and use tax exemptions eliminated by the Appropriations Act included the sale of livestock, rabbits, and poultry, feed for livestock, seeds, and tree seedlings, fertilizer, vegetable plants, berry bushes and fruit trees and horses. (fn16) Purchases by farmers remain exempt under the broader exemption applicable to agricultural production. (fn17) Also eliminated were the exemptions for cogeneration and renewable energy systems, (fn18) ambulances and ambulance-type motor vehicles (fn19) and newspapers sold other than by subscription. (fn20) Subscription sales of newspapers and magazines remain exempt. (fn21) The exemption for materials or equipment used in the production of radio and television programming and that utilized for purposes of accredited medical or surgical training has been limited to the purchase of filmed or taped television or radio programs and materials which become an ingredient or component part of films or tapes which are used directly in the production and transmission of programs for purposes of accredited medical or surgical training. (fn22) Finally, the clothing exemption, previously applicable to items selling for under $75, now applies to each item of clothing or footwear that sells for under $50, (fn23) and the general exemption for clothing and footwear for children under age 10 has been repealed. (fn24)
The Appropriations Act also worked to contract the tax base by repealing several formerly taxable service categories and adding several new exemptions to sales of property. Section 103 repealed the following service tax categories:
* Architectural, building engineering and building planning or design services, interior design and decorating services.
* Services provided by a licensed landscape architect. (fn25)
* Advertising services related to the development of cooperative direct mail advertising.
* Coin operated car washing services.
Reflecting concern voiced by hotel and property management businesses, the Act amended the definitions of "gross receipts" and "sales price" to exclude 95% of the reimbursement paid to property managers for the payroll costs of employees working exclusively at a property site. (fn26)
The new exemptions for property sales include several aimed directly at manufacturing activities. Component parts of manufacturing production machinery are now exempt, although, as noted above, repair and replacement parts remain taxable at the 5.5% rate. (fn27) Machinery, equipment, tools, materials and supplies used exclusively in the production of printed material by a commercial printer were also exempted. (fn28) In like manner, businesses other than printers involved in pre-press functions were accorded a similar exemption for machinery, equipment, tools, materials and supplies used exclusively in the production of typesetting, color separation, finished copy or similar content mounted for pbotomechanical reproduction. (fn29)
Codifying a practice previously followed by the DRS, (fn30) the Act exempts commercial trucks, truck tractors, tractors and semitrailers, and vehicles used in combination therewith, if they have a gross vehicle weight rating in excess of 26,000 pounds, or they are operated actively and exclusively for the carriage of interstate freight pursuant to an ICC certificate or permit. (fn31)
Three new exemptions of limited duration are related to use of natural gas for automotive power. The first exempts sales of new motor vehicles,
purchased on or before December 31, 1992, powered exclusively by natural gas. (fn32) Conversion equipment incorporated into or used in converting vehicles to be powered either exclusively or partially by natural gas is also exempt if purchased on or before December 31,1992. (fn33) Finally, equipment purchased on or before December 31, 1992 for incorporation into or use in a compressed natural gas filling station for vehicles powered by natural gas is also now exempt. (fn34)
The Appropriations Act included several changes aimed at improving the administration of the sales tax. Among these is a provision permitting the Department of Motor Vehicles to use a "blue book" price in determining the tax on motor vehicles purchased from other than a licensed dealer. (fn35) Another, directed to retailers of services who are cash basis taxpayers for federal income tax purposes, permits them to account for their Connecticut sales tax liability on a cash basis. (fn36) Reflecting the general approach taken by DRS examiners, the Act provides that resale certificates will be deemed to have been given in good faith if the tangible personal property sold is similar to or of the same general character as property that a retailer reasonably could assume would be sold by the purchaser in...
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