Survey of 1992 Connecticut Tax Developments

• Pages: 25
• Publication year: 2021

Connecticut Bar Journal Volume 67.

67 CBJ 25. SURVEY OF 1992 CONNECTICUT TAX DEVELOPMENTS

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SURVEY OF 1992 CONNECTICUT TAX DEVELOPMENTS

By JOHN R. SHAUGHNESSY, JR. AND RICHARD W. TOMEO(fn*)

In contrast to 1991, the year 1992 did not produce tax law changes as significant as the 1991 tax on individual income, and efforts by advocates of a more graduated income tax were deferred for the 1993 legislative session. The new income tax remains substantially as enacted in 1991 and has now been implemented in more detail through publication of comprehensive Temporary Rules by the Department of Revenue Services ("DRS").(fn1) Although fiscal pressures continued in 1992, the General Assembly generally held the line against tax increases and adopted several measures designed to provide targeted tax incentives to business.

Few tax cases were advanced toward resolution in the Superior Court due to the press of non-tax litigation in the Hartford-New Britain Judicial District. Although the Connecticut Supreme Court decided three tax cases of broad interest, Connecticut taxpayers and the DRS will be affected more by several recent state tax decisions of the United States Supreme Court.

This article will review the more significant legislative, judicial and administrative developments involving Connecticut state level taxes and will note some of the more significant issues awaiting decision in the Connecticut courts.

I. LEGISLATIVE DEVELOPMENTS

A. Sales and Use Taxes

1. Modifications of the tax base.

The 1992 legislation affecting the sales and use taxes resulted in both contractions and expansions of the tax base. Removed from the definitions of "sale", effective for sales on or after July 1, 1992, were land surveying services, charges for amusement and recreation services where those charges are already subject to the admissions, dues and cabaret tax, dance lessons, services provided by a licensed massage therapist, and the service of motor vehicle parking in a lot operated by an employer for the

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exclusive use of its employees, as long as the employer either owns the lot or leases it for a period of ten or more years.(fn2) Also, excluded from the definition of taxable passenger transportation services were those provided in vehicles designed to transport sixteen or more passengers, or ten or more passengers when used to carry children to and from school.(fn3) However, the definition of providers of taxable transportation services was expanded to include those who are required to have a certificate of authorization from the Interstate Commerce Commission(fn4) and not merely authorization from the Connecticut Department of Transportation. This change adds to the tax base services provided by interstate transportation companies picking up or delivering passengers in Connecticut. For sales made on or after July 1, 1993, rental of space in a campground is included in the definition of room occupancy.(fn5)

When adding amusement and recreation services to the tax base in 1991,

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the General Assembly excluded from the tax sales made by the State of Connecticut, Connecticut municipalities, nonprofit charitable hospitals and charitable and religious organizations. Sales of amusement and recreation services by these entities remain nontaxable unless the service provided entitles a person to participate in a sporting activity.(fn6) Effective July 1, 1992, this general rule applies to all such services except swimming, golfing fees at municipal courses and athletic and sporting activities organized exclusively for patrons under the age of nineteen.(fn7) On July 1, 1993, the exception for swimming and municipal golf courses will no longer apply and only the under-nineteen exclusion will be in effect.(fn8) In Special Notice SN 92(22), October 30, 1992, the DRS provided an explanation of the limitation on the exclusion. This includes drawing a distinction between general membership fees subject to the 10% tax on dues and charges for participation in an activity subject to the 6% sales tax. Only the latter is taxable when provided by an exempt organization.

The General Assembly in 1991 amended the definitions of gross receipts and sales price to exclude from the tax base 95% of separately stated compensation costs billed by property or business managers for services provided by employees who worked solely on site.(fn9) The 1992 legislation increased the exclusion to 100% of such costs and removed the proviso which limited the exclusion to the compensation of employees performing repair, maintenance and other routine services to the managed property.(fn10) This revision is effective retroactive to January 1, 1986.(fn11) Otherwise, the General Assembly confirmed that taxable gross receipts and sales price includes all costs incurred by the service provider, whether or not separately stated.(fn12) This was a response to the Connecticut Supreme Court decision in Air Kaman, Inc. v. Groppo,(fn13) which held in part that a business manager's separately stated expenses were not gross receipts subject to the tax.

The General Assembly also modified the scope of the use tax in response to the Connecticut Supreme Court's decision in Morton Buildings, Inc. v. Bannon.(fn14) In that case, the court held that raw materials purchased and fabricated into building components outside of Connecticut had undergone a manufacturing process and thus were sufficiently transformed that they were not subject to the use tax when brought into Connecticut and incorporated into a building by the fabricator. The legislative response was to expand the scope of the use tax to include tangible personal property which has been manufactured, fabricated, assembled or processed from materials by a person either within or outside the state of Connecticut, where that property is subsequently used by that person in Connecticut.(fn15) The measure of the tax is apparently the purchase price of the raw materials, though this is not clearly indicated.(fn16)

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2. Exemptions.

Several new exemptions were enacted effective July 1, 1992:

Special equipment installed in a motor vehicle for the exclusive use of a person with physical disabilities;(fn17)

Returnable dairy containers when sold to persons who fill the containers and sell them together with contents;(fn18)

Aviation fuels used exclusively for aviation purposes;(fn19)

Bunker fuel oil, intermediate fuel, marine diesel oil and marine gas oil for use in any vessel having a displacement exceeding 4,000 deadweight tons.(fn20)

Effective for sales occurring on or after July 1, 1993, there is a new exemption for computer and data processing services provided by a retailer which, on or after July 1, 1991, acquired the operations of a data processing facility from the person who is the recipient of the services, if the service recipient previously operated the facility for its own use.(fn21) Three new exemptions, also effective for sales made on or after July 1, 1993, create a broader exemption for aircraft manufacturers and overhaulers than for other manufacturers:

Repair and replacement parts used exclusively in aircraft owned or leased by a certificated air carrier or in the significant overhauling or rebuilding on a factory basis of aircraft or aircraft parts or components;(fn22)

Aircraft repair services rendered in connection with aircraft owned or leased by a certificated air carrier or with the significant overhauling or rebuilding on a factory basis of aircraft or aircraft parts or components;(fn23)

Materials, tools, fuel, machinery and equipment used by an aircraft manufacturer operating an aircraft manufacturing facility in Connecticut.(fn24)

For purposes of this last exemption, an "aircraft manufacturing facility" is defined to include not only that portion of a plant where aircraft or aircraft parts or components are manufactured

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but also any portion which is used for the significant overhauling or rebuilding of aircraft or aircraft parts or components. In addition, exempt machinery and equipment includes tangible personal property installed in such a facility when its predominant use is for the manufacturing or significant overhauling on a factory basis of aircraft or aircraft parts or components. There is no specific requirement as in the general manufacturing exemption(fn25) that such equipment be used directly in a manufacturing production process. It should also be noted that, under the aircraft manufacturer's exemption, repair or replacement parts are exempt while, for other manufacturers, these are simply taxed at a reduced rate.(fn26)

The General Assembly also extended to publishers the sales and use tax exemption enacted in 1991 for machinery, equipment, tools, materials and supplies used by commercial printers exclusively in the production of printed material.(fn27) It also extended through December 31, 1993 the exemptions for purchases of new motor vehicles powered by natural gas and the cost of equipment used to convert vehicles to natural gas power or used for the delivery of compressed natural gas at a filling station.(fn28) The exemption was expanded to include the purchase of a new electric-powered motor vehicle.(fn29)

3. The Manufacturing Recovery Act.

The Manufacturing Recovery Act was a major legislative initiative affecting the application to manufacturers of property, sales and corporate taxes. As to the sales and use tax, this legislation does not create any new exemptions, but reduces the effective rate of tax on certain favored kinds of property. This reduction is phased in in 0.6 percentage point increments beginning on January 1, 1993, concluding with an effective rate

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of 3% on sales and purchases made July 1, 1996 and thereafter.(fn30) This reduction applies to materials, tools and fuels which...