Robinson+Cole Boston | Hartford | New York | Providence | Stamford Albany | Los Angeles | New London | Sarasota Felicia S. Hoeniger Robinson & Cole LLP 280 Trumbull Street Hartford, CT 06103 Direct 860-275-8309 | Fax 860-275-8299 [email protected] | www.rc.com Connecticut Sales and Use Tax Exemptions and Credits JUNE 17, 2014 Overview • Is the transaction subject to tax? • If the transaction is taxable, is it taxable at a lower rate? • If the transaction is taxable, does the law provide for an adjustment to the tax base? • Is there an exemption? • Special rules for tax exempt entities. • Is there any such thing as a sales tax credit? Background • Imposition of Sales Tax and Use Tax • Most important statutes: • Sales Tax – C.G.S. § 12-408 • Use Tax – C.G.S. § 12-411 • Definitions – C.G.S. § 12-407 • Exemptions – C.G.S. § 12-412 Is The Transaction Subject to Tax? • Definition – At retail • Is the sale “at retail”? • Sales for Resale • Sale is not at retail because the purchaser is not the ultimate consumer • If purchased on resale, item is taxable when • sold at retail (sales tax applies) or • withdrawn from inventory • Occasional or Casual Sales • Sale is not at retail because the seller doesn’t normally sell the items being sold • Special rules for motor vehicles and vessels Is The Transaction Subject To Tax? • Tax Presumptions • Sales of tangible personal property are taxable unless specifically excluded or specifically exempt. • Sales of services are exempt, unless specifically taxed. Is The Transaction Subject to Tax? • Advertising and Public Relations Services = Taxable • All sales of advertising or public relations services other than those related to media or cooperative direct mail advertising are subject to sales tax under Conn. Gen. Stat. § 12-407(a)(37)(U). • Exception: Media and cooperative direct mail NOT taxable. • Media advertising is the sale of time or space in or on a preexisting medium for general dissemination. • Preexisting media include television, radio and newspaper advertisements • Dissemination of advertising materials is not taxable, unless the service provider is also involved in the creation of the advertising materials. Ruling 92-3. Is The Transaction Subject to Tax? • Creative Services – Media Exception Limitation • Advertising targeting to a specific audience is not considered to be media advertising, and is therefore taxable. • Direct mail, as long as it is not cooperative direct mail such as Val-Pak, is also subject to sales tax. Is The Transaction Subject to Tax? • Services to commercial, industrial or incomeproducing property – New construction exception • The Department has created an exception for “new construction.” Ruling 93-10 opens the door. • Ruling 96-2 closes the door, partly • where the interior wall studs and floor and ceiling joists are left in place, new construction does not occur under Conn. Agencies Regs. §12-407(2)(i)(I)1(c)(1), and therefore sales and use taxes apply Exceptions to Connecticut’s Sales Tax Rate of 6.35% • Computer and data processing services are taxable at 1% • The “partial exemption” for Manufacturers, Fabricators and Processors • Exempt to the extent of 50% of the sales price. Computer Services • Computer and data processing services are taxed at the rate of 1%. • Following is a list of computer and data processing services that the Department of Revenue Services says are subject to this tax: • • • • • • • • • • Data scanning Programming, code writing, and creating custom software Charges for on-line access to computer services Charges for internet access services and computer time Storing, filing, retrieving or proving access to information Designing, implementing or converting systems Providing consulting services Conducting feasibility studies Modification of existing programs Installation and implementation of software programs and systems even where such services are rendered in connection with the development, creation or production of canned or custom software or the license of custom software Computer Services – Website Exception • Exception: Services rendered in connection with the creation, development, hosting or maintenance of all or part of a website are not taxable. • Odd because it involves programming, code writing and graphic design. Partial Exemptions for Manufacturers, Fabricators and Processors • Partial exemption for machinery and equipment used in manufacturing, fabricating and processing. Conn. Gen. Stat. §12-412i. • Partial exemption for materials, tools and fuels used in manufacturing, fabricating and processing. Conn. Gen. Stat. §12-412i. Partial Exemptions for Manufacturers, Fabricators and Processors • These exemptions typically apply instead of the “full exemption” when machinery, equipment, tools or fuel are not purchased by a manufacturer or are not used directly in the manufacturing process • The 50% exemption applies to purchases by • Manufacturers, fabricators and processors Partial Exemptions for Manufacturers, Fabricators and Processors • Partial Exemption for Component, Enhancement, Replacement or Repair Parts • The partial exemption is provided for by including items under the definition of machinery, which is defined as: • the basic machine itself, including all of its component parts and contrivances such as belts, pulleys, shafts, moving parts, operating structures and all equipment or devices used or required to control, regulate or operate the machinery, including without limitation, computers and data processing equipment, together with all replacement and repair parts therefore, whether purchased separately or in conjunction with a complete machine, and regardless of whether the machine or component parts thereof are assembled by the taxpayer or another party. Partial Exemptions for Manufacturers, Fabricators and Processors • There is also a partial exemption for materials, tools and fuels: • used in a process preparatory or related to the manufacturing, processing or fabricating of tangible personal property to be sold, and • used or consumed in the manufacturing, processing or fabricating of tangible personal property to be sold. Partial Exemptions for Manufacturers, Fabricators and Processors • All software, whether canned, custom or customized, that is purchased in the same transaction with the machine on which the software is used, or as component parts to be assembled into or onto a new machine, may qualify for a partial exemption. Canned, or prewritten, software purchased in the same or a separate transaction from the purchase of machinery is treated as the purchase of a component or enhancement part. Adjustment to the Tax Base • Business management and consulting services are subject to tax • However are not taxable when performed by a professional service provider, such as a lawyer, accountant, doctor or engineer, as long as the services are performed in the provider’s professional capacity and are commonly associated with the profession. • Service on a board of directors is exempt. Adjustment to the Tax Base • Separately stated payroll overhead expenses (salaries, fringe benefits, and state and federal taxes incident to employment) are not included in gross receipts from the sale of management services that are subject to the payment of sales tax. • Limitations: • The employee must provide services for only one service recipient; and • Only at that service recipient’s property. • Renaissance Management Company, Inc. v. Commissioner of Revenue Services 267 Conn. 188 (2003). Robinson+Cole Boston | Hartford | New York | Providence | Stamford Albany | Los Angeles | New London | Sarasota Exemptions Statutory Exemptions • All sales of tangible personal property are taxable unless otherwise specifically exempt or excluded. • Exclusions are generally set forth in §§ 12-407 and 12-408. • Exemptions are generally set forth in Conn. Gen. Stat. § 12-412. • Some exemptions require that the taxpayer obtain and retain a certificate establishing its entitlement to the exemption. • Statutory exemptions are strictly construed against the taxpayer Common Exemptions • Common exemptions include: • Sales to the government • Sales to public utilities • Certain sales to tax-exempt organizations; • Sales of items considered beneficial or necessary • Sales in interstate commerce and • Sales to “favored industries” • The “other” category. Exemptions – Government Related • Sales that are prohibited from being taxed by the United States Constitution or federal laws. • Sales to the United States, the State of Connecticut or any of its political subdivisions or agencies. • Sales of United States and Connecticut flags. • Sales to any tourism district. • Sales of municipal publications, tangible personal property sold by public libraries, book sales by library support groups, and the sale of any property at auction by a municipality. Exemptions – Government Related cont’d • Sales to develop property which the State of Connecticut is under contract to purchase through a long-term financing contract. • Sales to be incorporated into, used, or otherwise consumed in the construction of Adriaen’s Landing, the convention center, the Connecticut Center for Science and Exploration, the stadium facility and related parking facilities. • Sales to be incorporated into, used or otherwise consumed in the operation of any project of the Connecticut Resources Recovery Authority, whether such purchases are made directly by the authority or are reimbursed by the authority to the lessee or operator or such project. Exemptions – Utility Related • Sale to a water company for use in maintaining, operating, managing or controlling a body of water, distributing plant or system supplying water to fifty or more consumers. • Sales related to the operation of facilities for the treatment of wastewater that is certified as approved for the reduction, control or elimination of pollution of the waters of the state by the Commissioner of Environmental Protection. • Sales related to the operation of facilities that reduce, control or eliminate air pollution, if certified as approved for such purpose by the Commission of Environmental Protection. • “Call before you dig” services. • Gas and electricity for residential use or used directly in manufacturing or agricultural production. Exemptions – Utility Related cont’d • Sales of electricity that are not otherwise exempt up to one hundred fifty dollars each month. • Sales of water, steam and telegraph delivered to consumers through mains, lines, pipes or bottles. • The sale, furnishing or service of gas, water, steam or electricity for use directly in the furnishing of gas, water, steam or electricity delivered to consumers through mains, lines or pipes. • The sale of fuel for heating purposes in any home, manufacturing plant, or agricultural production. • Sales and use of ice storage systems used for cooling, including equipment related to such systems, and sales of services relating to the installation of such systems by a utility ratepayer who is billed by such utility on a time-of-service metering basis. Exemptions – Charity and Welfare Related • Sales to organizations that the United States Treasury Department has expressly determined, by letter, to be an organization that is exempt from federal income tax because it is described in § 501(c)(3) or (13) of the Internal Revenue Code of 1986, as amended. Sales of tangible personal property by nonprofit organizations at bazaars, fairs, picnics, tag sales or similar events to the extent of five such events of a day's duration held during any calendar year. • Sales of tangible personal property by historical societies. • Sales to and by nonprofit charitable hospitals, nursing homes, rest homes and residential care homes, and sales of tangible personal property on the premises of a hospital by an organization recognized as exempt under § 501(c)(3) of the Internal Revenue Code. • Food sold in educational institutes, hospitals, residential care homes, assisted living facilities, senior centers, day care centers, convalescent homes, nursing homes and rest home. Exemptions – Charity and Welfare Related cont’d • Sales of items for not more than twenty dollars each by a PTO, for purposes of youth activities, or accredited elementary or secondary schools, for purposes of such school or its students. • Sales related to the operation of low and moderate income housing, if constructed under the sponsorship of and owned or operated by nonprofit housing organizations and housing authorities. • Sales related to the development, construction, rehabilitation, renovation or repair of housing facilities for low and moderate income families and persons if situated in qualified census tracts or difficult development areas, as designated by the Secretary of the United Stated Department of Housing and Urban Development, and assisted by an allocation of Low Income Housing Tax Credits. • Sales to any center of service for elderly persons. Exemptions – Charity and Welfare Related cont’d • Sales of items for not more than $100 each by any nursing home, or similar home, provided (1) such sales are made through a gift shop located in such home or center and (2) any profits from such sales are retained by such home or center for the benefit of the patients. • Certain services that are rendered at the residence of a disabled person. • Sales of items purchased with food stamps. • Sales of tangible personal property and services to The University of Connecticut Educational Properties, Incorporated, with regard to Connecticut Technology Park. • Sales of services by an affiliate participating in the Community Economic Development Fund to an affiliate participating in said program. • Sales of items that are eligible for benefits and that are made to an eligible beneficiary of federal programs. Exemptions – Safety Items • Sales of and the storage, use or other consumption of safety apparel. • Bicycle Helmets. • Sales of child car seats and booster seats for use in motor vehicles are exempt. This includes the sale of additional bases to be used in second cars. However, this exemption does not cover travel systems that combine child car seats and strollers that are priced as a single unit. • Firearm (gun) safety devices (safes, lock boxes, trigger and barrel locks). Exemptions – Educational Materials • Sales of college textbooks to full-time and part-time students enrolled at institutions of higher education, including private occupations schools, are exempt, with presentation of valid student identification cards. College textbooks means new or used books and workbooks required or recommended for courses. Exemptions – “Green” Items • Compact fluorescent light bulbs. • Residential weatherization products. • Sales to, and the storage, use or other consumption by, a fuel cell manufacturing facility in this state of materials, tools, fuel, machinery and equipment used in such facility. • Sales and use of solar energy electricity generating systems and passive or active solar water or space heating systems and geothermal resource systems, including equipment related to such systems, and sales of services relating to the installation of such systems. • Sales of and the storage, use or other consumption of machinery, equipment, tools, materials, supplies and fuel used directly in the renewable energy and clean energy technology industries. Exemptions – Food Sold at Retail • Grocery items are exempt. • Food products sold through coin-operated vending machines, meals delivered to the elderly, disabled or homebound, and purchases made with food stamps are exempt from tax. • Vegetable seeds suitable for planting to produce food for human consumption. • Milk bottles and certain other nonreturnable containers and returnable dairy product containers. Exemptions – Media Services • Internet access services. • Sales of equipment to a telecommunications company or community antenna television company that is used to provide telecommunications, high-speed data transmission or broad-band Internet services which offer the capability to transmit information at a rate that is not less than two hundred kilobits per second in at least one direction, such as fiber optics network equipment. • Magazines and newspapers sold by subscription. • Certain motion picture, video, television and radio production and broadcast equipment. • The leasing or rental of any motion picture film by the owner or operator of a motion picture theater for purposes of display at such theater. Exemptions – Medical Related • Sales of prescription medicines, syringes and needles. • Artificial devices individually designed, constructed or altered for the use of a particular handicapped person and repair or replacement parts and repair services to these devices. • Artificial limbs, artificial eyes, and other equipment worn as correction or substitute for a functioning part of the body and repair to these devices. • Closed circuit television equipment for the visually impaired, and repair or replacement parts and repair services to these devices. • Medical support hose. • Custom-made wigs or hairpieces for persons with medically diagnosed total and permanent hair loss from disease or the treatment of disease and repair or replacement parts and repair services to these devices. • Diabetic supplies and repair or replacement parts for such equipment. • Disposable pads used for incontinency. • Hearing aids when designed to be worn on the person of the owner or user and repair or replacement parts and repair services to these devices. Exemptions – Medical Related cont’d • Canes, crutches, walkers, wheel chairs and inclined stairway chairlifts for use of invalids and handicapped persons, and repair or replacement parts and repair services to these devices. • Prescription eyewear and nonprescription reading glasses and related repair. • Oxygen, blood or blood plasma for medical use in humans or animals. • Telephone equipment designed exclusively for deaf or blind persons. • Vital life support equipment, including oxygen supply equipment used for humans or animals, kidney dialysis machines, and any other such device used in necessary support of vital life functions, and related repair. • Sales of services used to determine the probable consequences in relation to human health of the consumption or other use of any product, substance or element. • Sales of and the storage, use or other consumption of machinery, equipment, tools and materials used exclusively in the fabrication of optical lenses. Exemptions – Transportation and Fuel • Flyable aircraft sold by a manufacturer of aircraft located in this state to certificated or licensed carriers engaged in interstate or foreign commerce or to nonresidents for use exclusively outside Connecticut. Conn. Gen. Stat. §12-412(20) • Aircraft having a maximum certificated takeoff weight of 6,000 pounds or more. Conn. Gen. Stat. §12-412(99). • Repair or replacement parts and repair services for use in aircraft or in the significant overhauling or rebuilding of aircraft or aircraft parts or components on a factory basis. Conn. Gen. Stat. 12-412(76) and (77). • Motor vehicles or water vessels purchased but not registered in this state by persons who are nonresidents and do not maintain a permanent place of abode in Connecticut. Conn. Gen. Stat. §12412(60); CERT-125. • Motor vehicles sold to limited liability companies or their members in connection with the organization or termination of the limited liability company, provided the last taxable sale was subject to tax. Conn. Gen. Stat. §12-431(a). Exemptions – Transportation and Fuel cont’d • Commercial trucks, truck tractors, tractors, semitrailers, and vehicles used in combination with commercial trucks, truck tractors, tractors, semitrailers that have a gross vehicle weight rating in excess of 26,000 pounds; or are operated actively and exclusively during the one-year period beginning on the date of purchase for the carriage of interstate freight under a certificate or permit issued by the Interstate Commerce Commission or its successor agency. • Equipment installed in motor vehicles for persons with physical disabilities repair or replacement parts for such equipment, whether such repair or replacement parts are purchased separately or in conjunction with such equipment, and whether such parts continue the original function or enhance the functionality of such equipment. • Commercial fishing vessels and machinery or equipment for use on the vessels. • Repair and maintenance services to vessels. • Fabrication labor to existing vessels. Exemptions – Transportation and Fuel cont’d • Sales of marine vessel brokerage services provided by marine vessel brokers selling such vessels for the owners. • Sales of and the storage, use or other consumption of railroad locomotives, track ballasts, ties, rails, machinery and equipment used to maintain the railroad right-of-way which is used or operated exclusively for the carriage of freight. • Property tax payments under motor vehicle leases (if separately stated on the bill to the lessee from the lessor). • Motor vehicle fuel that is subject to the Motor Carrier Road Tax. • Sales of any motor vehicle driving service to the extent of that proportionate part of gross receipts from such service rendered which is directly related to actual driving performance outside the state. Exemptions – Transportation and Fuel cont’d • Sales of and the storage, use or other consumption of any aviation fuel used exclusively for aviation purposes or exclusively and directly in the experimental testing of any product. • Materials, tools, fuel, machinery and equipment in an aircraft manufacturing facility. • Sales and the storage, use or other consumption of bunker fuel oil, intermediate fuel, marine diesel oil and marine gas oil for use in any vessel having a displacement exceeding four thousand dead weight tons or for use in any vessel primarily engaged in interstate commerce. • Sales of commercial motor vehicles and motor buses where seventyfive per cent of days-in-service revenue derives from trips involving other states. • Sales of, and the storage, use or other consumption of, diesel fuel to be used exclusively in portable power system generators that are larger than one hundred fifty kilowatts. Exemptions – Business Related • Professional, insurance or personal service transactions. • Sales of and storage or use of any materials that become an ingredient or component part of tangible personal property to be sold or which are used directly in the fishing industry or in an industrial plant in the actual fabrication of the finished product to be sold. • Sales and storage of any commodity in the form traded on any contract market or other board of trade as defined in the Commodity Exchange Act, as amended, except if the purchaser uses such commodities. • Sales of any printed material which has been manufactured in Connecticut to the special order of a purchaser and which, within thirty days following delivery to such purchaser, is to be delivered for use outside Connecticut. • Sales of and the storage, use or other consumption of machinery used directly in a manufacturing production process. Exemptions – Business Related cont’d • Sales of any replacement parts for machinery to any business entity located in any enterprise zone for use within such zone. • Services related to personnel, management or research when company rendering service and recipient are participating in a joint venture for purposes of research and new product development. • Services rendered between parent companies and wholly-owned subsidiaries. • Items sold for use in agricultural production by a farmer engaged in such production as a business. • Computer-related cleaning equipment. • Molds, dies, patterns and handling equipment for metal casting foundries. • Molds, dies and patterns for pattern shops and metal casting foundries. • Machinery, equipment, tools, materials and supplies used in commercial printing. Exemptions – Business Related cont’d • Machinery, equipment, tools, materials and supplies for typesetting, color separation, finished copy, or similar products. • Component parts for assembly of manufacturing machinery. • Certain sales of computer and data processing services. • Commercial photographic film and paper processing materials. • Machinery, equipment, tools, materials, supplies and fuel used in the biotechnology industry. • Sales, use or other consumption of calibration services for machinery, equipment or instrumentation used in a manufacturing production process, and other sales, use or other consumption of services or compliance practices associated with registration and compliance of quality management and quality assurance standards as part of standards created by the International Organization of Standards. Exemptions – Other • Personal property used in burial or cremation with value up to $2,500 for any single funeral. • Caskets for burial. • Gold or silver bullion, foreign currency, rare or antique coins. • Shoe repair services. Exemptions – Newly Revoked • Effective July 1, 2011, the following items are taxable: • Clothing and footwear under $50. • Cloth or fabric for noncommercial sewing. • Non-prescription medicines. • Smoking cessation products. Special Rules for Exempt Organizations • Connecticut law provides for an exemption from Connecticut sales and use taxes for qualifying nonprofit organizations. • An organization that has a valid Determination Letter from the Internal Revenue Service stating that it is exempt under Section 501(c)(3) or (13) of the Internal Revenue Code is a ”qualifying organization” for the purposes of the exemption from sales and use taxes. • Guidance does not cover other tax-exempt organizations that are exempt from federal and state income taxes. • The DRS does not issue exemption permits. • The single-member limited liability company issue. Special Rule for Exempt Organizations – cont’d • Purchases by exempt organizations: • A “qualifying organization” may purchase supplies, services and equipment without paying Connecticut sales and use taxes if the purchases are made by the organization, are purchased exclusively for the purposes for which the organization was established, and are paid for with organization funds. • Purchases that are made for the administrative needs of the organization can qualify for exemption. • Purchases that are entirely unrelated to furthering the charitable mission do not qualify for exemption. Special Rules for Exempt Organization – cont’d • Purchases by exempt organizations • To claim exemption for the purchase of goods or taxable services, the organization must complete CERT-119, Certificate for Purchases of Tangible Personal Property and Services by Qualifying Exempt Organizations and give it to the retailer. • The organization must attach to the CERT-119 a copy its federal Determination Letter or group Determination Letter issued by the Internal Revenue Service. Special Rules for Exempt Organizations – cont’d • Sales by exempt organizations: • A nonprofit organization may make sales at up to 5 fundraising events (bazaar, fair, tag sale, gala, etc.) each year without collecting, or registering, for sales tax. • Not required to collect sales tax on sales made at each of its 5 fundraising events • Nonprofit organizations that make other sales of goods or services are required to register with the Department of Revenue Services, obtain a Sales and Use Tax Permit and collect sales tax on non-exempt sales. Special Rules for Exempt Organizations – cont’d • Meals • If the organization is purchasing meals for which it will charge those attending an event, then CERT-119 can be completed in order to claim the exemption if the event is one of the organization’s exempt 5 one-day events. • If the organization is purchasing meals for which it will not be reimbursed, the exemption must be approved with CERT-112, Certificate for Exempt Qualifying Purchases of Meals or Lodging by an Exempt Organization or Qualifying Governmental Agency, to Department of Revenue Services at least three weeks prior to the event. • Meals purchased by a nonprofit hospital or nursing home are subject to different rules, and they must file CERT-113. Sales Tax Exemption Certificates • When Connecticut statutes or regulations require evidence of exemption, the buyer must generally provide the vendor with an exemption certificate prior to consummation of the sale. ( Reg. Sec. 12-426-16a(i). • Seller can accept in good faith that the statements made by the purchaser are true and accurate. • A purchaser who gives a false or fraudulent exemption certificate may also be subject to civil and criminal penalties. [ Informational Publication 2006(11)]. NOTE: Arkin-Medo put the burden of proving that a certificate was accepted in bad faith on revenue officials. Sales Tax Exemption Certificates – cont’d • Connecticut does not have any provisions for electronic exemption certificates. • Connecticut has no provisions regarding requirements for direct payment permit holders to file exemption certificates. • The Streamlined Sales Tax Governing Board has approved a uniform exemption certificate. Connecticut may, but is not required to, accept the certificate. Sales Tax Exemption Certificates – cont’d • CERT-100 - Materials, Tools and Fuel Certificate • CERT-101 - Machinery, Component Parts and Replacement and Repair Parts of Machinery Used Directly in a Manufacturing Process • CERT-103 - Residential Condominium Association Certificate • CERT-104 - Services Certificate for New Construction • CERT-108 - Certificate of Partial Exemption Materials, Tools and Fuels Sales Tax Exemption Certificates – cont’d • CERT-109 - Certificate of Partial Exemption of Machinery, Equipment, or Repair and Replacement Parts • CERT-119 - Certificate for Purchases of Tangible Personal Property and Services by Qualifying Exempt Organizations • CERT-136 - Purchases of Items by Eleemosynary Organizations and Schools That Will be Resold Tax-Exempt Is There Such a Thing As A Sales Tax Credit? • This is a trick question. • Any sales tax paid to another state is a credit against the use tax due to Connecticut • This can be relevant to contractors that purchase materials out of state but use or consume those materials in Connecticut Connecticut Innovations Sales Tax Incentive Programs • Sales Tax Incremental Financing (TIF) • TIF, authorized by CSG sec 32-285, is a financing tool used to provide state assistance to an economically significant project by giving a grant to the project’s developer. The TIF grant is funded by the sale of state general revenue bonds in an amount of up to 30 percent of the new, incremental sales tax revenue generated by the project. • Notable Connecticut projects that have benefited from the program include Lake Compounce in Bristol, the Oakdale Theater in Wallingford, Dodd Stadium in Norwich, The Meadows in Hartford and Cabela’s in East Hartford. • Sales & Use Tax Relief Program • Connecticut Innovations can grant a project-specific sales tax exemption in a specific amount.