Presented by:
Douglas A. Joseph, CPA T S it j ki CPA Tony Switajewski, CPA
Requirement to Collect Sales Tax (Nexus)
Basics of Sales and Use Taxation
Basics of Sales and Use Taxation
Taxation of Services and Sourcing
Listing of Taxable Services (not all inclusive)
S
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Specific Services Discussed
Advertising
Business and Human Resource Managementg Computer and Data Processing
Personnel Real Property Real Property
Under U.S. Treasury Department guidelines, we hereby inform you
that (1) any tax advice contained in this communication is not intended or written to be used and cannot be used by you for the intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service or State Tax Authorities, (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used by any party to market or promote any and cannot be used, by any party to market or promote any transaction or matter addressed herein without the express and written consent of Blum Shapiro & Company, P.C., (3) Blum Shapiro & Company, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (4) any fees otherwise payable to Blum Shapiro & Company, P.C. in connection with this written tax advice are not refundable or contingent on your realization of tax benefits from the advice contained herein
benefits from the advice contained herein.
This presentation is intended to provide general information and no
Nexus for service providers:
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Generally, “physical presence” in a state by a service
provider is required:
▪ Property in a state (e.g., office, inventory)
▪ Sales personnel or independent representatives visit customers
▪ Performing services within a state
▪ Attribution nexus (e.g., click-through nexus)
Once a business has nexus in a state for sales or use tax
collection responsibilities, it is likely subject to other state
taxation (e.g., employee withholding taxes, income
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The Basics of CT Sales Taxation on Services
Only listed taxable services are taxable
(“enumerated services”)
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Sales tax is legally imposed on the retailer (seller)
▪ Retailer is to collect the tax from the consumer and it is a debt from the consumer to the retailer when added to the sales price.
▪ Seller must pay sales tax to CT whether or not it collected the tax from its customer.
▪ What happens when you should have charged sales tax but didn’t – can you go after your customer for the tax?
Accrual basis — general rule (when services are
Accrual basis
general rule (when services are
rendered)
Cash basis — exception for sellers of services
filing Federal income tax returns on cash basis.
Use tax is imposed on taxable purchases of
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services where sales tax was not collected –
applies to both out-of-state and in-state
purchases of services
purchases of services.
Services that are
not
subject to Connecticut
j
sales tax are also
not
subject to the use tax.
F
OS 114
S l
d U
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Services to Identically Owned Affiliates
Applies to any types of business organizations (was once only applicable
Applies to any types of business organizations (was once only applicable
to corporations)
Services Rendered to Qualifying Exempt Organizations
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State of Connecticut and municipalities U.S. Government
501(c)(3) or (13) Organizations
Nonprofit Charitable Hospitals
Resell Services
Buying a taxable service that you will resell - must be an integral and inseparable
Sourcing of services:
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CT t
Sourcing is very important because CT taxes many
services not taxed by other states
CT DRS position has always been “where the benefit of the
p
y
service is enjoyed” is where the service is taxable
Easy when service is to real property, e.g., because
it is stationary (service to CT real estate is taxable in CT)
it is stationary (service to CT real estate is taxable in CT)
Difficulty is when services cross state lines or service
benefit is received outside CT and “brought back” to CT
Enumerated services are listed in C.G.S.
S ti
12 407( )(37)(A) th
h (FF)
Section 12-407(a)(37)(A) through (FF)
Services are not subject to tax unless specifically
enumerated
as taxable (i.e., not all services are taxable)
(
,
)
Department of Revenue Services – Link to “Services
Subject to Sales Tax”
Subject to Sales Tax”
▪ Services Subject to Sales Tax Web Site
http://www.ct.gov/drs/cwp/view.asp?a=1477&Q=269930&drsPNavCtr=|40829|#40952
Computer and data processing
Credit information and reportingp g
Employment agencies and personnel services
Private investigation, protection, patrol work, watchman,
armored car
Painting and lettering Photographic studio Telephone answering
St hi
Stenographic
Services to industrial, commercial or income-producing real property
Business analysis management management consulting
Business analysis, management, management consulting
Public relations Piped-in music
Furniture reupholstering and repair
Repair to any electrical or electronic devicep y Lobbying or consulting services
Broker services relating to tangible personal property Locksmith
Advertising
Landscaping and horticulture Window cleaning
M i t d j it i l
Maintenance and janitorial
Flight instruction and chartering Motor vehicle repair
Motor vehicle parking Motor vehicle parking Radio or television repair
Exterminating
Swimming pool cleaningg p g
Miscellaneous personal services
Repair and maintenance service to tangible personal property Patient care services
Health and athletic clubs
Producing, fabricating, processing, printing or imprinting of TPP Telecommunication
C it A t t l i i
Community Antenna television Furnishing of storage or mooring Prepaid telephone calling
Furnishing preparing or serving of food meals or drinks Furnishing, preparing, or serving of food, meals or drinks
NOT RELATED TO THE DEVELOPMENT OF MEDIA ADVERTISING
MEDIA ADVERTISING
What Advertising is taxable?
Non-media advertising
▪ Creation, preparation, production, dissemination
▪ Consulting and adviceg
▪ Layout, art direction, graphic design, mechanical preparation, production supervision
▪ Does not include marketing
What is Media Advertising?
Sale of time or spacep
In or on pre-existing medium
For broadcast or dissemination to all or segment of public Examples of media: Does not include ads Examples of media:
Newspapers, including
advertising inserts and
coupon inserts distributed
inside newspapers
Does not include ads devoted to a specific target:
inside newspapers
Magazines
Radio, TV, Cable TV
Billboards, Buses, Taxis
Trade or Campus Directories
Catalogs
Flyers
Brochures
Posters
Trade or Campus Directories
Restaurant Placemats
Cash Register Tapes
Includes:
B i
A l i
Business Analysis
▪ Examination of data, making of recommendations
Business Management
g
▪ Provision of general or specialized day-to-day management
Business Management Consulting
▪ Furnishing of advice or assistance on matters pertaining toFurnishing of advice or assistance on matters pertaining to management
Business Public Relations
▪ Preparation of materials designed to influence the general public or
▪ Preparation of materials designed to influence the general public or other groups by promoting interests of service recipient
It’s not what the services are “called” that
determines whether or not taxable
determines whether or not taxable
Reg. Sec. 12-407(2)(i)(J)-1(c)(1)
▪
Look at nature of services rendered
Message Center Management, Inc. v. Commission
er,
affirmed by CT Supreme Court 6/19/07
▪
The word “Management” was in the service provider’s name
plus service provider entered into “management
agreements” with clients, but services were held nontaxable
because they were not really “business management
services”
services
Must be rendered to service recipient’s
“C
b i
ti iti ”
“Core business activities”
OR
Core business activities: Activities directly related to service recipient’s
“lines of business, capital structure, budgeting and strategic planning”lines of business, capital structure, budgeting and strategic planning
Non-Core Business Activities
Administration of:
Payroll ▪ Payroll
▪ Employee insurance claims ▪ Pension funds
▪ Food service operations ▪ Employee health services ▪ Employee health services ▪ Mailroom delivery functions ▪ Plants & grounds maintenance
▪ Insurance claims against service recipient in capacity as insurer ▪ Self-insured claimsSelf insured claims
Investment advice
Marketing
Human Resource Management Activities
Hi i
Hiring
Development
Job-related training
Job related training
Compensation
Personnel management
Employee relations
Exclusions:
Professional Service Providers: Business consulting
services are not taxable when rendered by a person
acting in such person’s professional capacity and that
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p
y
are commonly associated with the profession:
Examples:
Examples:
▪ Medical ▪ Legal ▪ Engineering ▪ Accounting
Exclusions
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Separately stated compensation, fringe benefits, workers
compensation and payroll taxes paid to or on behalf of
employees of service provider who has contracted to
manage a service recipient’s property or business premise
Employees must perform services solely at recipient’s
Employees must perform services solely at recipient s
premises
▪
See Renaissance Management – Affirmed by Connecticut
Supreme Court 12/30/03
Supreme Court 12/30/03.
Exclusions (cont.)
G
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General Partner Services Rendered To A Limited
Partnership (LP):
▪ Provides that services are only taxable when general partner (or ff ) f
affiliate) if:
▪ Compensation is other than via distributive share of partnership profits
▪ General partner (of affiliate) offers such management services to others, including any other partnership
including any other partnership
▪ Presumably, otherwise, general partner management services for LP’s are nontaxable
Unbundle Taxable and Non-Taxable Services
C t
t
Contracts
One Contract: Identifying taxable and non-taxable
services and fee associated with each
services and fee associated with each
Two Contracts: Taxable service contract and
non-taxable service contract
Keep track of time spent on taxable and
non-taxable services
Unbundle Invoice
Unbundle Invoice
Job-related training
T i
t b di
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’ j b kill
Topics must be directly related to employee’s job skills
▪ General courses are excluded
▪ Higher education is excluded
DRS longstanding position has been that services are
sourced to where employee is based rather than where
sourced to where employee is based rather than where
training occurs
Computer-related services and sales of tangible
l
t
personal property
Computer Data Processing (CDP) Includes:
▪
Programming code writing and modification of
Programming, code writing and modification of
existing programs
▪
Implementation of software in connection with development,
creation production of canned or custom software or
creation, production of canned or custom software or
license of custom software
▪
Providing computer time, storing and filing information,
retrieving or providing access to information
retrieving or providing access to information
Computer-related services and sales of tangible
l
t (
t )
personal property (cont.)
Taxed permanently at 1%
Hardware and other tangible personal property is taxed at 6%g p p p y
▪
Separately state or unbundle computer service from
property. Otherwise everything is
taxed at 6%
taxed at 6%
Separately stated hardware installation is exempt (unless
hardware is leased rather than sold/purchased)
Repair and maintenance of hardware taxed at 6% Repair and maintenance of hardware taxed at 6%
Canned software is tangible personal property taxed at 6% (unless delivered electronically taxed as CDP at1%)
Custom Software
▪ For particular needs of a customer ▪ For particular needs of a customer ▪ Taxed as CDP service at 1%
▪ License fees for mere use and possession of custom software
( i t ibl t) t t d if t l t t d
Software installation, maintenance, support and
upgrades are taxable
Regardless of whether canned or custom
Software maintenance and warranty contracts are CDP
Software maintenance and warranty contracts are CDP
whether canned or custom
Upgrades of canned software
▪ Sale of tangible personal property – 6%
▪ Delivered electronically – CDP service – 1%
Maintenance and warranty contracts providing for phone
Maintenance and warranty contracts providing for phone
support and tangible personal property upgrades are
taxable at 6% unless charges separately stated
Computer Training
▪ If job related taxable at 6% ▪ If job-related, taxable at 6%
▪ If not job-related, taxable as CDP service at 1%
Personnel agencies – furnish temporary or
t ti
h l
part-time help
Personnel agency is employer
Any business can be considered a “Personnel Agency,” even a y g y,
related entity
▪ Doesn’t have to be in business of furnishing help
Service recipient controls work of agency’s employeeS p g y p y
▪ Similar to employee – independent contractor analysis
▪ Degree of prearrangement of services by agency is key
▪ If no prearrangement, will be personnel serviceIf no prearrangement, will be personnel service
All gross receipts are taxable at 6%, not just
Leased Employees Exception
▪ Defined by IRC Section 414Defined by IRC Section 414
▪ Employee works substantially full-time for service recipient for at least one year
▪ Must be agreement between service provider and service recipientg p p
▪ Services must be of type historically performed by employees
▪ If 75% of agency employees under contract meet definition at
commencement, all employees under contract qualify for exclusion, including those that are subsequently added to workforce
▪ Exclusion is for all compensation and employment-related expenses of leased employees
A contractor’s labor (or service) is subject to tax when
the service is to:
the service is to:
Existing commercial real property Existing industrial real property
Existing income-producing real property
Who is a “contractor” vs a “manufacturer”
Who is a contractor vs. a manufacturer
Example) Gross Receipts Test
U f l DRS P bli
i
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A li d
Useful DRS Publication on Sales Tax Applied to
A contractor’s labor (or service) is
not
subject to tax
when the service is to:
New construction;
Owner‐occupied residential
property;
h i bl li i
Hospitals and certain other exempt
entities;
Industrial, commercial, or income‐
d i l h h
Charitable or religious
organizations;
Qualifying government agencies or
their agents;
producing real property when the
service is for the voluntary
evaluation, prevention, treatment,
containment or removal of
Real property owned by federally
recognized Indian tribes when the
service is performed in federally
recognized Indian country;
hazardous waste or other
contaminants of air, water or soil;
Real property located within a
public right‐of‐way. ecog ed d a cou t y;
Low‐ and moderate‐income
housing;
Contractors are the consumers of materials
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and supplies used in fulfilling their
construction contracts
Contractor pays tax on purchases of physically
Contractor pays tax on purchases of physically
incorporated materials
Generally, a resale certificate cannot be used
y,
A contractor’s service (labor) charge is determined by subtracting
the cost of materials (including tax paid on materials) from the total ( g p ) contract price.
In other words every cent above the contractor’s cost of materials that is In other words, every cent above the contractor s cost of materials that is
physically incorporated into the real property AND already-taxed subcontractor services, plus the tax paid on those materials and services, is considered the service charge.
Invoicing:
Materials and labor (with associated sales tax on service portion) Lump sum (“sales tax included on services”)
BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS
“Nonresident contractors” or persons doing business with
nonresident contractors may use one of two options to satisfy
the requirements for posting security to ensure a nonresident
the requirements for posting security to ensure a nonresident
contractor pays
all Connecticut taxes
:
Nonresident contractors may furnish DRS a guarantee or cash
Nonresident contractors may furnish DRS a guarantee or cash
bond for 5% of the total contract price; or
P d i b i i h id
Persons doing business with nonresident contractors must
BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS
Nonresident contractor
means a contractor who does not
maintain a regular place of business in Connecticut.
Person doing business with a nonresident contractor
means
any
person who enters into a contract with a nonresident
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b t i
t li it d t
t
contractor and includes but is not limited to, property owners,
government, charitable or religious entities and resident or
nonresident general contractors or subcontractors.
BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS
The nonresident contractor’s tax liability includes sales and
use taxes, withholding tax, personal income tax, corporation
business tax, motor fuels tax, business entity tax and any
other applicable Connecticut taxes arising from the project for
which the deposit was made.
p
Not all services are taxable in CT, and within each type of taxable
service there may be exemptions or exclusions (consider y p ( exemption certificate requirement).
It is the “nature of the service” and not what it is called that determines its taxability.
Sales tax is generally due to the state on the accrual basis (when
th i i d d) d t h th t i ll t d f th
the service is rendered) and not when the tax is collected from the customer.
Service contracts should address sales taxability and Service contracts should address sales taxability and
Consider unbundling taxable services from non-taxable services on
the invoice as well as in service contracts.
Taxation of services occurs in CT if the benefit of the service is enjoyed in CT.
When dealing with a non-resident contractor, obtain a Certificate of Compliance.
Consider whether you have nexus in states that would require you to register for use tax collection on taxable services that you render for a customer in that state
Review Your Nexus Footprint
CT and other states (registration and compliance requirement) CT and other states (registration and compliance requirement)
Review Significant Service Contracts
Not what is the service “named” but what is the service? Is sales tax specifically addressed in the contract?
Review Significant Invoices from Service Providers
Is sales tax being properly charged (use tax being remitted)?g p p y g ( g )
Are non-taxable services separately stated from taxable services
on the invoice?
Determine Sales and Use Tax Exposure
Determine Sales and Use Tax Exposure
Please contact us with additional questions:
Doug Joseph, CPA, Partner BlumShapiro
djoseph@blumshapiro com djoseph@blumshapiro.com
860.561.6829
T S it j ki CPA P i i l Tony Switajewski, CPA, Principal BlumShapiro
tswitajewski@blumshapiro.com
860 561 6810 860.561.6810
