Presented by: Douglas A. Joseph, CPA Tony Switajewski, CPA

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Presented by:

Douglas A. Joseph, CPA T S it j ki CPA Tony Switajewski, CPA

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Requirement to Collect Sales Tax (Nexus)

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Basics of Sales and Use Taxation

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Basics of Sales and Use Taxation

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Taxation of Services and Sourcing

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Listing of Taxable Services (not all inclusive)

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Specific Services Discussed

ƒ Advertising

ƒ Business and Human Resource Managementg ƒ Computer and Data Processing

ƒ Personnel ƒ Real Property ƒ Real Property

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ƒ 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.

ƒ This presentation is intended to provide general information and no

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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)

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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

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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?

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Accrual basis — general rule (when services are

Accrual basis

general rule (when services are

rendered)

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Cash basis — exception for sellers of services

filing Federal income tax returns on cash basis.

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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.

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Services that are

not

subject to Connecticut

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sales tax are also

not

subject to the use tax.

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Services to Identically Owned Affiliates

ƒ Applies to any types of business organizations (was once only applicable

ƒ Applies to any types of business organizations (was once only applicable

to corporations)

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Services Rendered to Qualifying Exempt Organizations

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ƒ State of Connecticut and municipalities ƒ U.S. Government

ƒ 501(c)(3) or (13) Organizations

ƒ Nonprofit Charitable Hospitals

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Resell Services

ƒ Buying a taxable service that you will resell - must be an integral and inseparable

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Sourcing of services:

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Sourcing is very important because CT taxes many

services not taxed by other states

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CT DRS position has always been “where the benefit of the

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service is enjoyed” is where the service is taxable

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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)

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Difficulty is when services cross state lines or service

benefit is received outside CT and “brought back” to CT

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Enumerated services are listed in C.G.S.

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12 407( )(37)(A) th

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Section 12-407(a)(37)(A) through (FF)

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Services are not subject to tax unless specifically

enumerated

as taxable (i.e., not all services are taxable)

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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

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ƒ Computer and data processing

ƒ Credit information and reportingp g

ƒ Employment agencies and personnel services

ƒ Private investigation, protection, patrol work, watchman,

armored car

ƒ Painting and lettering ƒ Photographic studio ƒ Telephone answering

St hi

ƒ Stenographic

ƒ Services to industrial, commercial or income-producing real property

ƒ Business analysis management management consulting

ƒ Business analysis, management, management consulting

ƒ Public relations ƒ Piped-in music

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ƒ Furniture reupholstering and repair

ƒ Repair to any electrical or electronic devicep y ƒ Lobbying or consulting services

ƒ Broker services relating to tangible personal property ƒ Locksmith

ƒ Advertising

ƒ Landscaping and horticulture ƒ Window cleaning

M i t d j it i l

ƒ Maintenance and janitorial

ƒ Flight instruction and chartering ƒ Motor vehicle repair

ƒ Motor vehicle parking ƒ Motor vehicle parking ƒ Radio or television repair

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ƒ Exterminating

ƒ Swimming pool cleaningg p g

ƒ Miscellaneous personal services

ƒ Repair and maintenance service to tangible personal property ƒ Patient care services

ƒ Health and athletic clubs

ƒ Producing, fabricating, processing, printing or imprinting of TPP ƒ Telecommunication

C it A t t l i i

ƒ Community Antenna television ƒ Furnishing of storage or mooring ƒ Prepaid telephone calling

ƒ Furnishing preparing or serving of food meals or drinks ƒ Furnishing, preparing, or serving of food, meals or drinks

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NOT RELATED TO THE DEVELOPMENT OF MEDIA ADVERTISING

MEDIA ADVERTISING

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What Advertising is taxable?

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Non-media advertising

▪ Creation, preparation, production, dissemination

▪ Consulting and adviceg

▪ Layout, art direction, graphic design, mechanical preparation, production supervision

▪ Does not include marketing

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What is Media Advertising?

ƒ Sale of time or spacep

ƒ In or on pre-existing medium

ƒ For broadcast or dissemination to all or segment of public Examples of media: Does not include ads  Examples of media:

ƒNewspapers, including 

advertising inserts and 

coupon inserts distributed 

inside newspapers 

Does not include ads  devoted to a specific target:

inside newspapers 

ƒMagazines

ƒRadio, TV, Cable TV

ƒBillboards, Buses, Taxis

ƒTrade or Campus Directories

ƒCatalogs

ƒFlyers

ƒBrochures

ƒPosters

ƒTrade or Campus Directories

ƒRestaurant Placemats

ƒCash Register Tapes

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Includes:

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Business Analysis

▪ Examination of data, making of recommendations

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Business Management

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▪ Provision of general or specialized day-to-day management

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Business Management Consulting

▪ Furnishing of advice or assistance on matters pertaining toFurnishing of advice or assistance on matters pertaining to management

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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

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It’s not what the services are “called” that

determines whether or not taxable

determines whether or not taxable

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Reg. Sec. 12-407(2)(i)(J)-1(c)(1)

Look at nature of services rendered

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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

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Must be rendered to service recipient’s

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“Core business activities”

OR

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ƒ 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

ƒ Non-Core Business Activities

ƒ 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

ƒ Investment advice

ƒ Marketing

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Human Resource Management Activities

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Hiring

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Development

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Job-related training

Job related training

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Compensation

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Personnel management

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Employee relations

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Exclusions:

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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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are commonly associated with the profession:

Examples:

Examples:

▪ Medical ▪ Legal ▪ Engineering ▪ Accounting

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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

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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.

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Exclusions (cont.)

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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

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Unbundle Taxable and Non-Taxable Services

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Contracts

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One Contract: Identifying taxable and non-taxable

services and fee associated with each

services and fee associated with each

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Two Contracts: Taxable service contract and

non-taxable service contract

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Keep track of time spent on taxable and

non-taxable services

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Unbundle Invoice

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Unbundle Invoice

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Job-related training

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Topics must be directly related to employee’s job skills

▪ General courses are excluded

▪ Higher education is excluded

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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

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Computer-related services and sales of tangible

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personal property

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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

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Computer-related services and sales of tangible

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personal property (cont.)

ƒ Taxed permanently at 1%

ƒ 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%

ƒ Separately stated hardware installation is exempt (unless

hardware is leased rather than sold/purchased)

ƒ Repair and maintenance of hardware taxed at 6% ƒ Repair and maintenance of hardware taxed at 6%

ƒ Canned software is tangible personal property taxed at 6% (unless delivered electronically taxed as CDP at1%)

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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

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Software installation, maintenance, support and

upgrades are taxable

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Regardless of whether canned or custom

Software maintenance and warranty contracts are CDP

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Software maintenance and warranty contracts are CDP

whether canned or custom

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Upgrades of canned software

▪ Sale of tangible personal property – 6%

▪ Delivered electronically – CDP service – 1%

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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

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Computer Training

▪ If job related taxable at 6% ▪ If job-related, taxable at 6%

▪ If not job-related, taxable as CDP service at 1%

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Personnel agencies – furnish temporary or

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part-time help

ƒ Personnel agency is employer

ƒ 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

ƒ 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

ƒ All gross receipts are taxable at 6%, not just

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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

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A contractor’s labor (or service) is subject to tax when

the service is to:

the service is to:

ƒ Existing commercial real property ƒ Existing industrial real property

ƒ Existing income-producing real property

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Who is a “contractor” vs a “manufacturer”

Who is a contractor vs. a manufacturer

ƒ Example) Gross Receipts Test

U f l DRS P bli

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Useful DRS Publication on Sales Tax Applied to

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A contractor’s labor (or service) is

not

subject to tax

when the service is to:

ƒNew construction;

ƒOwner‐occupied residential   

property;

h i bl li i

ƒHospitals and certain other exempt 

entities;

ƒIndustrial, commercial, or income‐

d i l h h

ƒCharitable or religious 

organizations;

ƒQualifying government agencies or 

their agents;

producing real property when the 

service is for the voluntary 

evaluation, prevention, treatment, 

containment or removal of 

ƒReal 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; 

ƒReal property located within a 

public right‐of‐way. ecog ed d a cou t y;

ƒLow‐ and moderate‐income 

housing;

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Contractors are the consumers of materials

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and supplies used in fulfilling their

construction contracts

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Contractor pays tax on purchases of physically

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Contractor pays tax on purchases of physically

incorporated materials

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Generally, a resale certificate cannot be used

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ƒ 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.

ƒ In other words every cent above the contractor’s cost of materials that is ƒ 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.

ƒ Invoicing:

ƒ Materials and labor (with associated sales tax on service portion) ƒ Lump sum (“sales tax included on services”)

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BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS

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“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

ƒ 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

ƒ Persons doing business with nonresident contractors must

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BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS

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Nonresident contractor

means a contractor who does not

maintain a regular place of business in Connecticut.

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Person doing business with a nonresident contractor

means

any

person who enters into a contract with a nonresident

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contractor and includes but is not limited to, property owners,

government, charitable or religious entities and resident or

nonresident general contractors or subcontractors.

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BOND REQUIREMENTS OF NONRESIDENT CONTRACTORS

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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.

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ƒ 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).

ƒ It is the “nature of the service” and not what it is called that determines its taxability.

ƒ 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.

ƒ Service contracts should address sales taxability and ƒ Service contracts should address sales taxability and

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ƒ Consider unbundling taxable services from non-taxable services on

the invoice as well as in service contracts.

ƒ Taxation of services occurs in CT if the benefit of the service is enjoyed in CT.

ƒ When dealing with a non-resident contractor, obtain a Certificate of Compliance.

ƒ 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

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Review Your Nexus Footprint

ƒ CT and other states (registration and compliance requirement) ƒ CT and other states (registration and compliance requirement)

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Review Significant Service Contracts

ƒ Not what is the service “named” but what is the service? ƒ Is sales tax specifically addressed in the contract?

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Review Significant Invoices from Service Providers

ƒ Is sales tax being properly charged (use tax being remitted)?g p p y g ( g )

ƒ Are non-taxable services separately stated from taxable services

on the invoice?

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Determine Sales and Use Tax Exposure

Determine Sales and Use Tax Exposure

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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

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