(H)Guide to Sales and Use Taxes.pdf

Informational Publication 2018(2)

Building Contractors’

Guide to Sales and Use

Taxes

State of Connecticut

Department of Revenue Services

Issued: 12/19/2018 Replaces: IP 2006(35)

2 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

This document is not intended to be used as a legal ruling, but as a general guide for the proper treatment of sales and use taxes as they relate to the construction industry.

Not every potential tax situation is covered in this guide. If you have questions about the taxability of goods or services you provide, contact the Department of Revenue Services (DRS).

Visit the DRS website at portal.ct.gov/drs to preview and download forms and publications.

https://portal.ct.gov/drs

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 3

Table of ConTenTs

The Basics

Labor Charge Contractor’s Labor Subject to Tax Contractor’s Labor Not Subject to Tax

Contractor's Bill to the Final Customer 15 Tax Held in Trust

Condominiums Exempt Purchasers

Types of Nontaxable Contracts Contracts With Exempt Organizations Contracts With Governmental Agencies Federally Recognized Indian Tribes Connecticut Innovations, Inc. (CII) Low and Moderate Income Housing Waste Treatment Facilities Air Pollution Control Facilities Out-of-State Contracts

Construction Contracts with Direct Payment Permit Holders Renovation Construction Projects New Construction Projects Construction Projects That Involve Renovation and New Construction Recurring Taxable Services Provided to Real Property

Purchased by Direct Payment Permit Holders Contractors Paying Sales or Use Tax on Purchases

Materials Used in Construction Contracts

Tools of the Trade Contractor's Purchase of Subcontractor

Services General Contractor Issues a Resale Certificate to

Subcontractor General Contractor Does Not Issue a Resale Certificate to Subcontractor Temporary Personnel Agency Services

Purchasing Under Contracts With Exempt Entities

Nonresident Contractor Requirements

Bond Requirements of Nonresident Contractors Closing a Business

Introduction Obtaining a Sales and Use Tax Permit Keeping Good Records Filing Timely Returns Through the

Taxpayer Service Center (TSC) Filing an Amended Return Sales Tax Requirements for Different Types of Construction Contracts Lump Sum or Fixed Fee Contract Cost Plus Contract Time and Material Contract With an Upset or

Guaranteed Price That May Not Be Exceeded Contractors Collecting Sales Tax From Purchasers Tangible Personal Property or Real Property

Tangible Personal Property Temporary Sheds, Buildings, and Trailers

Installation Versus Repair or Maintenance of Tangible Personal Property Installation of Systems Repair or Maintenance of Tangible

Personal Property Warranty Contracts

Equipment Rental or Service Contract Service Contract Equipment Rental

Types of Real Property New Construction Owner-Occupied Residential Property Commercial Property Industrial Property Income-Producing Property Public Right-of way

Types of Services Services Taxable to All Real Property Services Taxable to Certain Real Property Site Improvements

Amount Subject to Tax Service Charge Reimbursed Expenses

4 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

Air Conditioning (See Central Air Conditioning and Ventilation Systems) Alarm Systems Antennas and Communications Towers Appliances (See Kitchens and Telephone, Audio-Visual, and Computer Cable or Wiring) Appraisals, Real Estate Architectural Services Audio-Visual Cable or Wiring (See Telephone, Audio-Visual, and Computer Cable or Wiring) Awnings (See also Standard Units of Equipment) Bathrooms (See also Standard Units of Equipment) Brickwork/Stonework Building Engineering, Building Planning or Design Services Cabinets (See Bathrooms, Kitchens, and Standard Units of Equipment) Carpentry Carpet Cleaning (See Janitorial Services) Carpeting (See Floor Coverings) Central Air Conditioning Central Vacuum Systems Chimneys Chimney Cleaning Clean Rooms/HVAC Systems (See also Heating Systems and Ventilation Systems) Computer Cable or Wiring (See Telephone, Audio-Visual, and Computer Cable or Wiring) Decks Demolition Dredging Driveways, Parking Lots and Walkways (For asphalt, tar, macadam, and poured concrete areas, see Paving) (For brick, stone areas, or concrete pavers, see Landscaping and Horticulture Services) Duct Work (See Interior Sheet Metal and Ventilation Systems) Electrical (Complete wiring or rewiring of structures or the upgrading of the electrical service of a structure) Electrical Devices

Elevators and Escalators (See also Inclined Stairway Chairlifts) Energy Audits Energy Efficient Heating, Cooling, and Generating Systems Environmental Services Excavating, Grading, and Land Clearing Exterior Sheet Metal Work (See also Gutters) Exterminating Fencing (See also Landscaping and Horticulture Services, Silt Fencing and Underground Pet Barrier Systems) Fire, Water, and Wind Damage (Cleaning, deodorizing, and removal of water or debris) Fireplaces Floor Coverings Floor Refinishing Furnaces (See Heating Systems) Garage Doors Garage Door Openers Garbage Disposals Gazebos (See Sheds and Gazebos) Gutters (See also Exterior Sheet Metal Work and Maintenance Services to Real Property) Hatchways (See Standard Units of Equipment) Hazardous Waste and Other Contaminants of Air, Water, or Soil (See Environmental Services) Heating Systems (See also Clean Rooms/HVAC Systems) Home Entertainment/Home Theater Systems Hot Tubs, Spas, and Saunas House Washing (See Maintenance Services to Real Property and Painting, Staining, Varnishing, and Waterproofing) Inclined Stairway Chairlifts Inspections (See Structural Inspections) Interior Decorators Interior Sheet Metal (Duct work) Janitorial Services (See also Maintenance Services to Real Property) Kitchens Landscape Architectural Services

The Details

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 5

Land Surveying Services Landscaping and Horticulture Services Locksmith Services Mailboxes Maintenance Services to Real Property Management Masonry (See Brickwork/Stonework) Mold Remediation Moving a Structure Outdoor Lighting Painting, Staining, Varnishing, and Waterproofing Paper Shredding Patio (See Landscaping and Horticulture Services) Paving (See also Maintenance Services to Real Property) Pest Control (See Exterminating) Plumbing Power Washing (See Maintenance Services to Real Property) Precast Concrete or Cement Steps (See Standard Units of Equipment) Protection, Patrol Work, and Watchman Services Refuse Removal Retaining Walls (See Landscaping and Horticulture Services) Roofing Roof Warranties Sandblasting Saunas (See Hot Tubs, Spas, and Saunas) Scaffolding and Sidewalk Bridging Septic Systems (See also Standard Units of Equipment) Septic System Cleaning Sheds and Gazebos Sheet Metal (See Interior Sheet Metal or Exterior Sheet Metal Work) Siding Signs Sign Painting and Lettering Services Silt Fencing Snow Plowing/Removal (See Maintenance Services to Real Property) Spas (See Hot Tubs, Spas, and Saunas)

Sprinkler Systems (Interior) (See Landscaping and Horticulture Services for exterior sprinkler systems) Staining (See Painting, Staining, Varnishing, and Waterproofing) Standard Units of Equipment Stock Cabinets (See Standard Units of Equipment) Stonework (See Brickwork/Stonework) Structural Inspection Sump Pumps Swimming Pools (See also Hot Tubs, Spas, and Saunas) Telephone, Audio-Visual, and Computer Cable or Wiring (See also Home Entertainment/Home Theater Systems) ... 59 Testing for Contaminants (See also Environmental Services) Underground Cables

Underground Pet Barrier Systems (See also Fencing) .. 60 Underground Storage Tanks Varnishing (See Painting, Staining, Varnishing, and Waterproofing) Ventilation Systems (See also Clean Rooms/HVAC Systems) Wallpapering Walls (For exterior walls, see Landscaping and Horticulture Services) Warranty Contracts for Real Property (See also Roof Warranties) Water Heaters Waterproofing (See Painting, Staining, Varnishing, and Waterproofing) Welding Wells and Pumps Windows Window Cleaning Window Treatments Wiring (See Telephone, Audio-Visual, and Computer Cable or Wiring)

Appendix Connecticut Tax Forms, Publications, Certificates, and Sales Tax Regulations Index Where to Get Help

6 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes notes

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 7

The basiCs

8 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

Connecticut building contractors and out-of-state contractors performing services in Connecticut are generally required to collect sales tax on their sales and pay sales or use tax on their purchases. This guide provides more information about

(1) when a contractor needs to pay tax on their purchases of services and materials, and (2) when a contractor needs to collect sales tax from their purchaser on their sales of contracting services and related materials.

Contractors are relatively unique in that they are both the consumer of materials and retailers of their services.

Therefore, contractors must generally:

1. Pay sales and use tax on materials, supplies, and equipment used in their construction contracts; and

2. Charge and remit sales tax on their taxable services and certain sales of related materials.

Generally, services to existing commercial, industrial, and income-producing property are taxable. Some services to residential property are also taxable.

All contractors must register with the Department of Revenue Services (DRS) if they are conducting business in Connecticut. Taxes for which they may be liable include, but are not limited to, sales and use taxes, withholding tax, corporation business tax, and business entity tax. See Informational Publication 2018(5), Getting Started in Business.

OBTAINING A SALES AND USE TAX

PERMIT

All contractors, including subcontractors, must obtain a Connecticut Sales and Use Tax Permit from DRS prior to providing any services in Connecticut, even if the services provided are not taxable or if the contract is with a tax-exempt entity.

To register a business, visit the Department of Revenue Services at www.ct.gov/register. Use the Taxpayer Service Center (TSC) to complete Form REG-1, Business Taxes Registration Application online. When registering online an electronic direct payment from a savings or checking account must be made for the Sales and Use Tax Permit fee. Credit or debit card payments are not accepted for registration fees. A business may also apply in person at the DRS main office in Hartford or at any of the regional offices. Only the Hartford office accepts cash.

In addition to obtaining a Sales and Use Tax Permit, a nonresident contractor is required to meet requirements imposed on such contractors. See Page 23 for more information on nonresident contractor bond requirements.

When purchasing an existing business, the new business may not use the Sales and Use Tax Permit issued to the previous owner. A new Sales and Use Tax Permit must be obtained. See Informational Publication 2018(10), Successor Liability and Request for Tax Clearance.

KEEPING GOOD RECORDS

Every contractor must keep accurate and complete records of all transactions subject to tax and all purchases made by the business for resale, if applicable. These records will assist the contractor when filing federal and state tax returns and must be available if the business is audited.

These records must be kept for at least six years. Contractors making purchases on resale must maintain records that show how sales or use tax was later paid on those purchases.

Other records the business must keep include:

• Records of sales (sales receipts, cash register tapes, guest checks, invoices, etc.);

• Purchase records (invoices, cash disbursement journal);

• State and federal tax returns including schedules and worksheets;

• Documents that show price changes;

• General ledger;

• Sales, purchases, accounts receivable, and accounts payable journals; and

• Resale and exemption certificates and records of purchases made with certificates.

See Conn. Agencies Regs. § 12-2-12 for more recordkeeping and record retention requirements.

FILING TIMELY RETURNS THROUGH THE

TAXPAYER SERVICE CENTER (TSC)

Form OS-114, Connecticut Sales and Use Tax Return must be filed for every reporting period even if no tax is due or no business activity was conducted for a particular period.

Taxpayers are responsible for filing a timely return whether they are a monthly, quarterly, or annual filer. The due date for Form OS-114 is the last day of the month following the end of the reporting period. If a return is filed late and a payment of tax is due, additional charges for penalty and interest will apply.

INTRODUCTION

https://drsbustax.ct.gov/REG/REGISTRATION.ASPX

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 9

Electronic filing is the easiest, most secure way to file returns on time. All taxpayers (except annual filers) must file electronically and make a tax payment by electronic funds transfer. See Informational Publication 2017(15), Filing and Paying Connecticut Taxes Electronically.

The Taxpayer Service Center (TSC) is a free service on the DRS website at portal.ct.gov/TSC that enables taxpayers to file a return and make a tax payment. A direct payment may be made at the same time as filing the return through the TSC. Upon completing the return, the taxpayer will automatically be directed to the payment page where checking or savings account information may be entered.

After successful filing and payment, a confirmation number will be received that can be printed for the taxpayer’s records. Processed or scheduled payments may be viewed from the main menu of the TSC.

FILING AN AMENDED RETURN

If a mistake is made or something is left off the return, the mistake must be corrected by filing an amended return.

Check the box indicating that this is an amended return and complete it using the correct figures and information for the reporting period.

An amended return claiming a refund of taxes already paid must be filed within three years of the original due date of the return. If tax was incorrectly collected from a customer, the business must prove the sale was not subject to sales and use taxes, or sales tax was otherwise paid in error, and prove the tax was returned to the customer (such as a canceled check or receipted bill). Alternatively, the business may provide DRS with copies of letters or memoranda issued to its purchasers in which it promises either to refund the tax to them, or for current, active customers of the retailer, to credit the refund amounts against amounts due from the purchasers.

If the business has not refunded the tax to its purchasers before DRS issues the refund to the business, then within 120 days after DRS issues the refund, the business must prove it has refunded or credited the refund amounts to its purchasers. A business must immediately return to DRS any amounts not refunded or credited to the business’s purchasers within 120 days after DRS issues a refund.

Businesses should keep their records and any other documentation to justify any adjustments for three years.

For information about DRS policies on issuing refunds of sales and use taxes, see Policy Statement 98(5), Sales and Use Tax Refund Policy.

SALES TAX REQUIREMENTS FOR

DIFFERENT TYPES OF CONSTRUCTION

CONTRACTS

There are three major types of construction contracts. This section briefly explains how sales or use tax should be paid by the contractor on purchases made for these contracts, and how sales tax should be collected by the contractor, if applicable.

Lump Sum or Fixed Fee Contract This type of contract provides for a single price for the total work to be performed on a construction project. Such contracts are generally not subject to adjustment because of higher than anticipated costs incurred by the contractor.

Example: The contractor agrees to install a new roof on a building for $10,000. The contractor cannot charge extra even if more material is used or more time is spent than expected.

Contractors pay sales or use tax on their purchase of materials for completion of the contract. Contractors must charge sales tax to the purchaser on the stated contract price, if the contractor’s service is subject to tax and the purchaser is not exempt. The contract should state whether the total contract price is inclusive or exclusive of sales tax, if applicable.

Cost-Plus Contract This type of contract provides for reimbursement of allowable or otherwise defined costs plus profit. Cost-plus contracts usually require the contractor to use its best efforts to accomplish the work within a specific time frame and a stated dollar limitation.

Example: The contractor agrees to install a new roof on a building. The contract states the property owner will reimburse the contractor for the cost of materials used and labor costs, plus 15%. The work is to be completed by a specific date within a maximum number of labor hours.

Contractors pay sales or use tax on their purchase of materials for completion of the contract. Contractors must charge sales tax from the purchaser on the total consideration paid, if the contractor’s service is subject to tax and the purchaser is not otherwise exempt.

https://portal.ct.gov/TSC

10 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

CONTRACTORS COLLECTING SALES TAX FROM PURCHASERS

Time and Material Contract With an Upset or Guaranteed Price That May Not Be Exceeded The contractor is paid on the basis of direct labor hours at a fixed hourly rate. The contract includes a maximum amount over which the contractor cannot charge.

A time and material contract with an upset or guaranteed price that may not be exceeded provides for:

• Direct labor hours at a specified fixed hourly rate that includes wages, overhead, general and administrative expenses, and profit;

• Materials at cost, including, if appropriate, material handling costs as part of material costs; and

• A ceiling price the contractor exceeds at its own risk.

Example: The contractor agrees to install a new roof on a building. The contractor will be paid at the rate of $75 per hour plus the cost of materials, with the entire cost to the property owner for time and materials not to exceed $10,000.

Contractors pay sales or use tax on their purchase of materials for completion of the contract. Contractors must charge sales tax to the purchaser on the total consideration paid, if the contractor’s service is subject to tax and the purchaser is not exempt.

In order to determine whether a contractor is required to collect sales tax on a sale made to a purchaser, three questions must be answered: (1) what type of service is being performed, (2) what type of property is receiving the service, and (3) whether the purchaser is exempt from sales tax.

TANGIBLE PERSONAL PROPERTY OR

REAL PROPERTY

Property is generally classified as either tangible personal property or real property. Sales of tangible personal property are subject to tax unless a specific exemption applies. Sales of services to commercial, industrial, or income-producing property are subject to tax unless a specific exemption applies. Sales of certain services are subject to tax for all types of real property.

TANGIBLE PERSONAL PROPERTY

The term tangible personal property refers to goods that are not part of real property. Examples of tangible personal property are furniture, curtains, and certain appliances.

The sale of tangible personal property is taxable. However, separately stated charges to install tangible personal property are not taxable, provided that such installation is not itself a service to existing commercial, industrial or income-producing real property.

Statutory Authority: Conn. Gen. Stat. § 12-407(a)(8)(B) and (9)(B)); Conn. Agencies Regs. § 12-426-18(e).

Temporary Sheds, Buildings, and Trailers Prefabricated temporary sheds, offices, or other buildings placed onto sites for use during construction projects are generally considered to be and remain tangible personal property. Prefabricated gazebos and storage sheds are generally considered to be and remain tangible personal property.

INSTALLATION VERSUS REPAIR

OR MAINTENANCE OF TANGIBLE

PERSONAL PROPERTY

This section covers services performed on systems that are integrated into real property, which contain core units that enable them to function. For example:

alarm systems central vacuuming units refrigeration units modular lighting units plumbing systems, which contain:

pumps tanks water heaters heating and cooling systems, which contain:

central air conditioning units furnaces (boilers and burners)

These services may include installation of the units or systems into the real property or may include repair or maintenance of these units, including their electrical or electronic devices.

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 11

Most contractors provide installation, repair and maintenance. Different tax rules apply depending upon which type of job is being done.

Installation of Systems The installation of these systems is considered a service to real property. Contractors are the consumers of the materials used when installing these systems and, therefore, must pay tax on their purchases.

Contractors do not collect tax on their services when installing a system in:

• New construction

• Owner-occupied residential property Contractors must collect tax on their services when installing a system in:

• Existing commercial real property

• Existing industrial real property

• Existing income-producing real property

Repair or Maintenance of Tangible Personal Property Repairing or maintaining units, or their electrical or electronic parts, is a taxable service to tangible personal property. Contractors providing repair or maintenance services must separately state the charge for integral parts and the charge for maintenance or repair services on the bill to the customer. Any fees, such as service call charges, minimum charges, hourly or flat rates, mileage charges, or pickup or delivery charges, are taxable as charges for repair or maintenance services to tangible personal property. The total bill is taxable.

Maintenance or repair service providers are the consumers of supplies used in performing their services. Therefore, sales of tangible personal property, other than integral parts, to a contractor who uses the property in repairing tangible personal property are taxable retail sales to the contractor.

The maintenance or repair service provider may purchase integral parts using a resale certificate. The term integral part means a part, such as a circuit board, heating element, control panel, or gear that retains its separate identity even after being incorporated into repaired equipment. The term integral part does not include materials such as lubricants, coolant, stain, paint, varnish, glue, solder and wire that do not retain their separate identity after being used to repair tangible personal property, but are consumed by the contractor.

A contractor that both installs and repairs or maintains these units or systems may purchase inventory items used in both installation and repairs on a resale basis. For example, if the contractor purchases piping, the purchase may be made using a resale certificate because piping can be used both in the installation of a water system and the repair of an existing water system.

• If the item is used in an installation, the contractor self-assesses use tax on the contractor’s purchase price.

• If the item is used in a repair, the contractor collects sales tax from its customer on the item.

However, a contractor cannot use a resale certificate to purchase items that can only be used in an installation (for example: furnaces, central air conditioning, or water heater units).

Statutory Authority: Conn. Gen. Stat. § 12-407(a)(37)

(Q) and (CC)

Warranty Contracts A warranty contract is a contract that provides for repair services to be performed on an item of tangible personal property only in the event of a future malfunctioning.

Warranty Contracts for Tangible Personal Property:

The sale of a warranty contract to service any item of tangible personal property is taxable. The sales tax applies to the charge for a warranty contract regardless of whether it is separately stated from the charge for the sale of the item or the warranty contract is purchased in a separate transaction from the sale of the item.

Warranty Contracts for Services: When repair services are performed under a warranty contract at no additional charge to the customer, the services are not taxable because the tax is considered to have been paid on the services when the warranty contract was purchased. However, any additional amount a warrantor charges a customer that is not covered under the warranty contract, such as a charge for a deductible, is subject to tax. The warrantor may purchase integral parts and repair labor used to service an item of tangible personal property under a warranty contract on resale from suppliers or third party repairers.

See the definition of integral part on this page and Conn. Agencies Regs. § 12-407(2)(i)(DD)-1, Repair or maintenance services to tangible personal property and contracts of maintenance, repair, or warranty.

12 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

EQUIPMENT RENTAL OR SERVICE

CONTRACT

The rental of equipment is a taxable transaction, whereas only certain services are taxable. However, sometimes it is difficult to distinguish between a contract for the rental of equipment and a contract for services.

The terms of the contract, not the billing method, determine if the transaction is for equipment rental or for a service.

Service Contract A contract is for service if the equipment owner:

• Is hired to do a specific job;

• Maintains complete control over the equipment; and

• Retains discretion over how and when to perform the job.

Example 1 : Contract for a Taxable Service: A bulldozer service receives a job order to tear up an existing parking lot at a shopping center. It dispatches a bulldozer and an operator to handle the job. When the work is completed, it bills as follows:

Bulldozer 3 hrs @ $100 $ 300.00 Operator 3 hrs @ $40 $ 120.00 Subtotal $ 420.00 Sales Tax ($420 x 6.35%) $ 26.67 Total $ 446.67 The entire charge is subject to tax because the renovation of commercial income-producing property is a taxable service.

When performing a taxable service the entire charge is taxable whether or not the charge for the operator is separately stated.

Example 2: Contract for Nontaxable Services: A crane service receives a job order to unload two freight cars of lumber.

The crane service dispatches a crane and an operator to handle the job. When the work is completed, it bills as follows:

Mobile Crane 3 hrs @ $100 $ 300.00 Operator 3 hrs @ $40 $ 120.00 Total $ 420.00 This again is a service contract, not the rental of equipment. The crane service was hired to do a specific job and it had complete control of the actual operation. Since the unloading of freight is not a taxable service, the charge is not subject to tax.

Equipment Rental When the contractor is merely supplying equipment, with or without operators, to a certain site and the customer controls how and when to perform the contract, the contract is for the rental of equipment.

Example 1: Rental Contract without an Operator: A contractor receives a request to supply a bulldozer and a truck without an operator. When the equipment is released the contractor bills as follows:

1 bulldozer 20 hrs @ $100 $ 2,000.00 1 truck 20 hrs @ $50 $ 1,000.00 Subtotal $ 3,000.00 Tax ($3000 x 6.35%) $ 190.50 Total $ 3,190.50 This is a rental of equipment and the entire charge is subject to 6.35% tax.

Example 2: Rental Contract with an Operator: A crane service receives a job order to provide a crane to unload two freight cars of lumber. The crane service dispatches a crane and an operator to handle the job. When the crane and the operator arrive at the job site, the freight company instructs the operator on how and when to unload the lumber. The freight company oversees the crane operator’s work and makes adjustments as necessary. When the work is completed, it bills as follows:

Mobile Crane 3 hrs @ $100 $ 300.00 Operator 3 hrs @ $40 $ 120.00 Subtotal $ 420.00 Tax ($300 x 6.35%) $ 19.05 Total $ 439.05 This is a rental of equipment and the charge for equipment is subject to the 6.35% tax. However, the charge for the operator is not taxable provided the lessor supplies the operator for the leased property and the amount charged for the compensation of the operator is reasonable and is separately stated on the invoice.

Statutory Authority: Conn. Agencies Regs. § 12-426-25

TYPES OF REAL PROPERTY

Real property is land, buildings, and materials permanently affixed to the land or buildings. This guide refers to six types of real property:

New Construction: Types of new construction are:

• The construction of a new building;

• The construction of a new addition that expands the cubic footage of an existing building;

• The replacement of the entire internal structure of a building. This includes removing and replacing floors, support columns, walls, mechanical systems, and electrical systems. Everything in the interior of a building between the floor that touches the ground and the rafters of the roof must be removed;

Example 1: A clothing store is a tenant of one space in a strip mall that has five other stores as tenants. The clothing store completely gutted its space, but the other spaces in the strip mall were left untouched. As the strip mall is only one building and only a portion of the building was gutted, the work done on the tenant’s space does not qualify as new construction.

Example 2: A manufacturer contracts to have 90% of the square footage of its recently purchased facility gutted, removing the internal walls, support columns, floors, and electrical and mechanical systems. The manufacturer plans to have both manufacturing and R&D operations take place in the building. Because the construction work needed is different for the section to be used for manufacturing than the section to be used for R&D, the manufacturer is leaving the internal walls, floors, and columns in 10% of the building where its R&D operations will take place. This contract does not qualify as new construction because 10% of the building will not be gutted.

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 13

• Site improvements to real property that put the property to a new use (see Site Improvements on Page 14);

• The substantial rehabilitation of a certified historic structure. For information about the special rules that apply to this type of construction, see CERT-102, Certified Rehabilitation Certificate for Certified Historic Structures; or

• The initial finish out work to the interior of a new building, if there has been no previous use of this space, (storage is considered a use).

New construction generally ends when the Certificate of Occupancy (C.O.) is issued.

A CERT-104, Services Certificate for New Construction, is used to establish the percentage of construction services that is attributable to new construction.

Owner-Occupied Residential Property:

• Is used exclusively for residential purposes;

• Consists of one to three dwelling units (up to a three family house); and

• The owner resides or will reside at the property upon completion of the work.

Commercial Property: Property where the buying, selling, or leasing of goods or services usually takes place. Examples include restaurants, retail stores, office buildings, and gas stations.

Industrial Property: Property where manufacturing or fabricating activities take place. An example is a factory. The grounds surrounding the factory, warehouse, and shipping dock are all part of the industrial property.

Income-Producing Property: Property held for or used in the production of income. Examples include land used for agricultural production and rental property such as an apartment building or nonowner-occupied residential property.

Public Right-of-Way: Property such as a state or municipal street and adjacent area. This property is not considered commercial, industrial, or income-producing property. Services to mains, lines, poles, pipes, and other facilities located along, above, or under a public right-of-way are generally not taxable.

Statutory Authority: Conn. Gen. Stat. § 12-407(a)(37)(I) and Conn. Agencies Regs. § 12-407(2)(i)(I)-1

TYPES OF SERVICES

Services to existing industrial, commercial, and income-producing property are generally taxable, unless the purchaser is exempt from sales and use tax.

Services Taxable to All Real Property Some services are taxable in all cases, whether performed on new construction, owner-occupied residential property, existing commercial property, existing industrial property, or existing income-producing property. These services include, but are not limited to:

Carpet cleaning Maintenance Exterminating Snow plowing and removal House washing Swimming pool cleaning Janitorial Swimming pool maintenance Landscaping Window cleaning Locksmith services

Additional information about these and other services can be found in the Details section of this guide beginning on Page 25.

Statutory Authority: Conn. Gen. Stat. § 12-407(a)(37)(T), (V), (W), (X), (Y), (Z), and (AA)

Services Taxable to Certain Real Property Services are generally taxable to existing commercial, industrial, or income-producing property, even if they are not taxable when performed on owner-occupied residential property or new construction. These services include, but are not limited to:

Air conditioning Paving Carpentry Plastering Carpeting Plumbing Construction management Property management Demolition Refuse removal Electrical Roofing Elevator or escalator work Sandblasting Excavating Siding Exterior sheet metal work Staining Flooring Structural inspection Foundation work Ventilation Heating Wallpapering Masonry Welding Painting

Statutory Authority: Conn. Gen. Stat. § 12-407(a)(37)(I)

14 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

Site Improvements Site improvements are improvements made to real property other than buildings. Certain site improvements put the property to a new use and are considered new construction.

The construction of roadways, parking lots, in-ground swimming pools, tennis courts, and decks put the property to a new use.

Walkways, driveways, and patios must be made of poured concrete or asphalt to be considered nontaxable new construction instead of a taxable landscaping service.

These services can be considered new construction work whether or not these improvements are in connection with the construction of a new building.

Other site improvements merely enhance an existing use of the property and are not considered new construction.

The installation of wells, septic systems, utility lines, storm water drainage systems, and outdoor lighting systems do not put the property to a new use. Such services are not new construction unless the construction of the improvement is directly connected with new construction as defined above.

A CERT-104, Services Certificate for New Construction, is used to establish the percentage of construction services that is attributable to site improvements.

AMOUNT SUBJECT TO TAX

Once contractors have determined the type of property and type of service they are providing, they need to determine the amount of the bill that is subject to sales tax.

SERVICE CHARGE

A contractor’s service charge, sometimes referred to as the labor charge, is determined by subtracting the cost of materials (including tax paid on materials) from the total contract price. In other words, every cent above the contractor’s cost of materials physically incorporated into the real property, plus the tax paid on those materials, is considered the service charge.

The service charge includes:

• The actual labor charge;

• Any markup or profit on labor;

• Any markup or profit on materials;

• Overhead expenses;

• Tool or equipment purchase or rental, including tax paid on the rental; and

• Reimbursed expenses incorporated into the bill

(whether or not the charges are separately stated).

REIMBURSED EXPENSES

Generally, reimbursed expenses associated with a taxable service are subject to tax even if separately stated on the invoice. When a business provides a taxable service in Connecticut and bills the customer for both the service and any reimbursable expenses used and consumed by the service provider in providing its services, such as postage, delivery charges, food, travel, and lodging, the entire bill is subject to sales tax.

Example 1: A security company is hired to provide a taxable guard service in Connecticut and presents the following bill.

Guard services $ 2,000.00 Travel and meals $ 300.00 Total $ 2,300.00 The entire bill of $2,300.00 is subject to the 6.35% tax.

Example 2: A landscaping company performs its taxable service for a company located in Connecticut and presents the following bill:

Landscaping services $ 10,000.00 Travel $ 1,000.00 Meals $ 300.00 Lodging $ 900.00 Total $ 12,200.00 The entire bill of $12,200 is subject to the 6.35% sales tax

There is an exception to this general rule:

When the seller of services incurs any expense that is for the sole benefit of and is used by the service recipient, the reimbursement of the expense is not subject to tax.

Examples are when a building contractor pays for a building permit for the building owner, town recording fees, and travel tickets purchased by the service provider for travel by the service recipient and used by the service recipient.

The distinction between expenses that are used and consumed by a service provider and expenses that are used solely by and solely benefit the service recipient is not in any way related to whether the service recipient is contractually obligated or otherwise required to reimburse the service provider for the expenses. Instead, as explained above, the taxability of an item that is the basis for an expense incurred by a service provider depends on how the item is used.

Otherwise, except in specific instances authorized by law, the general rule is that if a service is taxable, the reimbursed expenses associated with it are also taxable.

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 15

LABOR CHARGE

Contractor's Labor Subject to Tax A contractor’s labor is subject to tax when the service is to:

• Existing commercial real property;

• Existing industrial real property;

• Existing income-producing real property; or

• Any real property if it is one of the services listed in

Services Taxable to All Real Property on Page 13.

Contractor’s Labor Not Subject to Tax A contractor’s labor is not subject to tax when the service is performed on:

• New construction (except for services listed in Services

Taxable to All Real Property);

• Owner-occupied residential property (except for services listed in Services Taxable to All Real Property);

• Charitable or religious organizations;

• Qualifying governmental agencies or their agents;

• Real property owned by federally recognized Indian tribes when the service is performed in federally recognized Indian country;

• Low and moderate-income housing;

• Contracts performed out-of-state;

• Hospitals and certain other exempt entities; or

• Real property located within a public right-of-way.

For more information on nontaxable contracts, see Types of Nontaxable Contracts on Page 16.

CONTRACTOR'S BILL TO THE FINAL

CUSTOMER

The general contractor has two options to choose from when billing the final customer.

Option One The general contractor breaks the bill to the property owner into three components:

• Materials consumed, including tax paid on the materials;

• Service charges, including the markup on materials, overhead expenses, reimbursed expenses, labor charges, and profit; and

• Sales tax on the service portion of the bill, if applicable.

Example 1: The contractor bills its customer:

Taxable labor $ 600.00 Materials $ 400.00 Sales tax on labor ($600 x 6.35%) $ 38.10 Total $ 1,038.10

Sales tax separately stated is held in trust and must be remitted by the contractor. In this example, the contractor must remit $38.10 in tax with its return.

Option Two The general contractor does not break the bill down. Only a total charge is shown on the bill. The bill includes:

• Materials consumed, including tax paid on the materials;

• Service charges, including the markup on materials, overhead expenses, reimbursed expenses, labor charges, and profit; and

• The phrase "sales tax included on services", if applicable.

Example 2: The contractor bills its customer:

Total labor and materials is $1,063.50 (sales tax included on services) The contractor must remit the sales tax on the service portion of the bill only with its return. If the contractor has already paid $12.70 in tax to its vendors on material purchases of $200, the sales tax on the $800 service portion of the bill is $50.80.

Sales tax on the service portion of the bill may be backed out by multiplying the entire service charge by .9403. The result equals gross receipts from services. Subtract the gross receipts from services from the entire service charge. See Examples 3 and 4 in the Appendix.

Regardless of the option chosen, the general contractor must keep accurate records of the actual costs of materials and service, including all subcontracting costs. The general contractor charges tax to the final customer only on the service portion of the contract.

The purchaser of a taxable good or taxable service is responsible for paying use tax to DRS unless the retailer provides the purchaser with a receipt that shows sales tax was charged in one of the manners described above. See Paying Sales or Use Tax on Purchases on Page 20.

A sales invoice or an American Institute of Architects (AIA) document, such as an Application and Certificate for Payment and/or a Continuation Sheet, is an acceptable receipt. A contract does not constitute a receipt.

16 IP 2018(2), Building Contractors' Guide to Sales and Use Taxes

Tax Held in Trust Some contractors have made the mistake of incorrectly reimbursing themselves for tax they paid on materials out of the tax they collect from their customers. Conn. Gen. Stat.

§ 12-408(2) provides that tax collected by a retailer is held in trust for the state and the entire amount of tax collected must be remitted to DRS (even if the tax was charged in error) or refunded to the customer.

Statutory Authority: Conn. Gen. Stat. § 12-408(2);

§ 12-411(2)

CONDOMINIUMS

If a condominium unit is occupied by the owner, it is considered residential real property. When a unit is rented, it is considered income-producing real property for the owner, but would still be treated as residential real property if the tenant purchases the service directly from the contractor.

Therefore, if the contractor performs a service directly for the owner of the condominium unit and the service is a service to real property, the taxability depends on whether the unit is owner-occupied or rented.

If the contractor performs the service directly for a condominium association and the service is a service to real property, including common areas, under Conn. Gen. Stat. § 12-407(a) (37)(I), tax applies to the percentage of the service charge that equals the percentage of the total units that are rental units. See Services Taxable to Certain Real Property on Page 13.

Example: A condominium complex has a total of one hundred units. Forty of the units are owner-occupied and sixty are rental units. The sixty units are income-producing real property. If the contractor is performing a taxable service for the association, 60% of the service charge would be taxable. The contractor must obtain from the condominium association a completed CERT-103, Residential Condominium Association. CERT- 103 requires the association to provide a breakdown of the owner-occupied units as a percent of total units as of the first day of the calendar year.

Often an association contracts with a property management company to oversee the day-to-day operations of the association. The taxable portion of the management fee is equivalent to the percentage of rental units. The property management company may issue a resale certificate to a contractor providing a taxable service as long as the service will be resold to the association. The property management company must collect tax on the taxable services it resells.

Some services, such as landscaping and snow plowing, performed by a contractor to a residential condominium association or to the owner of a condominium unit are 100% taxable, regardless of the percentage of the owner-occupied units. The contractor must charge tax on the entire bill for these services. For examples of these services, see Services Taxable to All Real Property on Page 13.

EXEMPT PURCHASERS

Some purchasers of otherwise taxable contracting services are exempt from sales tax.

TYPES OF NONTAXABLE CONTRACTS

Contracts With Exempt Organizations The following section describes the types of exempt organizations and states which exemption certificate must be issued by the organization to the contractor. The contractor should keep the applicable certificate with its records.

A contractor performing work for one of these exempt organizations should issue a CERT-141, Contractor’s Exempt Purchase Certificate, to its vendors for purchases of materials and supplies installed or placed in the project.

Turn-key contracts with governmental or other exempt entities, in which the exempt entity contracts for a construction project to be completed by the contractor on land not owned by the exempt entity during the construction period, do not qualify for exemption from tax.

• Entity: A charitable or religious organization that holds an

Internal Revenue Service § 501(c)(3) or (13) determination letter or a valid exemption permit issued by DRS.

Certificate: CERT-119, Purchases of Tangible Personal Property and Services by Qualifying Exempt Organizations;

• Entity: Nonprofit charitable hospitals, nonprofit nursing homes, nonprofit rest homes, and nonprofit residential care homes licensed by the State of Connecticut under Chapter 368v of the Connecticut General Statutes.

Certificate: CERT-113, Purchases of Tangible Personal Property and Services by Certain Hospitals, Nonprofit Nursing Homes, Nonprofit Rest Homes, or Nonprofit Residential Care Homes;

• Entity: Tourism districts, as defined in Conn. Gen. Stat.

§ 10-397.

Certificate: CERT-134, Exempt Purchases by Qualifying Governmental Agencies;

• Entity: Materials Innovation and Recycling Authority (MIRA) (formerly, the Connecticut Resource Recovery Authority (CRRA)) or a lessee or operator of a MIRA project.

Certificate: CERT-131, Exemption for Projects of the Connecticut Resource Recovery Authority and Solid Waste-to-Energy Facilities. CERT-131 may also be issued for purchases of services or tangible personal property used or consumed in operating a solid waste-to-energy facility.

IP 2018(2), Building Contractors' Guide to Sales and Use Taxes 17

Contracts With Governmental Agencies Qualifying governmental agencies issue CERT-134, Exempt Purchases by Qualifying Governmental Agencies, to the contractor. Qualifying transactions with governmental agencies include:

• Sales to the United States government and its agencies;

• Sales to the State of Connecticut and its agencies;

• Sales to political subdivisions of Connecticut (cities and towns and their agencies, including municipal housing authorities);

• Sales of tangible personal property or services used to develop property that the State of Connecticut is under contract to purchase through a long-term financing contract;

• Sales in connection with the demolition, remediation or preparation of Adriaen’s Landing and Rentschler Field; and

• Sales to tax districts.

Agent of the Government: A governmental agency may appoint a business to act as its agent to purchase goods and services. A principal-agent relationship exists between a business and a governmental agency when all of the following conditions are met:

• The business is expressly acting as an agent for the governmental agency. The contract between the business and the governmental agency must state that the business is acting as an agent for the governmental agency;

• All purchases made by the business for the governmental agency are used exclusively for the governmental agency’s benefit; and

• The governmental agency issues CERT-134 to the business.

Using CERT-134: The governmental agency signs CERT-134, or in the alternative, the business appointed by the governmental agency (as explained above) signs CERT-134 as the purchaser and designates itself as agent of the governmental agency. The business attaches to the CERT-134 a copy of documentation from the governmental agency expressly designating the business as agent.

Federally Recognized Indian Tribes Contractors performing services in Indian country of a federally recognized Indian tribe must receive a completed CERT-127, Exempt Purchases by an Enrolled Member or by the Tribal Government of the Mashantucket Pequot Tribe or Mohegan Tribe, from an enrolled member or agent of the Indian tribe. Purchases of tangible personal property outside of Indian country of the tribe by contractors or subcontractors of the tribe for use in projects for the tribe within Indian country of the tribe are not subject to Connecticut sales or use tax provided the contractors or subcontractors comply with the provisions of Conn. Gen. Stat. §§ 12-407(a)(6) or 12-408c. See Ruling No. 2002-3 for more information on purchases of tangible personal property within and outside of Indian country of the tribe.

Contractors issue CERT-128, Exempt Purchases by Contractors in Connection With Construction Projects on the Mashantucket Pequot or Mohegan Reservations, to their vendors when making purchases of tangible personal property where title passes to the contractor in Indian country of the tribe or where delivery of rented property is taken by…