Publications

Presented at the Ninth Annual Connecticut State Tax Issues Update ’99 November 11, 1999.
Reprinted with permission from PESI.

TABLE OF CONTENTS
I. Exemptions

A. Legislative Changes

1. Personnel Training Services
2. Sale and Leaseback Arrangements
3. Patient Care Services by Hospitals
4. Vessels
5. Renovation and Repair Services of Residential Property
6. Building Material Suppliers
7. Repair, Replacement and Enhancement Parts
8. Inclined stairway chairlifts
9. Low and Moderate Income Housing
10. Nonprescription Medicines
11. Joint Ventures
12. Services between wholly owned entities
13. Firearm Safety Devices
14. Bicycle Helmets
15. Freight Railroad Equipment
16. Calibration Services
17. Shoe Repairs
18. “Call Before You Dig” Services
19. Diesel Fuel for Generators
20. Motor Vehicles sold to limited liability companies
21. Trade-ins
22. Coupons
23. Deposits
24. Newspapers

B. Administrative Announcements

1. “Outsourcing” and Resale of Computer and Data Processing Services
2. Business Management and Business Management Consulting Services

C. Judicial Decisions

1. Meals v. Bulk Sales
2. Management v. Janitorial Services Removal of Hazardous Waste
3. Management v. Personnel Services

II. Taxable Services and Property

A. Legislative Changes

1. Electric Power
2. Definition of Retailer
3. “Engaged in Business in Connecticut”

B. Administrative Announcements

1. Computer and Data Processing Services and Business Management Services
2. Sales of Motor Vehicles to Nonresident Military Personnel

C. Judicial Decisions

1. Books and Records
2. Internet Access
3. Customized Software
4. Statute of Limitations

III. Developments Related to Particular Businesses

A. Supermarkets
B. Biotechnology Industry
C. Computer-Related Services
D. Internet Access and E-Commerce
E. Air and Water Pollution Control Equipment

IV. Managed Compliance Program

A. Background
B. Managed Audit Agreements
C. Managed Compliance Agreements
D. Direct Payment Permits

V. Miscellaneous Tax Provisions

A. Sales Tax Rebate
B. Operation Equity
C. Sales and Use Tax Refund Policy
D. Sales and Use Tax Regulations
E. Repeal of Cabaret Tax
F. Tax free transfers of Real Property to wholly owned LLCs
G. Farmer’s Guide to Sales and Use Taxes

APPENDIX

I. Exemptions
A. Legislative Changes (SN 99(7))

1. Personnel Training Services. Effective July 1, 1999, job-related personnel training services otherwise taxable under C.G.S. § 12-407(2)(i)(J) are exempt from sales and use tax when provided by an institution of higher education licensed or accredited by the Connecticut Board of Governors of Higher Education. Previously, job-related personnel training provided by these institutions was considered taxable business management consulting services relating to human resource management activities only if the training was not open to the general public or if the institution was directly engaged and paid by an employer. (P.A. 99-173 § 10).

2. Sale and Leaseback Arrangements. Effective July 1, 1999, sale of equipment (or other tangible personal property) is exempt from sales and use tax if within 120 days from the original sale the purchaser sells or contracts to sell the equipment to a retailer who will then lease the equipment back to the original purchaser in a taxable lease. This provision eliminates the imposition of two taxes on a sale/leaseback arrangement and enables the original purchaser to purchase the equipment free from sales and use tax even though at the time of purchase the original purchaser has not found a retailer to purchase the property and then lease such property back to the original purchaser. (P.A. 99-173 § 11). The DRS is currently in the process of preparing a Special Notice and exemption certificate for this exemption.

3. Patient Care Services by Hospitals. Effective July 1, 1999, the tax rate for patient care services under C.G.S. § 12-407(2)(i)(FF) is reduced from 6% to 5.75% and patient care services provided at a short-term acute hospital operated exclusively by the State of Connecticut are exempt from tax. (P.A. 99-173 §§ 12, 13 and 15). Special Notice 99(10), 1999 Legislative Changes Affecting Hospitals discusses this exemption.

4. Vessels. Effective July 1, 1999, the sale of vessels (meaning all types of watercraft other than seaplanes) to nonresidents who maintain no permanent place of abode in Connecticut and who will not register the vessel in Connecticut are now exempt from sales and use tax. Also, fabrication labor and repair and maintenance services to vessels are exempt from sales and use tax. (P.A. 99-173 §§ 13 and 21). The DRS is currently in the process of preparing a Special Notice on this exemption and revising CERT-125 for use of sales of vessels.

5. Renovation and Repair Services of Residential Property. Effective July 1, 1999, the sales and use tax on paving, painting or staining, wallpapering, roofing, siding and exterior sheet metal work to residential real property is being phased out as follows: on or after July 1, 1999 the tax is 4%; on and after July 1, 2000 the tax is 2%; and on and after July 1, 2001 the services are exempt. (P.A. 99-173 §§ 13 and 15).

6. Building Material Suppliers. Certain building material suppliers can qualify to remit tax at the time they receive payment for materials or services from contractors, subcontractors or repairers. A supplier must demonstrate by July 1st of any year that (1) in two of the four most recent calendar quarters at least 50% of its sales of building materials were to contractors, subcontractors or repairers; and (2) it was a materialman authorized to file mechanic’s liens under state law with respect to such sales. Tax on the full purchase price, including any unpaid portion, must be paid within one year of the original date of sale. (P.A. 99-173 §§ 14 and 28). For details, see Special Notice 99(13) “Pay when Paid” Method for Materialmen and REG-20 Annual Application for a Materialman to Remit Sales Tax Under the “Pay When Paid” Method.

7. Repair, Replacement and Enhancement Parts. Effective July 1, 1999, repair and replacement parts for the following exempt items are now also exempt, whether purchased separately or with the exempt item: (1) medical equipment (such as corrective supports, wheelchairs and equipment used to support vital life functions) exempt under C.G.S. § 12-412(19); (2) glucose monitoring equipment exempt under C.G.S. § 12-412(54); and (3) special equipment exempt under C.G.S. § 12-412(80) installed in motor vehicles for persons with physical disabilities. (P.A. 99-173 §§ 16, 19, and 26).

8. Inclined stairway chairlifts. Effective July 1, 1999, inclined stairway chairlifts for persons with disabilities and repair, replacement and enhancement parts for the chairlifts are exempt. (P.A. 99-173 § 16).

9. Low and Moderate Income Housing. Effective July 1, 1999, the exemption for tangible personal property and services used in the construction, development and rehabilitation of qualifying low and moderate income housing projects is expanded to include projects sponsored and either owned or operated by municipal housing authorities. (P.A. 99-173 § 17).

10. Nonprescription Medicines. Effective July 1, 1999, the exemption for nonprescription medicines under C.G.S. § 12-412(48) is expanded and now includes vitamin or mineral concentrates; dietary supplements; natural or herbal medicines; cough, cold or allergy medicines; antihistamines; laxatives; antidiarrheal medicines; analgesics; antibiotic, antiviral and antifungal medicines; antiseptics; antiringents; anesthetics; steroidal medicines; anthelmintics; emetics and antiemectics; antacids; and eye, ear or nose medications. Excluded from this exemption are cosmetics, dentifrices, mouthwash, shaving and hair care products, soaps and deodorants even if they contain medicines listed in the exemption. (P.A. 99-173 § 18). For a more detailed explanation, see Special Notice 99(12) Sales and Use Tax Exemptions for Nonprescription Drugs and Medicines.

11. Joint Ventures. Effective July 1, 1999, the exemption in C.G.S. § 12-412(58) for certain personnel and business services rendered in connection with joint ventures is expanded to include joint ventures formed for marketing and support of new or experimental products or systems, in addition to production and development. The exemption is increased from 10 to 30 years for joint ventures in existence prior to January 1, 1986 within the aircraft industry. (P.A. 99-173 § 20).

12. Services between wholly owned entities. Effective July 1, 1999, the exemption from sales tax for intercompany services rendered between wholly owned corporations is expanded to included services between other types of business entities where one entity owns a 100% controlling interest in the other or where both entities are 100% owned by another. Entities eligible for this exemption include corporations, trusts, estates, partnerships, limited partnerships, limited liability partnerships, limited liability companies, sole proprietorships and nonstock corporations. This expansion in the law reflects the growing trend of doing business in various forms other than as a corporation. In addition to all the services provided under C.G.S. § 12-412(2)(i), the exemption now also applies to telecommunications services and community antenna television services rendered between wholly owned entities. (P.A. 99-173 § 22).

13. Firearm Safety Devices. Effective July 1, 1999, the sales of and the storage, use or other consumption of firearm safety devices are exempt. Firearm safety devices include safes, lock boxes, trigger and barrel locks and other items designed to enhance home firearm safety. (P.A. 99-173 § 27).

14. Bicycle Helmets. Effective July 1, 1999, bicycle helmets that conform to minimum specifications established by the American National Standards Institute or the Snell Memorial Foundation’s Standard for Protective Headgear for Use in Bicycling are exempt. (P.A. 99-173 § 27).

15. Freight Railroad Equipment. Effective July 1, 1999, railroad locomotives, track ballasts, railroad ties and rails, machinery and equipment used to maintain the railroad right of way which is used or operated exclusively for the carriage of freight are exempt. (P.A. 99-173 § 27).

16. Calibration Services. Effective July 1, 1999, calibration services for manufacturing machinery, equipment or instrumentation and other services associated with registration and compliance of quality management and assurance standards are exempt. Calibration services means independent inspection services performed to verify accuracy in the provision, calibration or recalibration of equipment used to test, measure, monitor or gage any quality, process or environmental equipment used in conjunction with maintaining quality standards or meeting regulatory requirements. (P.A. 99-173 § 27).

17. Shoe Repairs. Effective July 1, 1999, shoe repair services are exempt. There is no definition of “shoe” for purposes of this exemption. The exemption does not apply to repairs of pocketbooks, belts, or other leather products even if such items are repaired at by a shoe repairer. (P.A. 99-173 § 27).

18. “Call Before You Dig” Services. Effective July 1, 1999, business related services provided by public utilities to the “Call Before You Dig” program under C.G.S. § 16-349 are exempt. (P.A. 99-173 § 27).

19. Diesel Fuel for Generators. Effective July 1, 1999, the sale or use of diesel fuel to be used exclusively in portable power system generators that are larger than 150 kilowatts is exempt. (P.A. 99-173 § 27).

20. Motor Vehicles sold to limited liability companies. Effective July 1, 1999, motor vehicles sold to limited liability companies or their members in connection with the organization or termination of the limited liability company are exempt from use tax under C.G. S. § 12-431(a) provided the last taxable sale was subject to tax. (P.A. 99-173 § 29).

21. Trade-ins. Effective July 1, 1998, the value of trade-ins of all like-kind items is exempt from sales and use tax. (P.A. 98-110 § 5). Previously, on trade-ins of motor vehicles qualified for the exemption.

22. Coupons. Effective July 1, 1998, the full face value of any coupon, reimbursable or nonreimbursable, taken by a retailer is excluded from the sales price and gross receipts of a taxable item. (P.A. 98-110 § 5).

23. Deposits. Effective July 1, 1998, battery deposits required under C.G.S. § 22a-245h(a), beverage container deposits required under C.G.S. § 22a-244(a) and any other separately-stated deposit required by law to be paid by a purchaser and refunded by a retailer when the same or similar property is returned, are exempt from sales and use tax. (P.A. 98-110 § 5).

24. Newspapers. Effective July 1, 1998, all newspapers, not only those sold by subscription, are exempt from sales and use taxes. (P.A. 98-110 § 8). See Special Notice 98(13) Sales and Use Tax Exemption for Newspapers for a more detailed explanation of publications that are considered newspapers.

B. Administrative Announcements

1. “Outsourcing” and Resale of Computer and Data Processing Services. In Ruling 98-1 a financial institution that originally had an on-site computer and data processing facility which provided services for its internal functions as well as for its clients entered into an agreement with an unrelated computer and data processing service provider (the “Outsourcing Company”) for the provision of the following services:

a. “LAN Management Services” which are hardware and software support services for the facility and management of the internal local area network (LAN) system used by the taxpayer;
b. “Corporate Enterprise System Processing Services,” which includes PC applications and maintenance of the computer system with respect to the taxpayer’s internal reporting systems;
c. “System Development Services,” which is the group of activities performed by the Outsourcing Company regarding the development, implementation, and maintenance of the outsourced and updated information management systems;
d. “Item Processing Services,” which includes activities such as inputting, verifying, sorting, balancing and reporting of data from checks and other items for both the taxpayer and its clients; and
e. “Automated Teller Machine (ATM) Services,” which include providing ATM network access, processing and ATM card management services to the taxpayer’s clients, and providing sales support to assist the taxpayer in marketing the services to its clients, installing ATM machines at client financial institutions, and training of client financial institution personnel as necessary.

At issue was whether the services provided by the Outsourcing Company were exempt from sales and use tax under the “outsourcing” exemption for computer and data processing services set forth in C.G.S. § 12-412(74) when provided to the taxpayer and the taxpayer’s clients. The Company conceded that each of the services rendered were computer and data processing services. DRS ruled that (1) to the extent that the LAN Management Services consisted of on-site repair or maintenance of computer hardware, such services were taxable as repair and maintenance services to tangible personal property and (2) to the extent that the LAN Management Services consisted of providing prewritten canned computer software in a tangible form, such services were taxable as the sale of tangible personal property. DRS ruled, however, that any computer and data processing services were exempt from sales and use tax when provided to the taxpayer under the outsourcing exemption rule because the taxpayer had formerly conducted such services for its own internal use. The DRS also ruled that the computer and data processing services provided to the taxpayer’s clients fall outside the exemption under C.G.S. § 12-412(74) but the taxpayer could purchase such services from the Outsourcing Company on a nontaxable resale basis if the taxpayer will resell the services without making any intervening use of such services or if the services will become an integral, inseparable component part of any service rendered to the clients. (Ruling 98-1 2/6/98).

2. Business Management and Business Management Consulting Services. In Ruling 98-2 the taxpayer Company assists nursing homes with the Medicaid resident admissions process by performing functions such as (1) completing the resident patient intake form; (2) assigning a case worker to track a resident patient’s Medicaid admission process or the patient’s Medicaid eligibility; (3) acting as the admission liaison with a resident patient’s family and the nursing home; and (4) either completing the Medicaid application forms, or assisting the resident patient in completing the forms. At issue was whether the services provided were taxable business management services (i.e., the controlling or directing of all or a portion of the Company’s core business activities) or taxable business management consulting services (i.e., the furnishing advice and assistance on matters pertaining to the management of the Company’s core business activities). The DRS ruled that the services rendered were neither business management nor business management consulting services because such services were not directly related to the core business activity of the Company which was to provide health care. In reaching its conclusion, the DRS followed similar rulings issued in Ruling 97-1 and Ruling 93-6. (Ruling 98-2 2/24/98).

C. Judicial Decisions

1. Meals v. Bulk Sales. Taxpayers owned a restaurant that sold fish dishes, sandwiches, chowders, salads, desserts and beverages. At issue was whether the sale of three pieces of fish or more and the sales of pints of coleslaw were subject to sales tax. The sale of “meals” (such as pizza and cooked chicken sold by the piece, including buckets of chicken) for human consumption is subject to sales tax but bulk sales of food products (such as whole loaves of bread and whole cakes or pies) are exempt from sales tax. Taxpayers argued that the three pieces of fish and the pints of coleslaw constituted nontaxable bulk sales whereas the Commissioner argued that such food products constituted taxable meals. The Appellate Court held for the Commissioner, reasoning that the sale of the fish pieces was similar to the sale of buckets of chicken and thus constituted taxable meals. The court also concluded that the sale of coleslaw in portions equal to or less than one-half pound does not qualify as a nontaxable bulk sale. (Jones v. Crystal, 47 Conn. App. 694 (1998)).

2. Managerial v. Janitorial Services. Taxpayer, a producer of pharmaceutical products, entered into a contract with Sanitary Maintenance Services, Inc. whereby Sanitary agreed to manage the cleaning, maintenance and sanitation services required at the taxpayer’s West Haven Facility, in exchange for a management fee. Sanitary in turn hired employees to conduct the cleaning services. Taxpayer agreed to reimburse Sanitary for all payroll and payroll related expenses incurred by Sanitary. Bayer paid sales tax on the amount it reimbursed Sanitary for such expenses but later sought a refund of such tax, claiming that the services rendered by Sanitary were managerial and thus the reimbursement of payroll and payroll related expenses were excluded from sales tax under C.G.S. § 12-407(8) & (9). The Commissioner, on the other hand, argued that the services performed by Sanitary were taxable janitorial services under C.G.S. § 12-407(2)(i)(Y). The Superior Court held in favor of the Commissioner. Looking to the substance of the agreement, it concluded that the services Sanitary agreed to perform did not extend to the management of the property or business premises of the taxpayer but rather fell within the commonly understood meaning of janitorial (i.e., cleaning, maintenance, and sanitizing of the taxpayer’s premises). According to the court, the only management services provided by Sanitary were for Sanitary’s convenience in providing the janitorial services. (Bayer Corporation v. Commissioner, 1998 WL 405070 (Conn. Super. 1998)).

3. Removal of Hazardous Waste. Taxpayer collects scrap tires from service stations and tire stores for a fee and delivers them to a tire burning facility. At issue was whether such services were exempt from sales tax under C.G.S. § 12-407(2)(i)(I) which exempts services rendered in the removal of hazardous waste, among other things. Taxpayer argued that scrap tires constitute hazardous waste and the Superior Court agreed. The court reasoned that the tires posed threats to the groundwater, air and soil because of their chemical makeup and their risk for spontaneously combusting. The court rejected the Commissioner’s argument that the exemption from sales tax is limited to specific hazardous waste site cleanups. The DRS has appealed. (Oxford Tire Supply, Inc. v. Commissioner, 45 Conn. Supp. 508 (1998)). Effective June 29, 1999, scrap tires are excluded from the definition of hazardous waste. (P.A. 99-225, § 30, amending C.G.S. § 22a-115).

4. Management v. Personnel Services. Owner of a public shopping mall manages property through a wholly owned subsidiary. The owner and the wholly owned subsidiary entered into a services agreement for the maintenance and security of the mall. The wholly owned subsidiary hires its own employees to perform the services pursuant to the agreement with the owner. The owner reimburses the wholly owned subsidiary for the compensation the subsidiary pays to its employees and for all costs and expenses the subsidiary incurs in providing services to the owner. The wholly owned subsidiary requested a refund of sales tax paid but the DRS denied the request. The DRS contended that the wholly owned subsidiary was providing taxable personnel services to the owner. The wholly owned subsidiary contended that it provided management services and was entitled to exclude from sales and use tax charges for employee payroll and payroll-related expenses under C.G.S. § 12-407(8) & (9). The court held in favor of the wholly owned subsidiary, ruling that the wholly owned subsidiary employees were hired on a permanent basis and were involved in the day-to-day management operations of the mall. The DRS has appealed the theory that the service provider was a wholly-owned subsidiary of the shopping mall and that management services were being provided. (T.W.L.S. Management Company, Inc. v. Commissioner, No. CV98-0492493 S (5/13/99)).

II. Taxable Service and Property

A. Legislative Changes

1. Electric Power. Effective April 29, 1998, the definition of “tangible personal property” includes the generation, transmission and distribution of electricity. Although the electricity may be sold by one person and the distribution and transmission by another, all is subject to sales and use tax if the electricity itself is taxable. (P.A. 98-28 § 116).

2. Definition of Retailer. Effective June 8, 1998, the definition of “retailer” is amended to include out-of-state sellers with no place of business in Connecticut who repair or service items of tangible personal property under warranty in Connecticut, either directly or through an agent, independent contractor or subsidiary. (P.A. 98-244 § 15).

3. “Engaged in Business in Connecticut.” Effective June 8, 1998, the term “engaged in business in the state” is amended to include the repair or service of tangible personal property under warranty in Connecticut, either directly or through an agent, independent contractor or subsidiary, when such items are sold from outside the state to a destination within the state. (P.A. 98-244 § 16).

B. Administrative Announcements

1. Computer and Data Processing Services and Business Management Services. In Ruling 98-4, the company provided its customers with procurement process management services which were generally described as follows:

a. Supplier selection and monitoring services whereby Company selected customer’s suppliers, negotiated agreements between customers and suppliers, and monitored supplier contracts;
b. Procurement services whereby Company managed the actual procurement of goods and services and resolved disputes between customers and suppliers;
c. Accounts payable services whereby Company received and processed invoices from suppliers and authorized customers to pay suppliers; and
d. Support services whereby Company provided support to customers’ personnel to assist with computer software services and problems with customers’ suppliers.

DRS concluded that the supplier selection and monitoring services and the procurement services were potentially taxable as business management services. The DRS needed more information, however, to make a definitive ruling. It did suggest that if, for example, Company managed the procurement of raw materials or office supplies for a manufacturer, the management of these purchases would be related to the core business of the manufacturer and thus be a taxable business management service. On the other hand, DRS ruled that if Company managed the procurement of janitorial or maintenance services for the customer’s business premises, such services would not be taxable because they would be excluded from the definition of core business activity under Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h)(2) as the administration of plant and grounds maintenance. DRS also ruled that the accounts payable services and the support services appeared to be taxable computer and data processing services because they primarily involve the use of computers to process invoices and authorize payments and to transfer data between Company and its customers. The company was instructed to separately state the charges for taxable and non-taxable services. (Ruling 98-4 12/14/98).

2. Sales of Motor Vehicles to Nonresident Military Personnel. Most sales of tangible personal property, including motor vehicles, are subject to 6% sales and use taxes. Members of the armed forces of the United States who are stationed in Connecticut on full-time active duty and are residents of another state may purchase motor vehicles at a reduced rate of 4.5%. Nonresident military personnel may also jointly purchase motor vehicles with their spouses at the 4.5% rate. Special Notice 99(5) describes in detail who is eligible for this reduced sales and use tax rate.

C. Judicial Decisions

1. Books and Records. Restaurant owner’s sales tax returns were audited. At time of audit, taxpayer did not have available ledgers, cash register receipts, guest checks or bank statements for the audit period from which the reported gross receipts could be established. In order to calculate applicable sales tax due, Commissioner made an assessment based on a test period for gross receipts, using a markup over cost for food and alcohol. Specifically, Commissioner used a recreation of a six month period which was extended over the life of the audit as well as an actual two week period as a further means of checking the reasonableness of the audit calculations. The mark-up standards were recognized in the restaurant industry and generally reflected the discount factors claimed by the taxpayer such as happy hour free food, free drinks and extensive use of discount coupons. Court upheld Commissioner’s determination, concluding that the DRS’ method was a conservative industry recognized means which reasonably calculated gross receipts in the absence of sufficient records. (American Restaurant Group, Inc. v. Commissioner, No. CV-98-0492293 S (Conn. Super. Ct. 1999)).

2. Internet Access. In a pending case, America Online opposes the DRS’ position that charges for access to the Internet constitutes taxable computer and data processing services to Connecticut subscribers. America Online also argues that it does not have nexus with Connecticut. (America Online, Inc. v. Gavin, No. CV 90-04928485S J.D. New Britain) (pending).

3. Customized Software. In a pending case, the issue is whether contracts to develop customized software constitutes taxable computer and data processing services or the sale of non-taxable intangible personal property. (Andersen Consulting LLP v. Gavin, No. 98-0492505-S J.D. New Britain) (pending).

4. Statute of Limitations. In a pending case, the issue is whether understating gross receipts for federal and state corporate business tax purposes establishes fraudulent understatement of state sales tax gross receipts for the same time period so as to render void the three year statute of limitations for assessment. (Stewart J. Leonard v. Gavin, No. 98-0492503S J.D. New Britain) (pending). The taxpayer argued that the burden is on the DRS to prove fraud for sales tax and cannot rely on the guilty plea for income tax purposes.

III. Developments Related to Particular Businesses

A. Supermarkets. The sale of food products for human consumption is exempt from sales and use tax. Meals on the other hand are subject to sales and use tax. Supermarkets generally are not considered to be sellers of taxable meals except in the following situations: (1) catering services performed by a supermarket; (2) sales of sandwiches, grinders, coffee or tea prepared in a supermarket at a delicatessen counter or elsewhere for takeout; (3) sales of meals in areas of a supermarket where food is intended to be consumed in the supermarket, such as at snack bars or food courts – meals sold in these designated eating areas are taxable even if taken off the premises by the purchaser. Examples include the following: (1) a customer’s purchase of a meal in a snack bar area of a supermarket is a taxable sale irrespective of whether the customer consumes the meal on or off the supermarket’s premises; (2) a customer’s purchase of a meal in the checkout line of a supermarket is a nontaxable sale (except if the meal is of a sandwich, grinder, coffee or tea) irrespective of whether the customer consumes the meal on or off the supermarket’s premises. (Policy Statement 99(1)).

B. Biotechnology Industry. Since July 1, 1996, the sales and purchases of machinery, equipment, tools, materials, supplies and fuel used directly in the biotechnology industry have been exempt from sales and use tax. DRS has defined many of the key terms of this exemption including the following: (1) Biotechnology is defined as the application of technologies, such as recombinant DNA techniques, biochemistry, molecular and cellular biology, genetics and genetic engineering, biological cell fusion techniques, and new bioprocesses, using living organisms, or parts of organisms, to produce or modify products, to improve plants or animals, to develop microorganisms for specific uses, to identify targets for small molecule pharmaceutical development, or to transform biological systems into useful processes; (2) purchase of items for use in administrative and general management activities, maintenance and repair services, and diagnoses do not qualify for the biotechnology exemption; and (3) the exemption also does not apply to real property. (Policy Statement 98(8)).

C. Computer-Related Services. The sales and use tax rate for computer and data processing services in being reduced in annual increments as follows: sales of services occurring on or after July 1, 1999 through June 30, 2000 are taxed at 3%; services occurring on or after July 1, 2000 through June 30, 2001 are taxed at 2%; services occurring on or after July 1, 2001 through June 30, 2002 are taxed at 1%; and services occurring after July 1, 2002 are exempt from tax. (Policy Statement 98(3)).

D. Internet Access and E-Commerce.

(1) A purchaser of on-line internet access services where the benefit of the services is received in Connecticut is a user of taxable computer and data processing services, and is liable for use tax on the purchase of those services. If the seller of the on-line access services does not charge and collect Connecticut sales or use tax, the purchaser must self-assess the use tax. A Connecticut seller that accepts orders for tangible personal property by computer-including such items as books, prewritten (canned) computer software, computer hardware and equipment or any other goods not specifically exempt for sales and use taxes-and that ships or delivers the items to Connecticut addresses, must charge and collect Connecticut sales or use tax on such sales. (Policy Statement 98(2)).

(2) Community Antenna Television Companies that provide Internet access are to charge sales and use tax for such access at the reduced rate for computer and data processing services (currently 3%) provided that the charges are separately stated; if not separately stated, then such charges are subject to the 6% sales and use tax rate. (Policy Statement 98(6)).

E. Air and Water Pollution Control Equipment. Policy Statement 99(2) provides procedures for making exempt purchases of air pollution control equipment under C.G.S. § 12-412(22) and provides a list of air pollution control equipment and supplies designated as approved by the Commissioner of the Department of Environmental Protection. Policy Statement 99(3) provides procedures for making exempt purchases of water pollution control equipment under C.G.S. § 12-412(21) and provides a list of water pollution control equipment and supplies designated as approved by the Commissioner of the Department of Environmental Protection.

IV. Managed Compliance Program

A. Background. After an in depth study of how other states use audit and compliance programs conducted jointly by the taxpayer and the state revenue department, Connecticut adopted the Managed Compliance Program which is comprised of two key programs: Managed Audit Agreements and Managed Compliance Agreements. Through these two programs and through the direct payment permit, Connecticut is joining only a handful of states that are seeking novel ways to better utilize audit resources. Time will reveal whether these programs result in more effective and equitable audits. For a comprehensive analysis and explanation of the Managed Compliance Program see IP 99(22).

B. Managed Audit Programs. The Managed Audit Program is an agreement between the DRS and a taxpayer that provides for a self-audit by the taxpayer whereby a taxpayer agrees to review selected sales and purchase records and to calculate and determine its liability for sales and use tax. Under the supervision of the DRS, the taxpayer retrieves its own records, provides its internal accounting expertise and compiles proposed adjustments. As an incentive for participating in the Managed Audit Program, the DRS may waive the first $10,000 of interest and 10% of any additional interest and may also waive penalties. (P.A. 99-173, §§ 60 & 62, as amended by P.A. 99-1, § 42 (June Spec. Sess.)).

C. Managed Compliance Agreements. The Managed Compliance Agreement is an agreement between the DRS and a taxpayer that specifies an agreed upon method for calculating and remitting use tax on the taxpayer’s purchases. Under a “true-up” procedure, at the end of the agreement term (up to 3 years) the DRS determines whether the amount of tax reported accurately reflects the taxpayer’s tax liability during the term. If the error percentage after a true-up falls within an acceptable range, then no assessment or refund claim will result. (P.A. 99-173, §§ 60 & 61, as amended by P.A. 99-1, § 41 (June Spec. Sess.)).

D. Direct Payment Permits. Traditionally, businesses pay sales tax to vendors when purchasing taxable goods and services and the vendors then remit the tax collected to the DRS. In some cases, however, the taxability of purchases by certain businesses may not be always determinable at the time of purchase because the determination of the proper rate of tax is dependent on the type of item purchased and how and where the purchaser will use the product. The concept of direct payment allows a business to purchase taxable goods and services without paying tax to the vendor and to remit the appropriate tax directly to the DRS. This process allows businesses time to accurately determine how must tax to assess on their purchases. The qualifying taxpayer must provide the vendor at the time of purchase with a direct payment permit. Purchases not allowed with the direct payment permit include tangible personal property incorporated into new construction of real property and utilities such as gas, electricity and heating fuel. The DRS will issue a direct pay permit where, among other things, the collection of the sales and use tax will not be in jeopardy if the direct permit is used and the holder of the direct payment permit makes sufficient taxable purchases to justify the issuance of the permit. Effective October 1, 1999, amendments to the direct payment permits statute were made to allow more flexibility in its use, particularly with managed compliance agreements. (P.A. 99-173, § 63).

V. Miscellaneous Tax Provisions

A. Sales Tax Rebate. Residents of Connecticut will receive (or have already received) a $50 rebate of sales and use taxes paid if the resident was either (1) required to file Connecticut resident income tax returns for 1998 and filed such return; (2) not required to file Connecticut resident income tax returns for 1998 but were required to file and did file a federal income tax return; (3) not required to file Connecticut resident income tax returns for 1998 but received federal earned income tax credits for 1998; or (4) not required to file Connecticut resident income tax returns or federal income tax returns but received benefits under Title II of the Social Security Act. Married individuals who filed a joint tax return will receive a joint tax rebate of $100. Unlike the tax rebate issued in 1998 which was based on income and property taxes, the 1999 rebate is based on sales tax. As a consequence, individuals receiving such rebates will not have to report the amount as income on their 1999 federal or state income tax returns and thus will not have to pay tax on the amounts received. (P.A. 99-173, §§ 3 & 4). For more details see IP 99(27) Q&A: The 1999 Connecticut Sales Tax Rebate.

B. Operation Equity. Under C.G.S. § 12-416b, if a revenue agency from another state submits information to the DRS that assists in making use tax assessments against Connecticut purchasers of taxable goods or services, that cooperating agency can share up to 50% of the revenue collected. The DRS issued Special Notice 99(6.1) Sharing Use Tax Revenue with Revenue Agencies of Other States – Operation Equity provides details and explanations of the sharing of information arrangement.

C. Sales and Use Tax Refund Policy. In Policy Statement 98(5) Sales and Use Tax Refund Policy the DRS describes in detail the procedures for both retailers and purchasers to pursue sales and use tax refunds. Retailers claiming refunds must provide proof that they have collected tax from the purchasers and remitted such taxes to the DRS and that the retailer has refunded the tax to the purchaser or formally undertakes to refund such tax. Purchasers claiming refunds must file Form AU-524 Assignment of Retailer’s Rights for Refund.

D. Sales and Use Tax Regulations. The following regulations were recently issued:

1. Conn. Agencies Regs. § 12-407(2)(i)(F)-1, Photographic studio services.
2. Conn. Agencies Regs. § 12-407(2)(i)(M)-1, Motor vehicle repair services.
3. Conn. Agencies Regs. § 12-407(2)(i)(N)-1, Motor vehicle parking services.
4. Conn. Agencies Regs. § 12-407(2)(i)(O)-1, Radio and Television Repair Services.
5. Conn. Agencies Regs. § 12-407(2)(i)(P)-1, Furniture reupholstering and repair services.
6. Conn. Agencies Regs. § 12-407(2)(i)(Q)-1, Electrical repair services.
7. Conn. Agencies Regs. § 12-407(2)(i)(R)-1, Lobbying or consulting services.
8. Conn. Agencies Regs. § 12-407(2)(i)(S)-1, Sales agent services.
9. Conn. Agencies Regs. § 12-407(2)(i)(T)-1, Locksmith services.
10. Conn. Agencies Regs. § 12-407(2)(i)(V)-1, Landscaping and horticultural services.
11. Conn. Agencies Regs. § 12-407(2)(i)(W)-1, Window cleaning services.
12. Conn. Agencies Regs. § 12-407(2)(i)(X)-1, Maintenance services.
13. Conn. Agencies Regs. § 12-407(2)(i)(Y)-1, Janitorial services.
14. Conn. Agencies Regs. § 12-407(2)(i)(Z)-1, Exterminating services.
15. Conn. Agencies Regs. § 12-407(2)(i)(AA)-1, Swimming pool cleaning and maintenance services.
16. Conn. Agencies Regs. § 12-407(2)(i)(BB)-1, Services to property other than industrial, commercial or income-producing real property services.
17. Conn. Agencies Regs. § 12-407(2)(i)(DD)-1, Repair or maintenance services to tangible personal property and contracts of maintenance, repair or warranty.
18. Conn. Agencies Regs. § 12-410(5)-1, Resale of services.

E. Repeal of Cabaret Tax. Effective July 1, 1999, the 5% cabaret tax is repealed. The tax was imposed on all amounts charged for admission, food and drink, service or merchandise at any cabaret or similar establishment furnishing music, dancing, or other entertainment for profit in conjunction with the selling or serving of alcoholic beverages. The DRS warns that persons operating establishments that were subject to the cabaret tax should be aware of the 10% admissions tax which is imposed on admission to any place of amusement, entertainment or recreation. Charges for food, beverages, merchandise and service sold in such establishments, however, are not subject to the admissions tax.

F. Tax free transfers of Real Property to wholly owned LLCs and Partnerships. The DRS historically has assessed a conveyance tax on the fair market value of real property contributed by members to limited liability companies or partnerships notwithstanding that there has been no change in beneficial ownership. In many cases, this made it very costly to form a family limited partnership or LLC for estate planning purposes. Under the new law, however, effective for transfers on or after October 1, 1999, the real estate conveyance tax will no longer apply to transfers of real property to a limited liability company or partnership where the transfer represents a mere change in the identity or form of ownership. Thus, for example, unlike under present law, on or after the effective date, individuals may transfer Connecticut real estate to single person LLC or a family owned LLC in exchange for LLC interests without being subject to the real estate conveyance tax. This should make family LLCs much more enticing for holding real estate.

G. Farmer’s Guide to Sales and Use Taxes. IP 99(17) provides details regarding sales and use tax liability of farmers. Retail sales of tangible personal property used exclusively in agricultural production are exempt from sales and use taxes under C.G.S. § 12-412(63) provided the purchaser qualifies for and has been issued a Farmer Tax Exemption Permit. Anyone engaged in agricultural production as a trade or business and who had in the preceding taxable year gross income of $2,500 or more from agricultural production is eligible for such a permit. Applicants whose gross income from agricultural production in the preceding taxable year was less than $2,500 may still qualify for the permit if, in the current or immediately preceding taxable year, the farmer bought an agricultural trade or business from a seller who was issued a permit at the time of the sale. Agricultural production means raising and harvesting any agricultural or horticultural commodity; dairy farming; forestry; raising, boarding or training livestock and poultry; or raising and harvesting fish, oysters, clams, mussels or other molluscan shellfish.

Appendix

Rulings

1. Ruling 98-1
2. Ruling 98-2
3. Ruling 98-4

Special Notices

1. SN 99(5) Sales of Motor Vehicles to Nonresident Military Personnel and Joint Sales of Motor Vehicles to Nonresident Military Personnel and Their Spouses
2. SN 99(6.1) Sharing Use Tax Revenue with Revenue Agencies of Other States
3. SN 99(7) 1999 Legislation Affecting Sales and Use Taxes and the Admissions, Cabaret and Dues Tax
4. SN 99(10) 1999 Legislative Changes Affecting Hospitals
5. SN 99(12) Sales and Use Tax Exemption for Nonprescription Drugs and Medicines
6. SN 99(13) “Pay When Paid” Method for Materialmen
7. SN 98(13) Sales and Use Tax Exemption for Sales of Newspapers

Policy Statements

1. PS 99(1) Sales and Use Taxes on Meals
2. PS 99(2) Tax Exemptions for Certain Air Pollution Control Equipment
3. PS 99(3) Tax Exemptions for Certain Water Pollution Control Equipment
4. PS 98(2) Sales and Use Taxes on Access to the Internet and Other On-Line Sales of Goods and Services
5. PS 98(5) Sales and Use Tax Refund Policy
6. PS 98(6) Taxation of Internet Access Provided by Community Antenna Television Companies
7. PS 98(8) Exemption from Sales and Use Taxes for Items Used Directly in the Biotechnology Industry

Informational Publications

1. IP 99(17) Farmer’s Guide to Sales and Use Taxes, Motor Vehicle Fuels Tax and Estimated Income Tax
2. IP 99(22) Connecticut Managed Compliance Program
3. IP 99(27) Q&A: The 1999 Connecticut Sales Tax Rebate

Judicial Decisions

1. Jones v. Crystal
2. Bayer Corporation v. Commissioner
3. Oxford Tire Supply, Inc. v. Commissioner
4. American Restaurant Group, Inc. v. Commissioner
5. T.W.L.S. Management Company, Inc. v. Commissioner