SN 93(2)
Sales and Use Tax Charges Made by Service Providers
After AirKaman, Inc. v. Groppo and
1992 Conn. Public Acts 17 (May Special Session)
BACKGROUND: On April 28, 1992, the decision of the Connecticut Supreme Court in AirKaman, Inc. v. Groppo, 221 Conn. 751 (1992), was released. The Court determined that day-to-day operational management services were business management services, as the term is used in Conn. Gen. Stat. §12-407(2)(i)(J), and that, while the plaintiff's management fee was taxable as consideration for the rendering of the business management services, the reimbursement for payroll expenses was not included in "gross receipts," as defined in Conn. Gen. Stat. §12-407(9) (the measure of the sales tax), and "sales price," as defined in Conn. Gen. Stat. §12-407(8) (the measure of the use tax).
Both before and immediately after the AirKaman decision was released, the definitions of "gross receipts" and "sales price" were amended by the Connecticut General Assembly to allow the exclusion of reimbursement received by certain management service providers from service recipients in connection with the payroll expenses of the service providers. Then, in direct response to the AirKaman decision, and in order to place the payroll expense exclusion into its proper statutory context, the General Assembly passed additional amendments, clarifying that "gross receipts" and "sales price" include, unless explicitly exempted by statute, all compensation and all employment-related expenses paid to or on behalf of employees of the provider of any services enumerated in Conn. Gen. Stat. § 12-407 (2) (i)
PURPOSE: This Special Notice discusses generally the measure of sales and use taxes on services after AirKaman and 1992 Conn. Pub. Acts 17, §§20, 21, 22 and 23 (May Spec. Sess.). Specifically, it explains the extent to which charges for business management services or management services to industrial, commercial or income-producing real property are subject to sales and use taxes.
STATUTORY AUTHORITY: Conn. Gen Stat. §12-407(8) and (9), as amended by 1992 Conn. Pub. Acts 17, §§20, 21, 22 and 23 (May Spec. Sess.).
EFFECTIVE DATES: As specified herein.
EXCLUSIONS FROM GROSS RECEIPTS" AND "SALES PRICE": In 1992 Conn. Pub. Acts 17, §§20 and 22 (May Spec. Sess.), the Connecticut General Assembly amended Conn. Gen. Stat. §12-407(8) and (9), retroactively to January 1, 1986, to allow for the exclusion of 100% of:
the amount charged for separately stated compensation, fringe benefits, workers' compensation and payroll taxes or assessments paid to or on behalf of employees of a retailer who has contracted to manage a service recipient's property or business premises and renders management services described in [Conn. Gen. Stat. §12-407(2)(i)] ....
These amendments replaced and superseded legislation passed in 1991 which had excluded 95% of management payroll expenses under more limited circumstances. Like the 1991 legislation, the 1992 amendments allow the exclusion only where the employees of a management service provider render their services solely for a service recipient at the property or business premises of the service recipient, and disallow the exclusion for payroll expenses of officers, directors and owners of more than five percent of the outstanding capital stock of the service provider.
INCLUSIONS IN "GROSS RECEIPTS" AND "SALES PRICE": In 1992 Conn. Pub. Acts 17, § §21 and 23 (May Spec. Sess.), the Connecticut General Assembly also amended Conn. Gen. Stat. §§12-407(8) and (9) to place in the proper context the amendments made to the same sections by 1992 Conn. Pub. Acts 17, §§20 and 22 (May Spec. Sess.), and to clarify that
"gross receipts" and "sales price" include, unless explicitly excluded, all compensation and all employment-related expenses, whether or not separately stated, paid to or on behalf of employees of the provider of any of the services enumerated in Conn. Gen. Stat. §12-407(2)(i) (including business management services and management services to commercial, industrial or income-producing real property).
EFFECT ON AirKaman Inc. v. Groppo: The extent to which the 1992 legislation affects the AirKaman decision depends upon the time period in question:
For sales occurring prior to July 1, 1992 (the effective date of the statutory inclusion of all payroll expenses in the measure of gross receipts and sales price), the Department has determined that the AirKaman decision requires the exclusion of payroll and payroll related expenses in all situations involving business or property management services under Conn. Gen. Stat. §12-407(2)(i)(I) or §12-407(2)(i)(J), even if the additional restrictions regarding qualifying employees, qualifying services and the test period set forth in the statutory exclusion are not met. To this extent the AirKaman holding exceeds the limitations of the statutory exclusion of payroll and payroll-related expenses that is retroactive to January 1, 1986.
For sales occurring on and after July 1, 1992, AirKaman has been effectively superseded by the 1992 legislation, which, taken as a whole, restricts the exclusion from gross receipts and sales price to only the payroll-related expenses of property or business management service providers under Conn. Gen. Stat. §12-407(2)(i)(I) or §12-407(2)(i)(J), subject to the additional restrictions set forth in the amended statutes regarding qualifying employees, qualifying services and the test period (see below).
The AirKaman decision also discusses, in general terms, the issue of "pass-through" expenses (expenses incurred on behalf of the service recipient by the service provider). The Department's longstanding position regarding such expenses is set forth elsewhere in this Special Notice (see below).
QUALIFYING EMPLOYEES: Only where employees (i) are employed directly by a management service provider, (ii) are doing work that their employer is obligated to perform under an agreement to manage a business premises or real property, and (iii) work solely for a single service recipient at a single property or business premises, are the service provider's payroll-related expenses excludable from "gross receipts" and "sales price."
Use of the term "solely" indicates that the General Assembly intended the exclusion to apply only when the employees of the management service provider work for a single service recipient. There is no de minimis exception that would allow employees to be temporarily assigned to work for other service recipients.
Use of the terms "property" and "business premises" indicates that the General Assembly intended the exclusion to apply only when services to a single facility are involved. The word "premises" is defined at Black's Law Dictionary 1063 (5th ed. 1979) as "[a] distinct and definite locality, and may mean a room, shop, building or other definite area, or a distinct portion of real estate...." Thus, according the word "premises" its common meaning, and in the absence of any indication to the contrary from the General Assembly, the exclusions for payroll expenses apply only to "on-site" employees who are not moved from facility to facility, and where the facility is that of a single service recipient.
The employees may not be officers, directors or owners of more than five percent of the outstanding stock of the service provider.
THE TEST PERIOD: For each tax period, to determine whether an employee has worked solely for a single service recipient at a single property or business premises, the employees activities must be reviewed during the period beginning on the latest of (i) the commencement of the management contract, (ii) the date of the employee's first employment by the retailer, or (iii) the date which is six months immediately preceding the date of determination and ending on the date of determination. The date of determination means the last day of the tax period for which the exclusion is sought. The tax period is the monthly or quarterly filing period specified in Conn. Gen. Stat. §12-414(l).
Example: The tax period for which the exclusion of payroll expenses from the measure of sales and use taxes is sought ends on January 31, 1993. The management contract commenced on January 31, 1992, and the employee in question has been employed by the retailer since March 31, 1992. The employee must have been employed solely for a single service recipient at a single property or business promises for the six months from July 31, 1992 to January 31, 1993 in order to qualify for the exclusion of payroll expenses from "gross receipts" and "sales price" for the tax period ending January 31, 1993. For the tax period that ends on February 28, 1993, the employee must have been employed solely for a single service recipient at a single property or business premises for the six months from August 31, 1992 to February 28, 1993 in order to qualify.
QUALIFYING SERVICES: For the exclusions from "gross receipts" and "sales price" to apply, the services that are performed must be fairly characterized, on the whole, as business management services, as defined in Conn. Agencies Regs. §12-407(2)(i)(J)-l, or management services to industrial, commercial or income-producing real property, as defined in Conn. Agencies Regs. §12-407(2)(i)(l)-l. A variety of functions may be performed by employees of a provider of such services including, but not limited to, repairs, maintenance, janitorial, security, groundskeeping, the services of maids, bellhops, desk clerks, restaurant and kitchen personnel, as well as management and supervision. Such employee functions must, however, be performed in the context of an overall agreement to manage a business premises or real property. The services must be performed by the service provider's employees (and not by independent contractors) at the service recipient's property or business premises. Service providers and service recipients must maintain complete records substantiating that these conditions have been met.
USE OF RESALE CERTIFICATES BY MANAGEMENT SERVICE PROVIDERS TO PURCHASE TAXABLE SERVICES: Where a management service provider uses independent contractors rather than its own employees to render business management services or management services to commercial, industrial or income-producing real property, the services of the independent contractors may be purchased on a resale basis if the services become an integral, inseparable component part of management services which are to be subsequently sold by the management service provider to the service recipient. (See Conn. Gen. Stat. §§12-410(5) and 12-411(14).) In such cases, the management service provider's expenses in connection with the independent contractors do not qualify for the payroll expense exclusion under Conn. Gen. Stat. §12-407(8) and (9) because those rendering the services are not employees of the management service provider.
If a management service provider retains the services of temporary workers through a personnel agency, such workers do not become the management service provider's employees, and the management service provider's payroll expenses in connection with the temporary workers do not qualify for exclusion under Conn. Gen. Stat. §12-407(8) and (9). However, the management service provider may be able to purchase such services on a resale basis if the services become an integral, inseparable component part of management services which are to be subsequently sold by the management service provider to the service recipient.
EXPENSES TO BE INCLUDED IN THE MEASURE OF SALES AND USE TAXES: Generally speaking, a provider of services enumerated in Conn. Gen. Stat. §12-407(2)(i) must include all expenses that are billed to a service recipient in the measure of the sales and use taxes, even if such expenses are separately stated on the bill or invoice to the service recipient. To this general rule, there is one notable exception, for the reimbursement of a service provider by a service recipient for payments of expenses that are the legal or contractual obligation of the service recipient, which the service provider pays to a third party on behalf of the service recipient as an accommodation to the service recipient and for which the service provider had no liability to the third party. For example, if the service provider pays a service recipient's real property taxes or pays the premium on a fire insurance policy which insures the service recipient's buildings and on which the service recipient is the insured, the reimbursement received by the service provider for having paid these expenses of the service recipient is not includable in the measure of the sales and use taxes.
In contrast, a provider of services enumerated in Conn. Gen. Stat. §12-407(2)(i) must include in the measure of the sales and use taxes all reimbursement of the service provider by a service recipient for expenses that are the legal or contractual obligation of the service provider and for which the service provider is liable to a third party, even if such expenses are separately stated on the bill or invoice to the servicerecipient. See Geckle v. Dubno, 2 Conn. App. 303, 478 A.2d 263 (1984). For example, if the reimbursement of the service provider by the service recipient is for insurance premiums payable on an insurance policy that insures the service provider, or for property taxes payable on the service provider's property, the reimbursement is includable in the measure of the sales and use taxes.
EFFECT ON OTHER DOCUMENTS: None affected.
EFFECT OF THIS DOCUMENT: A Special Notice is a document that announces a new policy or practice in response to changes in State or federal laws or regulations or to judicial decisions. A Special Notice indicates the Department's informal interpretation of Connecticut tax law and may be referred to for general guidance by taxpayers or tax practitioners.
SN 93(2)
Sales and use taxes
Business and property management services
Issued: 4/13/93