At its meeting on January 22, the Connecticut Sales and Use Tax Task Force, which is chaired by Rep. Carl Schiessl (D), House cochair of the Finance, Revenue, and Bonding Committee of the General Assembly, adopted its final recommendations. The written report of the task force should be ready for distribution to the Joint Finance, Revenue, and Bonding Committee of the General Assembly in approximately two weeks.
The task force approved nine specific recommendations and referred three others to the Finance Committee for further review. The aggregate fiscal note on the recommendations that were approved is approximately $68 million. The members of the Finance Committee serving on the task force cautioned that the revenue impact of those recommendations would be reviewed closely by the Finance Committee.
The recommendations that were approved by the task force were to:
- Exempt repair and replacement parts and enhancement parts for manufacturing machinery, which has a fiscal note of $6.5 million. Under current law, repair and replacement parts are partially exempt and a partial refund is available for their purchase. The separate purchase of parts to enhance machinery is taxable.
- Allow trade-ins of like-kind property intended to be resold, which has a fiscal note of $1 million. Under current law, only motor vehicles, snowmobiles, vessels, and farm tractors qualify for a trade-in.
- Exempt deposits on tangible property, with a fiscal note of $100,000. Under current law, some deposits (e.g., bottle deposits) are exempted, while others, such as deposits on the core charge for car batteries, are subject to tax. This proposal would exempt all deposits.
- Allow motor vehicle manufacturers' rebates assigned to the dealer at the time of sale to be excluded from the sales price, which has a fiscal note of $4 million. These rebates currently are included in the measure of tax.
- Treat sale-leaseback transactions as one transaction only, with a fiscal note of $2 million. Under current law, there may be a tax both on the original transfer and on the subsequent lease payments, depending on how the transaction is structured.
- Repeal the tax on business analysis, management, management consulting, and public relations services under C.G.S. section 12-407(2)(i)(J), which has a fiscal note of $39 million. The task force received position papers from both the Connecticut Society of Certified Public Accountants and task force members urging its repeal.
- Repeal the tax on paving, painting, staining, wallpapering, roofing, siding, and exterior sheet metal work, with a fiscal note of $10 million. Such services currently are taxable, unless performed in connection with new construction.
- Exempt newspapers sold over the counter, with a fiscal note of $3.5 million. Currently only newspapers sold by subscription are exempt.
The Department of Revenue Services recommended modifying the regulations applicable to construction contractors to clarify those situations in which contractors may purchase tangible personal property on resale. The DOR, which intends to make these changes by regulation, projects that this would improve the enforcement of this tax and possibly increase revenue.
One member of the task force proposed that environmental remediation services provided to the purchaser of a parcel that already was subject to a mandatory cleanup order be exempt from tax. Under current law, only "voluntary" cleanups are excluded from the tax. The issue raised was whether the cleanup of a parcel subject to a mandatory cleanup order can be considered voluntary if performed for a new buyer of the parcel that is unrelated to the party that received the cleanup order. Because of concerns over the fiscal impact and policy issues, this proposal was referred to the Finance Committee for further study.
Another member of the task force suggested that Connecticut adopt either sales tax "holidays" for purchases of clothing, as New York has done, or broaden its exemption on clothing and footwear to match those in neighboring states, such as Massachusetts. This issue also was referred to the Finance Committee for further study.
A third member of the task force proposed that the current exemption for services between related corporations under C.G.S. section 12-412(62) be expanded to facilitate the conduct of business in Connecticut. Specifically, the proposal would (1) relax the requirement of 100 percent affiliation to 51 percent, (2) allow the exemption to apply to nonstock business entities such as limited liability companies, and (3) broaden the exemption to include entities under common ownership or control, such as brother-sister corporations, and not just wholly owned corporations. This proposal also was supported by the Connecticut Society of Certified Public Accountants. After brief discussion, the task force referred this proposal to the Finance Committee for a possible separate task force project.
Finally, the Department of Revenue Services was asked to propose new legislation to enhance its ability to enforce the sales and use tax, particularly on purchases made out-of-state and delivered into Connecticut. The department is expected to have a draft of its enforcement initiatives in the next couple of weeks.
Reprinted with permission from the February 9, 1998 issue of State Tax Notes.