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Connecticut Sales and Use Taxes on Services, Taxable Services

December 08, 2010

Douglas A. Joseph, CPA

Tony J. Switajewski, CPA

Connecticut's sales and use tax laws include a proliferation of tax on "enumerated services."  In contrast, most states tax somewhere between no services and a few select ones.  The roots of this Connecticut anomaly date from when a Connecticut income tax was a "sacred cow," and the legislature tried everything in its power to maintain its revenue base without one.  Services began being taxed by Connecticut in 1975 but grew wildly in 1989 (the last non-election-year before enactment of the income tax in 1991).  With the introduction of the personal income tax in 1991, a slight scaling back of the taxable service base as well as a reduction in the highest-in-the nation sales tax rate of 8% to 6% occurred.  Legislative changes since 1991 would best be described as tweaking.  The business community continues to criticize some of the state's taxable services to Connecticut's General Assembly to no avail while the Connecticut Department of Revenue Services ("DRS") and Connecticut's courts bulged with taxpayer disputes.

Basics of Connecticut Sales Taxation on Services

As mentioned above, Connecticut applies sales and use taxes to "enumerated services."  Unlike tangible personal property, the sale of which is presumed taxable before evaluating whether there are exemptions that could make it nontaxable, services are presumed to be non-taxable unless "enumerated" (i.e., listed as a taxable service). 

In general, service providers (with a physical presence in Connecticut) are required to charge Connecticut sales or use tax on their taxable services when the benefit of the service is "enjoyed" in Connecticut.  If a "service recipient" (i.e., the Connecticut customer) is not properly charged sales tax when applicable, they are nonetheless required to voluntarily pay the tax in the form of "use tax".  Determining if a retailer has nexus in Connecticut, if the service is considered taxable and if the benefit of a service is enjoyed in Connecticut, can keep tax practitioners, along with their business clientele, busy and challenged all the time.  

As with sales of tangible personal property ("TPP"), there are numerous exemptions and exclusions that apply to sales and use taxes on services.  For example, the sales of services to exempt charitable or government organizations are exempt.  In addition, taxable services can be eligible for a resale exemption when they are an "integral and inseparable component part" of another taxable service that is sold, an examplebeing  a subcontractor's work (e.g, plumber) rendered for a general contractor with respect to the renovation of real property.  Another important exemption is one for any type of service rendered to an identically owned affiliated organization. 

Focus on Examples of Taxable Services

The list of enumerated services is lengthy.  There is detailed information available on some or most of the services on the DRS website.  We can also guide you in that regard.  Some of the more complex services impacting our business clients include:

  • Business analysis, business management, business management consulting and business public relations services ("business management services", for short).
  • Computer and data processing services.
  • Employment and personnel services.
  • Services to real property.

In this article we will explore business management services. 

Business Management Services

Service providers typically use words like management, analysis and, especially, consulting when marketing themselves, even if they are not actually rendering these types of services.  Often, service providers even put words like those into their names.  DRS sales and use tax auditors  review  invoices, contracts and service provider names  looking for  these key words to determine if Connecticut sales and use tax is being applied.  Imagine a  business under audit, whether the service provider or service recipient, trying to dig their way out of a misnomer.  A key planning point is:  don't call it "management" or "consulting" if it's really something else.  Conversely, if you call it something else but the service really is taxable management or consulting, be prepared to be found out when audited (i.e., "a rose called by any other name is still a rose"). 

Business management services are taxable in Connecticut when they're rendered for a service recipient's "core business activities" or "human resource management activities."  The latter category is pretty straightforward and doesn't merit much discussion.  One subplot does merit coverage.  Personnel training falls under this latter category with some surprising twists.  First, there are many scenarios when personnel training is deemed nontaxable by virtue of not being "job-related training."  Secondly, Connecticut employees may attend a seminar outside of Connecticut and "bring back" their knowledge to Connecticut.  Whether or not the service provider had Connecticut nexus, the training may well be taxable (e.g., self-assessed use tax is imposed on the employee's employer). 

"Core business activities" are those which directly relate to a service recipient's lines of business, capital structure, budgeting and strategic planning.  There is also a litany of service categories that are not considered to be core business activities, such as the administration of payroll, employee insurance claims and company mailroom as well as "marketing" and investment advice. 

When an otherwise business management service is provided by a service provider in its capacity as a professional, such services are excluded from being taxable.  This includes an accountant providing financial statement or tax preparation, an engineer or architect's services, a pharmacist advising a nursing home on medications, etc.  However, when a "professional" renders services that go beyond their professional license or training (e.g., an accountant providing management consulting services), the professional service exclusion does not apply.

There are two other important exclusions.  First, there is one for a general partner managing a limited partnership when compensation is in the form of partnership profits or if the general partner only provides the services to one limited partnership.  Otherwise, general partner services in managing a limited partnership may well be taxable.  The other important exclusion applies when day-to-day management is provided to a service recipient's business premises and there are service provider employees on site, year round, solely at a single service recipient's business premises.  In such instances, there may be taxable management services but any separately stated (on the invoice) compensation, benefits, workers compensation insurance, and payroll taxes may be excluded from what is taxable.  While this might seem intuitive, a legislative change was required a number of years ago to spare businesses from often staggering tax liabilities. 

With all of the exclusions under business management services, there is a wealth of planning opportunities available.  A general principle of Connecticut sales and use taxation is that if a combination of taxable and nontaxable property and/or services are bundled together into one service, the taxable component will cause the entire service to be taxable.  To avoid this costly and unfair result, the strategy is to unbundle the taxable and nontaxable service components.  Ideally, there would be separate service contracts and separate invoices produced.  Secondarily, one contract and one invoice which clearly identify taxable and nontaxable services and associated fees, may be utilized.  In either instance, the service provider will need to keep detailed time records or other means of valuing the relative components so as to stand up to DRS audit scrutiny.


Sales and use taxes on services are major revenue raisers for Connecticut and other states that impose them.  At the same time, they create untold complexities and ambiguities for service providers and recipients that must be explored.  It is hoped that the legislature and DRS will strive to clarify definitions to make the laws more administrable.  Absent that, taxpayers sometimes find themselves in court to try to sort out the ambiguities.

Our state and local tax professionals are available to provide assistance in exploring these issues before or after a sales tax audit commences.  Please contact Doug Joseph for more information at


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