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Details of Connecticut Sales and Use Tax Legislative Changes Emerging

July 13, 2011

Introduction:

The Connecticut Department of Revenue Services (“DRS”), was forced into fast action by the Connecticut legislature’s passage of significant sales and use tax changes which took effect on July 1, 2011.  We very briefly outlined those changes in our newsletter of May 16, 2011.  Since that time, DRS has provided some much needed guidance with respect to many of the changes.  This newsletter will highlight some of those changes in more detail per the DRS guidelines.  We are not trying to be all-inclusive. 

Transition rules:

  • The new sales and use tax rates (6.35%, 7%, and 9.35%) will not apply to sales of tangible personal property (“TPP”) under a “binding sales contract without an escalator clause” where delivery is made within 90 days after July 1, 2011.  In that event, the tax rate will be 6%.
     
  • With regard to leases of TPP, the higher rates apply to lease payments due and owing on or after July 1, 2011. 
     
  • With regard to a rental of a motor vehicle subject to the new 9.35% rate, if the rental period overlaps July 1, 2011, the rate is 6% for days through June 30, 2011 and 9.35% for days beginning July 1, 2011.
     
  • For sales of taxable services, payments made at any time for services provided before July 1, 2011 are not subject to the new rates or expanded list of taxable services.  Payments made on or before May 4, 2011 for services provided both before and after July 1, 2011 are subject to the pre-July 1, 2011 rules.  Payments made after May 4, 2011 for services provided for periods including July 1, 2011 (or later dates) are subject to the new rates and rules.   

Sales of so-called “luxury items”

  • The sales price before deducting any trade in allowance determines whether the subject item is taxable at the higher 7% rate.  However, the net amount, whether or not over the threshold for the type of item, is the amount taxable at 7%.
     
  • For leases of motor vehicles, the technical term used to determine whether or not the vehicle has a sales price exceeding $50,000 is the “agreed upon value”.  If the lease commenced before July 1, 2011, the agreed-upon value at the commencement of the lease applies, not the value on July 1, 2011.
     
  • Extended warranties are never considered to be part of the sales price threshold for determining whether the subject items exceeds the threshold nor are such warranties ever subject to 7% tax.  They are taxable at 6.35%, whether or not the sales price of the item exceeds its threshold. 
     
  • A gemstone by itself is not considered “jewelry” nor are repairs of jewelry of more than $5,000.

Nonprescription drugs and medicines:

Refer to the DRS publication IP 2007(10) (http://www.ct.gov/drs/cwp/view.asp?A=1510&Q=379222) which lists in detail what are considered to be nonprescription drugs and medicines. 

In addition to the products in the DRS publication, the following will also be taxable:  tonics and preparations in liquid, powdered, or granular, tablet, capsule, lozenge and pill sold as dietary supplements or adjuncts.

Vitamins or supplements will only be considered a prescription medicine (and therefore nontaxable) if it has one of the following federal legends on it:  “Caution: Federal Law prohibits dispensing without prescription” or “Caution: Federal Law restricts this drug to use by or on the order of a licensed veterinarian.”

Details on new taxable services:

Cosmetic medical procedures:   Circumcision, laser eye surgery, reconstructive surgery and dental and orthodontia work are not included in this service.

Motor vehicle towing and road services:   This includes jump starting, changing tires and opening locked vehicles.   AAA or other motor club membership fees are nontaxable, but their towing and road service charges are taxable. 

Yoga instruction provided at a yoga studio:   Such a studio would be a fixed interior location substantially dedicated to yoga instruction.  If the studio is in a facility operated by a federally exempt organization or a municipality, it will remain nontaxable.    Pilates classes were taxable before July 1, 2011 and will continue to be taxable. 

Spa services:  Massage services (including reflexology) provided by someone other than a licensed massage therapist were taxable before July 1, 2011 and will continue to be taxable.  If provided by a licensed therapist, massage services will remain nontaxable.  Hair salon services, whether or not rendered at a spa, are nontaxable if separately stated from taxable services. 

Pet boarding, grooming, and obedience services: 

  • Dog walking by itself is not a taxable service.
  • Pet daycare services are considered to be taxable pet boarding services.
  • Pet bathing and nail clipping are considered to be taxable pet grooming services.
  • Do-it-yourself dog washing is not a taxable pet grooming service.
  • Special services provided while a pet is boarded are considered to be taxable pet boarding services. 
  • Pet sitting at an owner’s home is not considered to be a taxable dog boarding service.
  • If services are an integral part of professional veterinary services, they are nontaxable. 

We recommend that you refer to DRS Special Notice 2011(9), 2011 Legislative Changes Affecting Sales and Use Tax (http://www.ct.gov/drs/cwp/view.asp?A=1514&Q=482490),  and two other documents posted to the DRS website—one called “common sales tax questions concerning new legislation”  (http://www.ct.gov/drs/lib/drs/legislativechanges/q&aconcerninglegislation.pdf) and another called “notice to motor vehicle dealerships”  (http://www.ct.gov/drs/lib/drs/legislativechanges/caranotice.pdf).  

 Presumably, additional guidance will also be forthcoming from DRS. 

You may also be intersted in the following articles:

Changes to the Estate and Gift Tax >>

May Article: Highlights of Tax Changes in the 2011-2013 Connecticut Budget Bill >>

 

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