DRS: SN 91(17), Sales and Use Taxes on Tax Preparation Services

 

STATE OF CONNECTICUT
DEPARTMENT OF REVENUE SERVICES

25 Sigourney Street
Hartford CT 06106-5032
 
 
 
 
 
 

 
 

This Special Notice has been modified and superseded
 in part by SN 92(6)

SN 91(17)

Sales and Use Taxes on Tax Preparation Services


PURPOSE: This Special Notice describes changes made by 1991 Conn. Pub. Acts 3 (June Spec. Sess.) imposing the sales and use taxes on tax preparation services.


EFFECTIVE DATE: Effective upon issuance and applicable to the provision of tax preparation services on or after October 1, 1991.


STATUTORY AUTHORITY: Conn. Gen. Stat. 12-407 (2) (i) (GG), as added by 1991 Conn. Pub. Acts 3, 103 (June Spec. Sess.).


TAX PREPARATION SERVICES TO BE TAXED: The provision of tax preparation services will be taxed as follows:

Where the services are provided in connection with taxes, as defined herein, imposed by the State of Connecticut, all such services will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut, irrespective of the location of the service recipient or the service provider.

Where the services are provided in connection with taxes imposed by another State or a foreign country (or a political subdivision thereof), all such services will be treated as services which are received, and the benefit of which is enjoyed, outside Connecticut, irrespective of the location of the service recipient or the service provider.

Where the services are provided in connection with taxes, as defined herein, imposed by the United States:

  • all such services for service recipients who, for Connecticut income tax purposes, are resident individuals, resident estates or resident trusts (or part-year resident individuals or part-year resident trusts, if resident at the close of the taxable period for which the services are provided) will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut, irrespectively of the location of the service provider.
  • all such services for service recipients who, for Connecticut income tax purposes, are nonresident individuals, nonresident estates or nonresident trusts (or part-year resident individuals or part-year resident trusts, if nonresident at the close of the taxable period for which the services are provided) will be treated as services which are received, and the benefit of which is enjoyed, outside Connecticut, irrespective of the location of the service provider.
  • all such services for service recipients which are corporations that are not included in a consolidated income tax return will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut, but only to the extent of their income or loss apportionment fraction under the Corporation Business Tax Act, as originally reported on their corporation business tax return for the year preceding the income year for which the services are provided (or, if no such return was filed, for the income year for which the services are provided).
  • all such services for service recipients which are corporations that are included in a consolidated income tax return will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut, but in the same ratio that the income or loss apportioned to Connecticut (using their income or loss apportionment fraction under the Corporation Business Tax Act, as originally reported on their corporation business tax return for the year preceding the income year for which the services are provided (or, if no such return was filed, for the income year for which the services are provided) of those corporations in the consolidated return that are subject to the corporation business tax bears to the total income or loss of all corporations in the consolidated return for the same year. Solely for the purpose of determining such ratio, a loss shall be treated as if it were income.

For example, if Corporations A, B and C file a federal consolidated return; Corporations A and B (but not Corporation C) carry on business in Connecticut; Corporation C has net loss of $100,000 while Corporation A has net income of $200,000 and Corporation B has net income of $100,000; Corporation A has an apportionment fraction under the Corporation Business Tax Act of 25% while Corporation B has an apportionment fraction under the Corporation Business Tax Act of 50%; then 25% ($100,000/$400,000) of the tax preparation services will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut.

  • all such services for service recipients which are partnerships will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut, but in the same ratio that their income or loss derived from or connected with sources within Connecticut for the year preceding the income year for which the services are provided bears to their total income or loss for the same year, except, for their income year beginning in 1991 only, the year for which the services are provided, rather than the year preceding the year for which the services are provided, shall be used. Solely for the purpose of determining such ratio, a loss shall be treated as if it were income.

For example, if a partnership has a loss of $100,000 derived from or connected with sources without Connecticut and income of $100,000 derived from or connected with sources within Connecticut, then 50% ($100,000/$200,000) of the tax preparation services will be treated as services which are received, and the benefit of which is enjoyed, in Connecticut.


SERVICE PROVIDERS: Tax preparation service provider means any person, as defined in Conn. Gen. Stat. 12-407 (1), who, for consideration, provides tax preparation services for a service recipient other than his or her employer, and includes but is not limited to accountants, attorneys, enrolled agents, bank trust departments and tax return preparation establishments, whether or not located within Connecticut. Tax preparation service provider does not include any official or employee of the Internal Revenue Service or of the Department of Revenue Services performing his or her official duties. A person may be a tax preparation service provider without regard to educational qualifications and professional status requirements.


TAX RETURNS AND TAXES: Solely for purposes of Conn. Gen. Stat. 12-407 (2) (i) (GG):

  • taxes mean federal or Connecticut taxes on or measured by income, including income taxes on individuals, trusts, estates or corporations and corporate franchise taxes; federal or Connecticut gift taxes; and federal or Connecticut death taxes, including estate, succession or inheritance taxes.
  • tax returns mean federal or Connecticut tax returns, including requests for extension, tentative returns and amended returns (and any schedules, attachments or addends thereto), plus Internal Revenue Service Form 1065 and Form 1120S (and the equivalent Connecticut returns), that are filed with respect to the liability of any person for taxes, as defined above. Tax returns do not include declarations of estimated tax; Form 990 (and other forms in the 990 series); payroll taxes; and any tax or informational returns other than those described above.

TAX PREPARATION SERVICES: Subject to the two conditions set out below, tax preparation services mean and include:

  • preparing all or a substantial portion of a tax return, or
  • furnishing sufficient information and advise so that completion of a tax return is largely a mechanical or clerical matter, even if the person furnishing the information and advice does not actually place or review placement of information on the tax return, or
  • furnishing information or advice that is directly relevant to the determination of the existence, characterization or amount of an entry on a tax return, where the entry is a substantial portion of the tax return, or
  • reviewing all or a substantial portion of a tax return prepared by another, if done before the filing thereof, or if done to determine whether an amended tax return should be prepared.

1. With respect to a particular tax return, tax preparation services are taxable only if performed after the close of the taxable period to which the return pertains. (With respect to a federal or Connecticut estate tax return, including a succession or inheritance tax return, tax preparation services are taxable only if performed after the death of the decedent.)

2. Whether a substantial portion of a tax return is being prepared (or whether the information or advice is directly relevant to a substantial portion of a tax return) will be determined under the principles set out in the federal income tax return preparer regulation (26 C.F.R. 301.7701-15 (b)).


OTHER CHARGES TREATED AS CHARGES FOR TAX PREPARATION SERVICES: Where tax preparation services are being provided, charges made in connection therewith by the service provider for time spent in interviewing the client, answering client questions, organizing and summarizing data for input on computerized or actual forms, inputting data (including direct entry) on computerized or actual forms, reviewing the tax return, and meetings with the client to explain the tax return as well as related charges for typing, reproducing, assembling or mailing the tax return, or for travel, lodging and meals are considered to be charges for tax preparation services and will be subject to sales and use taxes.


EXCLUDED SERVICES: Tax preparation services do not include:

  • tax advice, tax research or tax planning, by whatever name called, that is given with respect to a particular tax return on or before the close of the taxable period to which the return pertains. (Tax advice, tax research or tax planning, by whatever name called, that is given with respect to a federal or Connecticut estate tax return, including a succession or inheritance tax return, is not taxable if given before the death of the decedent.)
  • accounting and bookkeeping services (e.g., the preparation of profit or loss statements, balance sheets or other financial statements), where provided together with tax preparation services; however, the exclusion will not apply to those charges that are reasonably attributable to the preparation of a tax return, and not to the accounting and bookkeeping services.
  • advice in connection with, and preparation of, documents (other than succession tax returns) that are required to be filed with the probate court.
  • services rendered in connection with tax audit examinations by, or correspondence pertaining to a tax return that has been filed with, the Internal Revenue Service or the Department of Revenue Services; or tax litigation.

RESALE OF SERVICES: Existing rules under Conn. Gen. Stat. 12-410 (5) and 12-411 (14) for selling or purchasing services on a resale basis will apply to the sale or purchase of tax preparation services. The sale of any service to a tax preparation service provider will be considered a sale for resale only if (1) the service to be resold becomes an integral, inseparable component part of a tax preparation service that is sold by the tax preparation service provider to a particular client and (2) such tax preparation service provider separately states the service being resold and the cost thereof to such service provider on the bill or invoice to the client. For example, the computer and data processing services involved in generating computerized tax returns may be purchased on a resale basis by a tax preparation service provider. Tax preparation services may also be purchased on a resale basis; however, the sale of tax preparation services to the fiduciary of a trust or estate, to an S corporation or to a partnership will not be considered a sale for resale to the beneficiaries, shareholders or partners, respectively.


REGISTRATION: Anyone described in this Special Notice as a tax preparation service provider must, if not already registered with the Department of Revenue Services for purposes of the Sales and Use Taxes Act, complete a Form REG-1, Application for Tax Registration Number. Anyone purchasing tax preparation services from an unregistered tax preparation service provider must self-assess Connecticut use tax on the services which are received, and the benefit of which is enjoyed, in Connecticut, as discussed herein.


CHARGES FOR TAX PREPARATION SERVICES TO BE SEPARATELY STATED: Any person who is engaged in the business of providing tax preparation services as well as other services, e.g., legal, accounting or bookkeeping services, (1) must separately state on the bill or invoice to such person's client the charge for tax preparation services and (2) will have the burden of establishing that the charges for tax preparation services are reasonable.


PLEASE NOTE THE FOLLOWING NEW INFORMATION ABOUT DRS.

FOR FURTHER INFORMATION: To order forms and publications or for further information, call the Department of Revenue Services at 860-297-5962 (Hartford area or out-of-state) or 1-800-382-9463 (in-state). Forms and publications may be ordered through voice-mail 24-hours a day by choosing Option 3 on your touch tone telephone.

Electronic Delivery Options: You can also obtain tax forms and publications 24-hours a day from our Web home page at http://www.ct.gov/drs. Telecommunications Device for the Deaf (TDD/TT) users only call 860-297-4911 during business hours.


SN 91(17)
Sales and Use Taxes
Issued 11/91
TS/0056/1191