Location:
TAX EXEMPTIONS; TAXES - SALES;
Scope:
Connecticut laws/regulations; Program Description;

OLR Research Report


September 16, 2010 2010-R-0379

OLR BACKGROUNDER: CONNECTICUT'S SALES AND USE TAX

By: Rute A. Pinho, Associate Analyst

This report provides an overview of Connecticut's sales and use tax. It (1) describes major sales tax exemptions and (2) compares the tax rates, range of taxable services, and sales tax holidays in Connecticut and nearby states.

OVERVIEW OF CONNECTICUT'S SALES AND USE TAX

Connecticut taxes items and services purchased in the state (sales tax) and those purchased outside the state for use here (use tax). The state imposes a 6% sales tax on retail sales of all tangible personal property and specific services provided by companies doing business in the state. Consumers pay the tax to the retailer at the time of the purchase.

The 6% use tax applies to the same goods and services if a person buys them outside the state for use in Connecticut. If a retailer does not collect sales tax on these purchases when they occur, the consumer must pay the equivalent use tax directly to the Department of Revenue Services (DRS). Use tax is generally paid along with an individual's personal income tax payments or, in the case of a vehicle purchased in another state, when an individual registers the car here.

The sales and use tax applies to all tangible personal property unless it is expressly exempted by law (CGS 12-408, 12-412). Taxable services, on the other hand, are specifically enumerated in the statutes (CGS 12-407(I) – (P); 12-407(37)). DRS makes a list of these services available on its website.

There are three exceptions to the 6% rate. The state imposes a sales tax of (1) 12% on short-term stays in hotels and lodging houses; (2) 4.5% on sales of motor vehicles to a nonresident member of the U.S. Armed Forces serving on active duty in Connecticut, or his or her spouse; and (3) 1% on computer and data processing services.

The Office of Fiscal Analysis (OFA) projects that the sales and use tax will bring in $3.165 billion in revenue in FY 11, or 17.9% of total General Fund revenues. This compares to $3.204 billion, or 18.1%, in FY 10.

MAJOR EXEMPTIONS

State law exempts many types of goods and services from the sales and use tax. Table 1 lists the exemptions for goods and services with an estimated FY 11 revenue loss of over $10 million. It includes a brief description of the exemption and indicates whether it is for a consumer good, business good, or service. The revenue loss figures are from the 2010 Tax Expenditure Report, published by OFA. We have omitted the exemption for motor vehicle fuel because it is subject to other state taxes. We have included computer and data processing services, which are not exempt, but are subject to a reduced tax rate of 1%.

Eight of the 15 major exemptions listed are for consumer goods, including the two highest cost exemptions. OFA estimates that the food products and prescription drug exemptions will cost the state $375 million and $325 million in FY 11, respectively. The exemption for patient care services is the next highest, with an estimated cost of $180 million. The clothing exemption has an estimated cost of $130 million. The reduced sales tax rate for computer and data processing services will cost an estimated $90 million in FY 11.

Table 1: Major Sales Tax Exemptions

Exemption

Description

Type

FY 11 Estimated Revenue Loss (millions)

Food products

(1) Food products for human consumption, excluding meals sold by an eating establishment or caterer and (2) certain nonfood products, such as candy, gum, and soda

Consumer good

$375

Prescription medicines, syringes, needles

Prescription drugs and medicines, syringes, and needles

Consumer good

325

Patient care services

Hospital patient care services

Service

180

Fuel for heating purposes

Heating oil for (1) residential dwellings and (2) certain manufacturing, fabrication, or agricultural production facilities

Consumer/ business good

175

Clothing under $50

Clothing or footwear costing less than $50

Consumer good

130

Machinery used in manufacturing and component parts for the assembly of manufacturing machinery and production materials

Machinery, including component parts and production materials, used directly in a manufacturing production process

Business good

100

Computer and data processing

Certain computer and data processing services, including programming, code writing, software installation, and custom software development

Service

90

Amusement and recreation services1

Amusement and recreational services, such as dance studios, bowling alleys, and riding stables

Service

65

Newspapers and magazines

Magazine subscriptions and newspapers

Consumer good

65

Certain utilities sales

(1) Gas and electricity for residential use and certain manufacturing or agricultural production; (2) water, steam and telegraph; (3) electricity, if the monthly charge is $150 or less and it is not otherwise exempt; and (4)

gas, water, steam, or electricity used in the furnishing of such utilities.

Consumer/

business good

53

Motor vehicles and vessels purchased by non-residents to use out-of-state

Motor vehicles or vessels sold in the state to nonresidents

Consumer good

45

Advertising

Non-media advertising and public relations services and direct mail advertising services, other than cooperative direct mail

Service

30

World wide web

Services rendered in connection with the creation, development hosting, or maintenance of a website

Service

30

Renovation and repair for residential property

Services, such as electrical, plumbing painting, and carpentry services, rendered to owner-occupied residential property

Service

21

Nonprescription drugs and medicines

Nonprescription drugs and medicines, including vitamins, antiseptics, and nonprescription eye medication

Consumer good

18

Source: OFA, Connecticut Tax Expenditure Report, March 2010

COMPARING SALES TAX RATES IN CONNECTICUT AND NEARBY STATES

Sales taxes across states vary by tax rate and base. Some states tax a broad number of goods and services, with few exemptions, while others tax relatively few. Table 2 shows sales tax rates for Connecticut and nearby states. Some states allow counties and municipalities to levy sales taxes. Consequently, the rate varies within these states.

Table 2: State and Local Sales Tax Rates in Nearby States

State

Sales Tax Rate

Connecticut

6%

Massachusetts

6.25%

New Jersey

7%

New York

4% - 8.875%

Pennsylvania

6% - 7%

Rhode Island

7%

Connecticut and parts of Pennsylvania have the lowest sales tax rates among the selected states. (Two counties in Pennsylvania levy an additional 1% tax.) Massachusetts has the next highest rate at 6.25%. While New York's state-level rate is low (4%), the local rates give it among the highest combined state-local rates in the country.

TAXABLE SERVICES

Although most states tax services to a certain degree, they vary widely in the number and types of services taxed. The Federation of Tax Administrators (FTA) conducts a periodic survey of state service taxation. The FTA survey includes a list of 168 selected services, in different categories, to illustrate the extent to which each state taxes services. Across nearby states, Connecticut taxes the highest number of the services surveyed (79 out of 168). New Jersey taxes a comparable number (74), while Massachusetts taxes the fewest (18). New York and Pennsylvania tax a similar number of services, 57 and 55 respectively. Rhode Island, on the other hand, taxes only 29 services. None of the states tax professional services (e.g., legal, accounting, and engineering services).

Table 3 lists a selection of specific services and indicates, for Connecticut and nearby states, whether the service is taxable in the state. We selected services to illustrate the variation in service taxation across the states. The check mark (Π) means that the service is taxed. The last column indicates the total number of states that tax the service.

Table 3: Taxable Services in Connecticut and Nearby States

Service

CT

MA

NY

NJ

RI*

PA

Total States

Armored car services

Π

 

Π

Π2

   

16

Automotive washing and waxing

   

Π

Π

 

Π

21

Carpet and Upholstery cleaning

Π

 

Π

Π

 

Π

19

Dating services

Π

         

8

Debt counseling

Π

         

7

Downloaded books and music

Π3

   

Π

   

17

Electricity (residential use)

     

Π

   

22

Employment agencies

Π

       

Π

11

Gift and package wrapping service

         

Π

21

Health clubs, tanning parlors, reducing salons

Π

   

Π

   

22

Horse boarding

   

Π4

Π

   

9

Household goods storage

Π

 

Π5

Π

   

13

Landscaping Services (including lawn care)

Π

 

Π6

Π

 

Π7

21

Limousine service (with driver)

   

Π

Π8

   

16

Pet grooming

   

Π

Π

 

Π

18

Private investigation services

Π

 

Π

Π

   

16

Swimming pool cleaning and maintenance

Π

 

Π

Π

 

Π9

17

Taxidermy

 

Π

Π

Π

Π

Π

26

Tuxedo rental

Π10

11

Π

   

Π

39

Window cleaning

Π

 

Π

Π

 

Π

19

Source: FTA, By The Numbers, 2007 Survey of Services Taxation – Update, July 2008

*RI did not respond to the FTA's 2007 survey. The data included is for 2004.

As the table shows, Connecticut and its surrounding states vary greatly in the services they tax. Connecticut is the only state that taxes dating and debt counseling services. Pennsylvania is the only state that taxes gift and package wrapping services. Among the selected services, Rhode Island taxes only taxidermy. And Connecticut and New Jersey are the only states that tax downloaded books and music. (Connecticut taxes book and music downloads at the 1% rate for computer and data processing services while New Jersey taxes them at 7%.)

SALES TAX HOLIDAYS

A sales tax holiday is a period during which a state suspends its sales tax on certain items. Among the 19 states with scheduled sales tax holidays in 2010, Connecticut, Massachusetts, and Vermont are the only northeastern states. Table 4 lists the (1) duration, (2) type and cost of eligible items, (3) first year, and (4) 2010 dates for the sales tax holidays in the northeast.

Unlike Massachusetts and Vermont, Connecticut's sales tax holiday is limited to clothing and footwear (CGS 12-407e). Massachusetts exempts sales of any tangible personal property, costing $2,500 or less, from its sales tax over a two-day period. Similarly, Vermont limits its one-day exemption to sales of any tangible personal property costing $2,000 or less.

Table 4: 2010 Sales Tax Holidays in the Northeast

State

Days

Items Included

Maximum Cost

1st Year

2010 Dates

Connecticut

7

Clothing and footwear

$300

2001

August 15 -21

Massachusetts

2

Tangible personal property

$2,500

2008

August 14 – 15

Vermont

1

Tangible personal property

$2,000

2008

March 6

Source: FTA, 2010 State Sales Tax Holidays, August 3, 2010

HYPERLINKS

DRS' List of services subject to sales and use tax, http://www.ct.gov/drs/cwp/view.asp?a=1477&Q=269930&drsPNavCtr=|40829|, last visited September 3, 2010.

FTA's 2007 Survey of Services Taxation – Update, http://www.taxadmin.org/fta/pub/services/btn/0708.html, last visited September 3, 2010.

OFA's Connecticut Tax Expenditure Report: March 2010, http://www.cga.ct.gov/ofa/Documents/RevItems/TaxExp/TaxExpenditureReportMarch2010.pdf, last visited September 9, 2010.

RP:df

1 Admission charges to any place of amusement, entertainment, or recreation are subject to a 10% admissions tax.

2 Taxable if the service is performed entirely in NJ or customer's location is in NJ.

3 Taxable as a computer and data processing service at 1% rate.

4 Training is exempt as a professional service

5 Storage of property is taxable, but rental of real property for storage is exempt

6 Taxable unless an exempt capital improvement (e.g., installation of a new fence, pond, underground sprinkler, hardscaping - deck, paver patio, walkway, driveway, retaining wall, pool deck).

7 Lawn care is taxable; designing landscapes, planting trees, and maintaining landscape is exempt.

8 Taxable if limousine ride begins and ends within NJ.

9 Cleaning of above ground and indoor pools is taxable.

10 Taxable when rental is $50 or greater.

11 Rental charges exceeding the $175 clothing exemption are taxable.