Friday, October 1, 2010

WITH THE LOWEST TAXES OF SURROUNDING STATES ... COULD THERE BE A SUT INCREASE IN OUR FUTURE?

OLR Research Report

September 16, 2010 2010-R-0379

OLR BACKGROUNDERCONNECTICUT'S SALES AND USE TAX
ByRute APinho, Associate Analyst
This report provides an overview of Connecticut's sales and use taxIt (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 stateConsumers pay the tax to the retailer at the time of the purchase.
The 6% use tax applies to the same goods and services a person buys outside the state for use in ConnecticutIf 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% rateThe state imposes a sales tax of (1) 12% on short-term stays in hotels and lodging houses(2) 45% on sales of motor vehicles to a nonresident member of the USArmed Forces serving on active duty in Connecticut, or his or her spouseand (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 revenuesThis compares to 3204 billion, or 18.1%, in FY 10.
MAJOR EXEMPTIONS
State law exempts many types of goods and services from the sales and use taxTable 1 lists the exemptions for goods and services with an estimated FY 11 revenue loss of over 10 millionIt includes a brief description of the exemption and indicates whether it is for a consumer good, business good, or serviceThe revenue loss figures are from the 2010 Tax Expenditure Report, published by OFAWe have omitted the exemption for motor vehicle fuel because it is subject to other state taxesWe 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 exemptionsOFA estimates that the food products and prescription drug exemptions will cost the state 375 million and 325 million in FY 11, respectivelyThe exemption for patient care services is the next highest, with an estimated cost of 180 millionThe clothing exemption has an estimated cost of 130 millionThe reduced sales tax rate for computer and data processing services will cost an estimated 90 million in FY 11.
Table 1Major Sales Tax Exemptions

ExemptionDescriptionTypeFY 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 sodaConsumer good$ 375
Prescription medicines, syringes, needlesPrescription drugs and medicines, syringes, and needles
Consumer good
325
Patient care servicesHospital patient care services
Service
180
Fuel for heating purposesHeating oil for (1) residential dwellings and (2) certain manufacturing, fabrication, or agricultural production facilities
Consumer/ business good
175
Clothing under 50Clothing or footwear costing less than 50
Consumer good
130
Machinery used in manufacturing and component parts for the assembly of manufacturing machinery and production materialsMachinery, including component parts and production materials, used directly in a manufacturing production processBusiness good100
Computer and data processingCertain computer and data processing services, including programming, code writing, software installation, and custom software developmentService90
Amusement and recreation services1Amusement and recreational services, such as dance studios, bowling alleys, and riding stablesService65
Newspapers and magazinesMagazine subscriptions and newspapersConsumer good65
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 exemptand (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-stateMotor vehicles or vessels sold in the state to nonresidentsConsumer good45
AdvertisingNon-media advertising and public relations services and direct mail advertising services, other than cooperative direct mailService30
World wide webServices rendered in connection with the creation, development hosting, or maintenance of a websiteService30
Renovation and repair for residential propertyServices, such as electrical, plumbing painting, and carpentry services, rendered to owner-occupied residential propertyService21
Nonprescription drugs and medicinesNonprescription drugs and medicines, including vitamins, antiseptics, and nonprescription eye medicationConsumer good18
SourceOFA, Connecticut Tax Expenditure Report, March 2010
COMPARING SALES TAX RATES IN CONNECTICUT AND NEARBY STATES
Sales taxes across states vary by tax rate and baseSome states tax a broad number of goods and services, with few exemptions, while others tax relatively fewTable 2 shows sales tax rates for Connecticut and nearby statesSome states allow counties and municipalities to levy sales taxesConsequently, the rate varies within these states.
Table 2State and Local Sales Tax Rates in Nearby States

StateSales Tax Rate
Connecticut6%
Massachusetts625%
New Jersey7%
New York4% - 8875%
Pennsylvania6% - 7%
Rhode Island7%
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 625%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 taxedThe Federation of Tax Administrators (FTA) conducts a periodic survey of state service taxationThe FTA survey includes a list of 168 selected services, in different categories, to illustrate the extent to which each state taxes servicesAcross 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 respectivelyRhode Island, on the other hand, taxes only 29 servicesNone of the states tax professional services (eg, 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 stateWe selected services to illustrate the variation in service taxation across the statesThe check mark (Π) means that the service is taxedThe last column indicates the total number of states that tax the service.
Table 3Taxable Services in Connecticut and Nearby States

ServiceCTMANYNJRI*PATotal States
Armored car servicesΠ ΠΠ2  16
Automotive washing and waxing  ΠΠ Π21
Carpet and Upholstery cleaningΠ ΠΠ Π19
Dating servicesΠ     8
Debt counselingΠ     7
Downloaded books and musicΠ3  Π  17
Electricity (residential use)   Π  22
Employment agenciesΠ    Π11
Gift and package wrapping service     Π21
Health clubs, tanning parlors, reducing salonsΠ  Π  22
Horse boarding  Π4Π  9
Household goods storageΠ Π5Π  13
Landscaping Services (including lawn care)Π Π6Π Π721
Limousine service (with driver)  ΠΠ8  16
Pet grooming  ΠΠ Π18
Private investigation servicesΠ ΠΠ  16
Swimming pool cleaning and maintenanceΠ ΠΠ Π917
Taxidermy ΠΠΠΠΠ26
Tuxedo rentalΠ1011Π  Π39
Window cleaningΠ ΠΠ Π19
SourceFTA, By The Numbers, 2007 Survey of Services Taxation – Update, July 2008
*RI did not respond to the FTA's 2007 surveyThe data included is for 2004.
As the table shows, Connecticut and its surrounding states vary greatly in the services they taxConnecticut is the only state that taxes dating and debt counseling servicesPennsylvania is the only state that taxes gift and package wrapping services.Among the selected services, Rhode Island taxes only taxidermyAnd 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 itemsAmong the 19 states with scheduled sales tax holidays in 2010, Connecticut, Massachusetts, and Vermont are the only northeastern statesTable 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 periodSimilarly, Vermont limits its one-day exemption to sales of any tangible personal property costing 2,000 or less.
Table 42010 Sales Tax Holidays in the Northeast

StateDaysItems IncludedMaximum Cost1st Year2010 Dates
Connecticut7Clothing and footwear$ 3002001August 15 -21
Massachusetts2Tangible personal property$ 2,5002008August 14 – 15
Vermont1Tangible personal property$ 2,0002008March 6
SourceFTA, 2010 State Sales Tax Holidays, August 3, 2010
HYPERLINKS
DRS' List of services subject to sales and use tax, http//wwwctgov/drs/cwp/viewasp?a=1477&Q=269930&drsPNavCtr=|40829|, last visited September 3, 2010.
FTA'2007 Survey of Services Taxation – Updatehttp//wwwtaxadminorg/fta/pub/services/btn/0708html, last visited September 3, 2010.
OFA'Connecticut Tax Expenditure ReportMarch 2010http//wwwcgact.gov/ofa/Documents/RevItems/TaxExp/TaxExpenditureReportMarch2010pdf, last visited September 9, 2010.
RPdf
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.