This Ruling has been obsoleted by AN 94(4)
You have requested a ruling from this Department as to whether labor costs on leasehold improvements that will be capitalized for federal income tax purposes are subject to the Connecticut sales and use tax as services to commercial property; section 12-407(2)(i)(I) of the Connecticut General Statutes.
Section 12-426-26 of the Regulations of Connecticut State Agencies provides that "the tax does not apply to ... services rendered with respect to the renovation of ... real property if the cost of such renovation is capitalized for federal income tax purposes.
This regulation incorporates the provisions of capitalization of expenses for federal income tax purposes. To the extent, under the Internal Revenue Code, that a lessee making leasehold improvements is able to capitalize the cost of those improvements, the labor attendant to such capitalized renovation costs would not be subject to the sales and use tax.
Please note that, effective July 1, 1989, services rendered with respect to renovations are taxable. See Public Act 89-251.
May 10, 1989