January 19, 1989
Application of the Sales and Use Tax
to Actuarial Services:
Exempt Professional Services and Taxable
Business Analysis and Management Services
I. GENERAL STATEMENT OF PRINCIPLES
On April 1, 1988, the Department of Revenue Services and certain actuarial firms reached agreement concerning the application of the sales and use tax to services performed by actuarial firms. The general principles set forth by the agreement are:
A. The services provided by actuarial firms in rendering actuarial advice to their business clients shall be exempt from the sales tax as professional services pursuant to Section 12-412(11) of the Connecticut General Statutes and shall not be considered business analysis and management services within the meaning of Section 12-407 (2) (i) of the Connecticut General Statutes.
B. Regarding other services rendered to business clients by actuarial firms, services providing alternative courses of action or an analysis of certain aspects of the client's business, which advice may utilize actuarial information to permit the clients to make decisions involving their business operations, will be considered business analysis and management services and will be subject to the sales tax.
C. In all instances when both taxable services and exempt services are included in the total charge to a client, the actuarial firm must break down the total charge into taxable and exempt categories in order to take the benefit of the exemption.
II. ILLUSTRATION OF GENERAL PRINCIPLES
A. Actuarial valuations for pension and welfare plans are exempt, including the preparation of accounting data and determination of minimum and maximum contribution rates normally incident to such valuations. However, consultations with a client about alternate plan designs or alternate funding methods based upon such valuations are taxable.
B. Actuarial calculations as such are exempt, including calculations of benefit eligibility, premium levels, and costs of plan changes requested in union negotiations. Similarly, projections of reserve requirements or of utilization of benefits based on actuarial analysis are also exempt. Consultations with a client about alternative actions based on such calculations or projections are taxable.
C. Surveys of competitive practices or surveys of employee attitudes are taxable.
D. Assistance to employers with regard to communication compensation and benefit coverages to employees is exempt, although conduction employee surveys and assisting with preretirement counseling programs are taxable.
E. Recordkeeping services for employee benefit plans are exempt except where they constitute data processing services rendered to the client. Similarly, preparation of reports or summaries for government agencies or for employee participants or testing plans for compliance with laws and regulations are exempt. Licensing of software is taxable.
F. Services to trust funds related to investment selection, investment strategies, and investment manager selection and performance are ordinarily taxable. In general, these are services for which registration is required as an investment adviser.
G. Actuarial analysis of group insurance experience, or audits of welfare plan claims and utilization, or audits of claim payment operations are exempt. Actuarial analysis of premium rate levels, reserve adequacy, and retention levels is exempt. However, preparation of bid specifications, solicitation and review of insurance proposals, assistance in implementation of an insurance program, review of insurance documents, analysis of alternate arrangements proposed by insurers, negotiations with underwriters, and development of loss control programs are all taxable.
H. Assistance with regard to compensation programs and salary administration is taxable. This includes analyses of salary, bonus, and incentive and sales compensation plans, establishment of job evaluation and management salary programs, and advice regarding employee performance evaluations.
I. Actuarial calculations for insurance companies are normally exempt, including projections of future income flows and benefit liabilities to establish the adequacy of reserves or premium levels, determination of minimum surplus required, calculation of insurer capacity, analysis of actual mortality and morbidity experience and of trends in benefit costs and utilization and calculation of the effect of income tax legislation. However, development of financial models for forecasting, assistance in developing corporate strategies, design of systems, analysis of the feasibility of new product designs, financial cost evaluation of proposals for products, and competitive analysis of products are all taxable.