Ruling 2017-1 - Sales and Use Taxes - Services to Real Property, Electrical/Electronic Repair Services, Repair Services to Tangible Personal Property

FACTS:

The Company sells “home service contracts” or “home warranties” (referred to in this ruling as “Contracts”). These Contracts are entered into with buyers of residential real property. The Contracts provide that the Company will service, repair, or replace certain operational or structural failures in the home located on the residential real property for a certain period of time. The Contracts cover various systems and appliances, such as electrical systems, heating systems, air-conditioning systems, interior plumbing, waters heaters, dishwashers, microwaves, and refrigerators. Depending on the property, the Contracts may also cover additional systems and appliances located at the residential real property, such as swimming pools, septic systems, and well pumps.

The Contracts are typically offered in connection with the purchase of a home, and the price of the Contracts is based upon the purchase price of the residential real property and the systems and appliances being covered. For each of the Contracts, the Company separately states the charge related to the warranty of residential real property and the charge related to the warranty of tangible personal property, including applicable systems and devices, located at the residential real property.

ISSUE:

Are sales of the Contracts subject to sales and use taxes?

RULINGS:

1. If the Contract is for residential real property that is being used as income-producing property, the sale of the Contract is subject to sales and use taxes on the entire price of the Contract. Conn. Gen. Stat. § 12-407(a)(37)(I).
2. If the Contract is for residential real property that is being used as a residence for the owner of the property, the sale of the Contract is subject to sales and use taxes to the extent that the Contract provides for repairs to tangible personal property or electrical devices. Conn. Gen. Stat. § 12-407(a)(37)(Q) and (CC).

DISCUSSION:

Retail sales of tangible personal property in the State of Connecticut are subject to sales and use tax, unless specifically exempt. Conn. Gen. Stat. §§ 12-407 and 12-408. In contrast, sales of services are not subject to sales and use tax unless specifically enumerated as taxable in Conn. Gen. Stat. § 12-407.

Services to industrial, commercial, or income-producing real property are specifically enumerated as being subject to sales and use tax. Conn. Gen. Stat. § 12-407(a)(37)(I).

Although the Contracts are sold for residential real property, residential real property that is being rented to a tenant is generally characterized as income-producing real property.[1] As a result, sales of the Contracts are subject to sales and use tax on the full purchase price when sold for income-producing residential real property.

If the residential real property is occupied, or is intended to be occupied, by the owner, the purchase price is not entirely subject to sales and use tax because repair services to residential real property are not specifically enumerated as taxable. However, there are two other services that are specifically enumerated as taxable that are relevant to the Contracts: (1) repair services to any electrical or electronic device, including, but not limited to, equipment used for purposes of refrigeration or air-conditioning are also specifically enumerated as being subject to sales and use tax;[2] and (2) repair services for tangible personal property, including warranty contracts related to tangible personal property. Conn. Gen. Stat. § 12-407(a)(37)(Q) and (CC); see Conn. Agencies Regs. §§ 12-407(2)(i)(Q)-1 and 12-407(2)(i)(DD)-1.

Generally, when a non-taxable service is included in the purchase price of a taxable service, the entire purchase price is subject to sales and use tax. However, the Company separately states the charge related to the warranty of residential real property and the charge related to the warranty of tangible personal property, including applicable systems and devices, located at the residential real property. As a result, when the Contracts are sold for residential real property that is not income-producing real property, the Contracts are subject to sales and use tax on the purchase price attributable to tangible personal property, including any applicable systems and devices.