SN 92(23)

Sales and Use Taxes on Certain Renovation and
Repair Services to Residential Real Property

This publication has been obsoleted by IP 99(19) and AN 2000(8)

PURPOSE: This Special Notice describes changes made by 1991 Conn. Pub. Acts 3, §103 (June Spec. Sess.) treating as sales subject to the sales and use taxes the following renovation and repair services provided to renovation and repair services provided to residential real property:  paving, painting or staining, wallpapering, roofing, siding and exterior sheet metal work.

EFFECTIVE DATE:  Effective upon issuance and applicable to the provision of such renovation and repair services to residential property on or after October 1, 1991.

STATUTORY AUTHORITY: Conn. Gen. Stat. §12-407(2((i)(DD), as amended by 1991 Conn. Pub. Acts 3, §103 (June Spec. Sess.) and Conn. Agencies Regs. §12-407(2)(i)(I)-1.

GENERAL RULES:  The gross receipts from paving, painting or staining, wallpapering, roofing, siding and exterior sheet metal work provided in the renovation and repair of residential property are treated as sales subject to the Sales and Use Taxes Act as of October 1, 1991.  "Residential property" means real property used exclusively for residential purposes and includes rental property consisting of three or fewer dwelling units, one of which is owner-occupied.

Any other rental property is considered to be income-producing property, and the provision of renovation and repair services to income-producing property, where the cost of such renovations or repairs were capitalized for federal income tax purposes, has been treated as a sale subject to the Sales and Use Taxes Act since July 1, 1989.  The provision of such services to income-producing property, where the cost of such renovations or repairs were not capitalized for federal income tax purposes, has been treated as a sale subject to the Sales and Use Taxes Act since July 1, 1975.

"Renovation" means the making of permanent improvements or betterments which increase the value of and prolong the life of the existing residential property.   "Repair" means the mending, restoring or maintaining of existing residential property.

SCOPE OF TAXABLE RENOVATION AND REPAIR SERVICES PROVIDED TO RESIDENTIAL PROPERTY:

• PAVING involves covering the ground with a hard smooth surface such as asphalt, tar, macadam and concrete.  Paving includes the replacement of sections or the complete repaving of driveways, parking areas and walks, and tennis or basketball courts.  Paving services also include all work performed in preparation for paving, where performed as part of the entire job, as well as the subsequent sealing or dressing of the pavement.  Paving does not include driveways, parking areas and walks that are covered with materials such as crushed stone, crushed stone with oil, or gravel.   Under Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(2), paving also does not include the initial paving done in the construction of roads, parking areas and walks.

• PAINTING OR STAINING includes the painting or repairing and the staining or restaining of all interior and exterior surfaces for decoration, protection or preservation purposes.  Such services also include all necessary surface and other preparations, where performed as part of the entire job, prior to the actual painting or staining, such as sanding, planing, puttying, taping and spackling as well as the application of sealants, waterproofing or other types of protective finishing.

• WALLPAPERING means the application of wallpaper or wall fabric to the interior walls and ceilings.   Such services also include all necessary surface and other preparations, where performed as part of the entire job, prior to the wallpapering, such as removing old wallpaper, steaming, puttying, taping, spackling and sizing.

• ROOFING includes the replacement of a part of or an entire roof and the repair or spot replacement on all types of roofs (asphalt, shingle, slate, tile, built-up, metal, single ply, etc.).  The replacement of roof rafters, their plywood, wood or other covering, ventilation work, expansion joints, flashings, metal or composition valleys, rain and draft deflectors, drip edges, snow guards and snow slides are considered to be integrally related to the roofing services bargained for by the residential property owner and are subject to tax whether performed by a roofing contractor or by a carpenter.   Roofing services also include all work performed in preparation for roofing, where performed as part of the entire job.

• SIDING includes the installation, replacement and repair of all types of siding including aluminum, vinyl, stucco, brickface, shingles, clapboards, shakes and other wood coverings.  The replacement or repair of an outside wall or wallcovering, such as insulated board or plywood sheathing, done in connection with siding is considered to be integrally related to siding and is subject to tax.  Siding services also include all work performed in preparation for siding, where performed as part of the entire job.

• EXTERIOR SHEET METAL WORK includes the installation or the forming of and the subsequent installation or repair of sheet metal, such as tin, aluminum, steel or copper, when used on the exterior of residential property, including sheet metal downspouts and gutters.  Exterior sheet metal work services also include all work performed in  preparation for exterior sheet metal work services, where performed as part of the entire job. 

NEW CONSTRUCTION:  When provided in the construction of a new building or in the expansion of an existing building by the addition of new cubic footage under Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1), or in the making of improvements to real property that put the property affected to a new use under Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(2), the services described in this Special Notice are not considered to be renovations or repairs and are not subject to tax.   When provided in connection with a project involving both the renovation and repair of residential property and new construction, the total charge for such services will be treated as a sale subject to the Sales and Use Taxes Act unless the portion of  the charge for the services attributable to new construction is separately stated on the service provider's invoice to the property owner.  The service provider must maintain adequate records (e.g., building permits and applications therefor) to substantiate that the portion of the charges attributable to the taxable renovation or repair service has not been understated. 

NONTAXABLE SERVICES PERFORMED IN CONJUNCTION WITH TAXABLE SERVICES:   Nontaxable services, such as architectural or engineering services, performed in connection with taxable renovation and repair services are not subject to tax when separately stated on the bill or invoice to the services recipient.

PURCHASE OF MATERIALS ON RESALE:  Persons providing the services of paving, painting or staining, wallpapering, roofing, siding and exterior sheet work to residential property are considered to be contractors under Conn. Agencies Regs. §12-426-18(a).  Contractors are consumers of materials used in providing their services and are retailers of services.  Contractors must pay tax on their purchase of materials used in fulfilling the following types of contracts:

• Lump sum or fixed fee contracts providing for a single price for the total work to be performed on a construction project.  Such contracts are generally not subject to adjustment because of higher than anticipated costs incurred by the contractor.

• Cost-plus contracts providing for reimbursement of allowable or otherwise defined costs incurred plus a fee representing profit.  Cost-plus contracts usually require that the contractor use his best efforts to accomplish the scope of the work within a specified time and a stated dollar limitation.

• Time and material contracts with an upset or guaranteed price which may not be exceeded providing for payments to the contractor on the basis of direct labor hours at fixed hourly rates (that cover the cost of direct labor and indirect expenses and profit) and the cost of materials and other specified costs.  Such contracts compensate the contractor's performance on the basis of the effort expended in fulfilling the contract with guaranteed maximum costs.

Under Conn. Agencies Regs. §12-426-18(b), a contractor may act as a retailer of materials, and may purchase those materials on a resale basis, in two extremely limited situations:

• The contractor specifically invoices the Homeowner for particular materials, stating the charge for and the amount of the materials being sold to the Homeowner.  In addition, the contractor agrees to render services in connection with the sales of materials, for an additional agreed price or on the basis of time consumed.  However, if the contract is a lump sum contract, a cost-plus contract or a time and material contract with an upset or guaranteed price which may not be exceeded, the contractor may not purchase the materials on a resale basis.

HOW GENERAL CONTRACTORS MUST CHARGE TAX TO RESIDENTIAL PROPERTY OWNERS ON TAXABLE RENOVATION AND REPAIR SERVICES: Where the contractor has paid tax on the purchase of the materials physically incorporated into and becoming a permanent part of the residential property, the contractor's bill to the residential property owner shall either:

• separately state the cost of such materials and the charge for services, expressly noting that tax has been paid by the contractor on the materials (with words such as "tax paid on materials") and charging tax only on the charge for services; or

• state only the total charge together with the words "tax included," without separately stating the cost of such materials and the charge for services or the tax on the charge for services, and maintain records that show that the tax on the charge for services was built into the total charge, and was calculated on the total charge less the cost of such materials and, where appropriate, the tax paid thereon.  The contractor must maintain adequate records to account for the payment of tax on the materials.

Where the contractor has not paid tax on the purchase of the materials physically incorporated into and becoming a permanent part of the residential property, the contractor's entire charge to the residential property owner is taxable.

As used herein, the charge for services includes the cost of labor, mark-up on materials and labor, overhead and profit.

The contractor is engaged as a permittee in the business of selling such materials at retail.  In order to be considered engaged as a permittee in the business of selling materials at retail, the contractor must be a person required to be issued a seller's permit for a place of business (e.g., a lumberyard) at which sales of such materials are made.  The contractor will be held strictly accountable for the payment of use tax on any materials that are removed from inventory and are not sold at retail but, instead, are used in fulfilling a lump sum contract, a cost-plus contract or a time and material contract with an upset or guaranteed price which may not be exceeded contract.

RESALE OF RENOVATION AND REPAIR SERVICES: Renovation and repair services may be purchased on a resale basis if they are being resold without change to another renovation and repair service provider.  Under Conn. Agencies Regs. §12-407-(2)(i)(I)-1(i)(1), a service provider performing services to real property is permitted to accept or refuse to accept a resale certificate from a person who will resell such services to the owner of the real property.  Thus, where a subcontractor sells a taxable renovation and repair services to a general contractor who in turn will resell those services to a residential property owner, the subcontractor may accept or refuse to accept a resale certificate from a person who will resell such services to the owner of the real property.  Thus, where a subcontractor sells taxable renovation and repair services to a general contractor who in turn will resell those services to a residential property owner, the subcontractor may accept or refuse to accept a resale certificate from the general contractor.

HOW SUBCONTRACTORS MUST CHARGE TAX TO GENERAL CONTRACTORS ON TAXABLE RENOVATION AND REPAIR SERVICES:  Where a subcontractor has paid tax on the purchase of materials physically incorporated into and becoming a permanent part of the residential property and,

• a resale certificate is accepted by the subcontractor, the subcontractor should separately state the cost of such materials on its invoice to the general contractor and indicate that tax has been paid on such materials by the subcontractor (with words such as "tax paid on materials").  The general contractor should ultimately charge tax to the residential property owner only on the subcontractor's charge for services.
• a resale certificate is not accepted by the subcontractor, the bill or invoice from the subcontractor to the general contractor shall either:
  • separately state the cost of such materials and the charge for services, expressly noting that tax has been paid by the subcontractor on the materials (with words such as "tax paid on materials") and charging tax only on the charge for services; or
  • state only the total charge together with the words "tax included," without separately stating the cost of such materials and the charge for services or the tax on the charge for services, and maintain records that show that the tax on the charge for services was built into the total charge, and was calculated on the total charge less the cost of such materials and the tax paid thereon.  Thus, the charge for services includes any markup on materials, overhead or profit.   

Where a subcontractor has not paid tax on the purchase of the materials physically incorporated into and becoming a permanent part of the residential property, and,

• a resale certificate is accepted by the subcontractor, the subcontractor should separately state the cost of such materials on its invoice to the general contractor and indicate that tax has not been paid on such materials by the subcontractor (with words such as "tax not paid on materials").  The general contractor should ultimately charge tax to the residential property owner on the subcontractor's entire charge to the general contractor.
• a resale certificate is not accepted by the subcontractor, the bill or invoice from the subcontractor to the general contractor shall either:
  • separately state the cost of such materials and the charge for services, charging tax on the total charge; or,
  • state only the total charge together with the words "tax included," without separately stating the cost of such materials and the charge for services or the tax on the charge for services and such materials, and maintain records that show that the tax on the charge for services and such materials was built into the total charge.

SERVICES CONTRACTED FOR BEFORE OCTOBER 1, 1991:  When contracted for prior to October 1, 1991 and rendered after October 1, 1991, renovation and repairs to residential property involving paving, painting or staining, wallpapering, roofing, siding and exterior sheet metal work services shall be treated as sales subject to the Sales and Use Tax Act, regardless of when payment for such services was made.  Payments made subsequent to October 1, 1991 for services provided before October 1, 1991 are not subject to tax as long as the invoice indicates when the services were performed.

REGISTRATION:  All persons providing the services described in this Special Notice must register with the Department of Revenue Services  for purposes of the Sales and Use Taxes Act by completing a Form REG-1, Application for Tax Registration Number.  All persons purchasing the services described in this Special Notice from an unregistered service provider must self-assess Connecticut use tax on such services using the Form OS-114 (Sales and Use Tax Return) if the service recipient is using those services in carrying on a trade, occupation, business or profession, and using the Form OP-186 (Individual Use Tax Return) if the service recipient is not using those services.

SPECIAL REQUIREMENTS FOR NONRESIDENT CONTRACTORS:  Under Conn. Gen. Stat. §12-430(7), a nonresident contractor, as defined in Conn. Agencies Regs. §12-430(7)-1, providing services described as sales by this Special Notice is required, at the time of entering into the contract, to:

• deposit with the Commissioner a sum equivalent to 3% of the total amount to be paid under the contract; or

• furnish the Commissioner with a guarantee bond for a similar amount and obtain certification from the Commissioner that the bond requirements have been met. Residential property owners who do not obtain a copy of the Commissioner's certification from the nonresident contractor shall be personally liable for the payment of any taxes payable with respect to tangible personal property consumed or used pursuant to or in the carrying out of such contract.

EFFECT ON OTHER DOCUMENTS:  LSN-91 is superseded and may not be relied upon with respect to renovation and repair services involving paving, painting or staining, wallpapering, roofing, siding and sheet metal work provided to residential property on or after October 1, 1991. 

SN 92(23)
Sales and use taxes
Issued 12/8/92