The Connecticut General Assembly Finance Committee has proposed imposing the state’s sales tax on engineering services. ACEC/CT opposes the tax and asks its members to contact their legislators immediately to prevent this legislation from passing.
Connecticut Sales Tax Q&A
Q: Why is the state imposing a sales tax on engineering services?
A: Governor Malloy proposed a budget last February for the fiscal years 2016-17. That budget included some tax increases and reductions in taxes, including a reduction in the sales tax rate. The Appropriations Committee in the General Assembly proposed a spending budget that restored many of those spending reductions. The Finance Committee proposed significant tax increases to pay for the increase in spending.
Specifically, Substitute Senate Bill 946 would impose the state’s sales tax on a number of additional services that are not now included in the sales tax including engineering, accounting, architecture, drafting, surveying, interior design, industrial design, general management consulting, HR, marketing, scientific and technical, advertising, veterinary and other services.
Q: Why isn’t this tax a good idea?
A: There are several reasons why the tax is bad for Connecticut:
- The increase in the cost of construction projects would discourage businesses from locating or expanding in Connecticut.
- The sales tax would also impact the housing market, making housing less affordable for residents in the state.
- Is very complicated to administer for states and taxpayers, as the multi-state nature of customers and service providers often makes it difficult to determine where, when, and how the services take place. In fact, when Connecticut taxed engineering services about 25 years ago, the Department of Revenue Services recommended that the tax be eliminated in part because of the complexity in administering the tax.
- Connecticut engineering firms will also find themselves at a competitive disadvantage. Owners will find ways to have engineering work performed out of state. Out-of-state engineering firms will not collect the sales tax for Connecticut. The loss of work will mean fewer jobs for Connecticut engineers and support staff and lower income taxes for the state.
- The tax discriminates against small businesses because small and emerging businesses often have a need to use outside engineering services that would be taxed, while larger companies with in-house expertise would not be subject to a tax for such services.
Q: Who would pay the sales tax?
A: The sales tax is billed and collected by the service provider and paid by the client. The engineering firm would pay the taxes to the state. In practice, however, the engineering firm would have to pay the sales tax to the state when billed and many firms will be paying taxes that they have not yet collected. This tax presents a cash flow problem for many firms.
Again, we don’t know the details but back 25 years ago, a subconsultant did not bill or collect the sales tax; the primary consultant would bill the owner or client for the total services, including subconsultant fees.
Q: What exactly is taxed?
A: We don’t know the details yet. When Connecticut imposed the sales tax about 25 years ago, the tax was imposed on work for projects located in the state. If a Connecticut firm worked on a project located outside the state, that work wasn’t taxable.
If an out-of-state firm worked on a project in Connecticut, the work was taxable. However, many out-of-state firms were not aware of the tax or simply failed to collect the tax. The Department of Revenue Services had a very difficult time finding those firms and collecting the taxes. This problem put Connecticut firms at a competitive disadvantage.
Many clients of engineering firms are tax exempt (government agencies, municipalities, universities, etc.). In fact, as much as 80% of our members’ work is for exempt clients. We don’t know the details about this proposal and if these clients would be exempt. However, the Office of Fiscal Analysis projects that the engineering sales tax would produce $121.2 million in FY16 and $154.1 million in FY17. Those projections would be based on about $2.8 billion in taxable services per year! That level implies that either there are no exemptions for governments and nonprofits or the projections were in error.
Q: What can I do to oppose the sales tax on engineering services?
Contact your legislator. SalesTax Sample Letter-Email If you can call your legislators before the session ends on June 3, please do so immediately!