Sales tax on invoices in Connecticut

In Connecticut, whether a contractor’s labor is taxed depends on the property. The Department of Revenue Services (DRS) says services to existing commercial, industrial and income-producing property are generally taxable, while labor on new construction and on owner-occupied homes of one to three units isn’t, except for services such as landscaping and janitorial work that are taxable on every kind of property.

Permit: every building contractor needs one

Retailers register with DRS for a Sales and Use Tax Permit, which costs $100 and should be displayed conspicuously for customers to see. All building contractors, including subcontractors, must get a permit from DRS before providing any services, even if their services aren’t taxable or the contract is with a tax-exempt entity. No local jurisdiction in Connecticut adds a sales tax of its own.

Consumer of materials, retailer of services

DRS’s Building Contractors’ Guide to Sales and Use Taxes (IP 2018(2)) describes contractors as both consumers of materials and retailers of their services. You pay sales or use tax on the materials, supplies and equipment you use in your construction contracts, and charge sales tax on your taxable services.

Your labor is taxable when the service is to:

• existing commercial, industrial or income-producing real property; or
• any real property, for the services DRS lists as taxable to all real property (below).

Apart from those services, your labor isn’t taxable on new construction or owner-occupied residential property. It also isn’t taxable for charitable or religious organizations, qualifying government agencies or their agents, hospitals and certain other exempt entities, or low and moderate-income housing, nor on contracts performed out of state or real property within a public right-of-way.

Separately stated charges to install tangible personal property aren’t taxable, unless the installation is itself a service to existing commercial, industrial or income-producing real property.

Which property is which

• New construction: a new building; a new addition that expands an existing building’s cubic footage; replacing a building’s entire internal structure; site improvements that put the property to a new use; and the initial finish-out of a new building’s interior, if the space hasn’t been used (storage counts as a use). It generally ends when the Certificate of Occupancy is issued. Form CERT-104 establishes the share of construction services attributable to new construction.
• Owner-occupied residential: used only as a residence, with one to three dwelling units, where the owner lives or will live once the work is done.
• Income-producing: for example, rental property such as an apartment building, residential property the owner doesn’t occupy, or land used for agricultural production.

Trades by property type

Work	New construction or owner-occupied home	Existing commercial, industrial or income-producing
Landscaping, lawn care, janitorial, power washing	Taxable	Taxable
Air conditioning repair or maintenance	Taxable	Taxable
Plumbing, wiring, HVAC installation, roofing	No tax collected	Taxable

• Landscaping and lawn care: planting and caring for plants, and services to lawns. Building irrigation and sprinkler systems, or patios other than poured concrete or asphalt, is landscaping too, and ponds, fences, gates and walls (other than a building’s walls) are presumed to be landscaping until shown otherwise. You may buy the materials you’ll incorporate on a resale basis, and you collect tax on the labor, the installation and the materials.
• Janitorial: cleaning the interior or exterior of any building, or its contents, whether on a schedule, periodically or once, such as after construction or renovation. Carpet cleaning at the customer’s premises is taxable; cleaning non-permanent carpeting removed from the premises isn’t.
• Power washing: house washing (power washing) is a maintenance service. So is cleaning chimneys, gutters, downspouts and drains. Power washing done to prepare surfaces as part of a painting job counts as painting, which isn’t taxed on new construction or owner-occupied homes.
• Disability exemption: landscaping and maintenance services at the residence of a person receiving total disability payments under Social Security aren’t taxable.
• Repairs: repairing or maintaining an air conditioning unit is taxable on the total bill, including in an owner-occupied home, unless it’s done under a service contract with no additional charge. Repairing electrical or electronic devices, or other tangible personal property, is a taxable service too.
• Roofing includes replacing all or part of a roof and roof repairs. You collect no tax on the initial roof on new construction.

Your invoice: tax on the service portion

DRS counts as your service charge every cent above your cost of the materials physically incorporated into the real property, plus the tax you paid on them. That includes your labor, markups on labor and materials, overhead, tools or equipment, and reimbursed expenses on the bill. Bill the final customer in one of two ways:

1. Itemized: the materials, with the tax you paid; your service charges; and sales tax on the service portion.
2. One total: with the phrase “sales tax included on services”.

Either way, you charge tax only on the service portion. Landscaping and air conditioning repairs are exceptions: landscapers collect tax on the labor, the installation and the materials, and an air conditioning repair is taxed on the total bill, as above. On an illustrative $10,000 renovation job for an existing office building, with materials that cost you $4,000 including the tax you paid, the service portion is $6,000, and that’s what you charge sales tax on.

When your service isn’t taxable, or your customer is exempt, you don’t charge sales tax on it. A lump-sum contract should say whether its total price includes or excludes sales tax. A sales invoice, or an AIA document such as an Application and Certificate for Payment, is an acceptable receipt; a contract isn’t.

Connecticut law bars a retailer from advertising that it will pay or absorb any of the sales tax on merchandise; the fine is $500 for each offense.

Watch-outs for Connecticut contractors

• Collected tax is held in trust: some contractors have wrongly reimbursed themselves, out of the tax they collect from customers, for the tax they paid on materials. Under § 12-408(2), all the tax you collect is held in trust for the state and must go to DRS, even if you charged it in error, or back to the customer.
• Resale purchases for installs and repairs: if you both install and repair systems, you may buy items usable for either, such as piping, on resale. If an item goes into an installation, self-assess use tax on your purchase price; if it goes into a repair, collect sales tax on it from your customer. You can’t use a resale certificate for items that can only go into an installation, such as furnaces, central air conditioning or water heater units.