A ruling by a New Britain judge could allow companies to cut their Connecticut tax bills by avoiding tax they would ordinarily have to pony up in training employees at conference facilities in other states.
In December, Superior Court Judge Arnold Aronsen sided with Oxford-based Key Air L.L.C. that the state Department of Revenue Services improperly taxed the charter-jet company for the cost of a training program its employees attended outside the state. While the case addressed the specific arena of aviation training, it could have broader implications for Connecticut”™s sales-and-use tax policy.
“Use” taxes allow states to collect taxes for goods or services companies purchase in tax havens elsewhere or online, and are intended to protect a state”™s companies from suffering a competitive disadvantage with nearby rivals that might slash taxes in a bid to win business.
For a state like Massachusetts neighboring sales-tax-free New Hampshire, use taxes allow the state to recoup at least some of the revenue lost from residents and businesses that might cross the border for purchases.
Connecticut taxes personnel training services under the same umbrella as business management services. The stance of the Department of Revenue Service (DRS) has always been to apply a tax on business services where companies enjoy the benefit of the service, according to Doug Joseph, a partner in the West Hartford office of Blum Shapiro & Co. P.C. In the case of training, that means that even if Connecticut workers complete a seminar in another state or country, a company can be taxed on the cost of that seminar because workers apply their newfound knowledge at their jobs here.
In a reversal Joseph termed “a bombshell,” Aronsen ruled that personnel training services are “consumed” where the training takes place, and not where employees are based. In theory, that could provide an additional incentive for companies to schedule training at convention magnets like Orlando or Las Vegas.
It is uncertain whether destinations closer to home, including New York, could also benefit.
New York and Connecticut have among the most onerous sales-and-use tax codes in the nation for business services, according to Joseph. In 2006 the states renewed a decade-old cooperative agreement jointly to administer their sales-and-use tax schedules and so minimize tax evasion. DRS shares information on Connecticut merchants with the New York State Tax Department.
But the states do not have identical exemption schedules for sales and use taxes. For instance, New York does not impose sales tax on the use of hotel conference rooms for meetings, levying only the standard state sales tax on guest rooms.
Connecticut, by contrast, charges a 12 percent tax on hotel rooms, and charges the standard 6 percent sales tax for the use of any meeting rooms in which food is served. Provided a crumb of food cannot be found in a meeting room, the final bill is not taxed.
DRS has long allowed a number of loopholes to the training tax, including “refresher” and continuing education seminars, or those that address “indirect” skills such as motivation, public speaking, alcohol and drug awareness, and physical fitness.
However, if the topic falls within the scope of an employee”™s job ”“ perhaps to include a sales manager who motivates his sales force for a living ”“ the training is considered job-related and so subject to tax.
Until DRS”™ appeal of the Key Air decision is completed, the agency is leaving unchanged its policy to sales-and-use taxes generated on training employees receive elsewhere. Joseph said the agency appears to be more open, however, to taxpayer proposals for the sourcing of business services such as training.
“DRS is saying, ”˜Come up with creative ideas and we will work with you,”™” Joseph said.
