Are Connecticut sales and use taxes owed on a home warranty (home service contract), and does it matter whether the home is owner-occupied or a rental?

Plain-English summary

A company sells home service contracts — "home warranties" — to buyers of residential real estate. For a set period, the warranty covers repair or replacement of a home's systems and appliances: electrical and HVAC systems, plumbing, water heaters, dishwashers, microwaves, refrigerators, and sometimes pools, septic systems, and well pumps. On each contract the company separately states two charges: one for the warranty of the real property and one for the warranty of the tangible personal property (the systems and appliances). The company asked whether its contracts are subject to Connecticut sales and use tax.

DRS said the answer depends on how the covered home is used:

• Rental / income-producing homes → fully taxable. Servicing "industrial, commercial, or income-producing real property" is a specifically enumerated taxable service. Residential property rented to a tenant is generally income-producing property, so a warranty on such a home is taxable on the entire contract price under Conn. Gen. Stat. § 12-407(a)(37)(I).
• Owner-occupied homes → only the personal-property part is taxable. Repair services to a home the owner lives in are not an enumerated taxable service, so that portion isn't taxed. But two other enumerated services still reach part of the contract: repairs to electrical or electronic devices (§ 12-407(a)(37)(Q)) and repairs to tangible personal property, including related warranty contracts (§ 12-407(a)(37)(CC)). Because the company separately stated the personal-property charge, only that charge is taxable — the real-property portion is not.

The separate statement is what saved the owner-occupied customers from tax on the whole contract. Normally, bundling a non-taxable service into the price of a taxable one makes the entire price taxable; itemizing the taxable piece keeps the tax confined to that piece.

What this means for you

Home warranty and service-contract sellers

Whether your contract is taxable — and how much of it — turns on the property's use and on your invoicing. For rental/income-producing homes, expect the whole price to be taxable. For owner-occupied homes, tax attaches only to repairs of appliances and electrical/electronic devices — and only if you separately state that charge. If you lump everything into one price on an owner-occupied contract, the general bundling rule can make the entire charge taxable. Collect the property-use information you need to apply the right treatment.

Landlords and rental-property owners

A home warranty you buy on a rental property is a service to income-producing real property and is taxable on its full price. Budget for the tax and confirm it appears correctly on the invoice.

Homeowners

On a warranty for the home you live in, you should generally see tax only on the separately stated portion covering appliances and electrical/electronic device repairs, not on coverage for the house itself. Watch for one nuance from the ruling's footnotes: rewiring or upgrading a building's electrical system is treated as a service to real property, not a taxable device repair — so not every "electrical" item is taxable.

Accountants and tax professionals

The decision applies the enumerated-services scheme of Conn. Gen. Stat. § 12-407 against § 12-408's imposition of tax. Note the definitional lines: income-producing property excludes an owner-occupied dwelling of no more than three units and certain nonprofit low/moderate-income housing under § 12-412(29); and § 12-407(a)(37)(Q)'s device-repair category excludes building-wide electrical wiring/upgrades, which fall under real-property services. Separate statement of the taxable component is essential to avoid full-contract taxation under the bundling rule.

Common questions

Q: Is a home warranty taxable in Connecticut?
A: Partly or fully, depending on the home. On a rental (income-producing) home the whole contract price is taxable; on an owner-occupied home only the separately stated charge for appliance and electrical/electronic-device repairs is taxable.

Q: Why does a rental home get taxed on the full price but my own home doesn't?
A: Servicing income-producing real property is itself an enumerated taxable service, so the whole contract is taxed. Repairs to an owner-occupied home are not an enumerated service, so only the parts that fall under other taxable categories (personal-property and electrical-device repairs) are taxed.

Q: Does separately stating the charges matter?
A: Yes. Because the company separately stated the personal-property warranty charge, tax on owner-occupied contracts was limited to that charge. If a non-taxable service is bundled into the price of a taxable one, the entire price generally becomes taxable.

Q: Is fixing the home's wiring a taxable "electrical device" repair?
A: No. Under the ruling's footnote, wiring, rewiring, or upgrading a building's electrical system is a service to real property, not a taxable electrical/electronic-device repair.

Q: Does this ruling apply to my contracts?
A: Not automatically. A Connecticut Ruling binds DRS only for the taxpayer and facts it addressed. Different contract terms, invoicing, or property uses could change the result.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407 (services taxed only if specifically enumerated)
• Conn. Gen. Stat. § 12-408 (imposition of sales and use tax on retail sales)
• Conn. Gen. Stat. § 12-407(a)(37)(I) (services to industrial, commercial, or income-producing real property)
• Conn. Gen. Stat. § 12-407(a)(37)(Q) (repair services to electrical or electronic devices)
• Conn. Gen. Stat. § 12-412(29) (nonprofit low/moderate-income housing exclusion from income-producing property)

Regulations:

• Conn. Agencies Regs. §§ 12-407(2)(i)(Q)-1 and 12-407(2)(i)(DD)-1 (electrical-device and tangible-personal-property repair services)
• Conn. Agencies Regs. § 12-407(2)(i)(I)-1 (services to income-producing real property)

Administrative guidance:

• Informational Publication 2006(35), Building Contractors' Guide to Sales and Use Tax (installation versus repair; building electrical work as a real-property service)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2017-1

Original ruling text

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:

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).

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.

LEGAL DIVISION

January 18, 2017

[1] Income-producing property does not include property used “exclusively for residential purposes in which the owner resides and which contains no more than three dwelling units.” Conn. Gen. Stat. § 12-407(a)(37)(I). Income-producing property also excludes housing facilities for low and moderate income families that is owned or operated by a nonprofit housing organization, as defined by Conn. Gen. Stat. § 12-412(29).  See Conn. Agencies Regs. § 12-407(2)(i)(I)-1.

[2] While repair services to most systems within a home are taxable under Conn. Gen. Stat. § 12-407(A)(37)(Q), the wiring, rewiring, or upgrading of a building’s electrical system is not taxable under this subparagraph because such services are considered to be services to real property. See “Installation versus Repair or Maintenance of Tangible Personal Property,” Informational Publication 2006(35) , Building Contractors’ Guide to Sales and Use Tax , p. 19.