Is the labor to install a fuel cell facility on real property a taxable service in Connecticut, or is it exempt as new construction / a site improvement?

Plain-English summary

An electricity supplier hired a contractor to build a large fuel cell facility on the grounds of a municipal school, so the supplier could sell the heat and electricity the facility produces to the town. The generation unit alone was about 28 feet long and weighed 57,000 pounds. Over five months, the contractor designed the facility, pulled permits, excavated and poured a concrete foundation, crane-set and bolted the fuel cell down, ran underground gas/water/electric/heating connections into the school, built a concrete-embedded security fence, and installed site lighting. The supplier asked two questions: is that labor a taxable service to real property, or just the (differently taxed) installation of equipment — and if it is a service to real property, is it taxable?

The Department of Revenue Services gave a two-part answer that ends in no tax on the labor:

1. It's a service to real property, not equipment installation. Connecticut distinguishes "simple installation" — where a retailer just sets, connects, or hangs a finished product (an awning, a washing machine, cabinets) — from work that integrates a whole system permanently into real property. Given the excavation, poured foundation, anchor-bolting, underground utility tie-ins, fencing, and site lighting, this was clearly the latter: a service to real property.

2. But it's exempt as new construction / a site improvement. Connecticut taxes services to real property only when they are performed on existing commercial, industrial, or income-producing real property. Services rendered in the construction of new real property are excluded — and the regulation defines that to include site improvements that put property to a new use. Because the facility was a new improvement that put the school grounds to the new use of generating and supplying power, the installation labor counts as construction of new real property and is not subject to sales and use tax.

One important companion point: the fuel cell equipment itself (the tangible personal property) was taxable to the contractor, who is treated as the consumer of the materials it installs. So the exemption is about the labor, not the hardware.

What this means for you

Contractors and energy/infrastructure developers

The taxability of your labor on real property hinges on two questions in sequence. First, is the work "simple installation" of a finished product (potentially taxed as part of a TPP sale) or the integration of a system into real property (a service to real property)? Second, if it's a service to real property, is the property new construction / a site improvement (not taxable) or existing commercial/industrial/income-producing property (taxable)? A ground-up build like this fuel cell facility lands on the non-taxable side because it creates a new improvement. Separately, remember you generally owe use tax on the equipment and materials you install, as the consumer — so price that into the job.

Owners commissioning new energy or utility facilities

Labor to build a brand-new facility on your site is generally not taxed as a service to existing real property. But repairs, maintenance, and services to that facility after it exists — once it's established commercial/industrial/income-producing real property — can become taxable services. The new-construction exclusion is a one-time, build-phase benefit.

Accountants and tax professionals

The analysis runs through Conn. Gen. Stat. § 12-407(a)(37)(I) (services to real property), the installation-labor exclusion in the sales-price/gross-receipts definitions at § 12-407(a)(8) and (9), and the regulations distinguishing simple installation (Conn. Agencies Regs. § 12-426(18)-1(e)) from services to existing property versus new construction/site improvements (§ 12-407(2)(i)(I)-1(c)). DRS relied on its Building Contractors' Guide (IP 2018(2)) and analogized to communications-tower construction; it also cited its earlier Ruling No. 92-9, which treated construction of an interstate gas pipeline as an improvement to real property.

Common questions

Q: Is labor to install big equipment taxable in Connecticut?
A: It depends. Simply setting or connecting a finished product can be treated as part of a taxable equipment sale, but integrating a permanent system into real property is a "service to real property," which is taxable only when performed on existing commercial/industrial/income-producing property — not on new construction.

Q: Why wasn't this fuel cell installation taxed?
A: Because the facility was a brand-new improvement that put the site to a new use (generating power). Connecticut's rules treat that as construction of new real property / a site improvement, which is excluded from the tax on services to real property.

Q: So nothing was taxed?
A: The labor wasn't. But the fuel cell equipment and materials were taxable to the contractor, who is treated as the consumer of what it installs.

Q: Would maintenance on the facility later be taxable?
A: Potentially yes. Once the facility exists as income-producing real property, services to it (repairs, maintenance) can be taxable services to existing real property — the exclusion here was specific to the new-construction phase.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-407 (services taxed only if specifically enumerated)
• Conn. Gen. Stat. § 12-407(a)(37)(I) (services to commercial, industrial, or income-producing real property)
• Conn. Gen. Stat. § 12-407(a)(8), (9) (sales price / gross receipts; installation-labor exclusion)

Regulations:

• Conn. Agencies Regs. § 12-426(18)-1(e) (simple installation of tangible personal property)
• Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c) (services to existing real property; construction of new real property, including site improvements)

Administrative guidance and prior rulings:

• Informational Publication 2018(2), Building Contractors' Guide to Sales and Use Taxes
• Ruling No. 92-9 (construction of an interstate gas pipeline held to be an improvement to real property)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 2019-1

Original ruling text

Ruling 2019-1 Sales and Use Taxes, Services to Real Property, Installation (Real Property)

FACTS:

An electricity supplier (the “Company”) entered into a contract with a contractor to install a fuel cell facility (the “Facility”) on the premises of a municipal school. The municipality will lease the Facility site to the Company without charge for an initial term of twenty years. The Company will sell the heat and electricity produced by the Facility to the municipality for use in the school.

The generation component of the fuel cell is approximately twenty-eight and one-half feet long, over eight feet wide, ten feet tall, and weighs fifty-seven thousand pounds. The cooling module of the fuel cell is approximately sixteen feet long, eight feet wide, and six feet tall, and weighs over three thousand pounds. The contractor manufactured the components of the fuel cell at its offsite facility and shipped them to the Facility where the contractor set them in place.

The contractor performed the following work for the Company over a five-month period to furnish the Facility and make it operational:

Hired and directed an engineering firm for the creation of the design for the Facility;

Obtained state and local building permits;

Excavated and leveled the area for the foundation;

Applied crushed stone to prepare for the precast foundation slabs;

Poured concrete for the surrounding service, maintenance, access, fences, utility and lighting areas (approximately twenty-seven feet by sixty feet);

Used a crane to set the foundation slabs, fuel cell components, and cooling tower components in place, and anchor bolted the components to the foundation;

Installed connections to underground utilities, including natural gas, water, electric grid, heating water supply and return piping, and control wiring;

Installed new piping and conduit above and below ground with hard connections, including pavement cutting/trenching through the existing parking lot, to connect the Facility to the school building’s utility systems for heating and electricity;

Installed chain-link security fencing that is eight feet high with a perimeter of one hundred eighty feet, with posts embedded in concrete, around the Facility site, and with security posts to prevent damage to the Facility from vehicles;

Installed lighting for the site; and

Performed startup and final testing of all Facility systems.

ISSUES:

Is the labor performed to install the Facility considered a service to real property or the installation of tangible personal property?

If the labor to install the Facility is ruled to be a service to real property, is it a service to existing real property or to a site improvement?

RULINGS:

The labor performed to install the Facility is considered a service to real property, and not the installation of tangible personal property.

The Facility is a site improvement, and so the labor to install the Facility is not taxable as a service to existing real property.

DISCUSSION:

Connecticut generally imposes sales tax on retail sales of tangible personal property, whereas sales of services are not subject to sales tax unless specifically enumerated as taxable in Conn. Gen. Stat. § 12-407. Sales of services to commercial, industrial or income-producing real property are so enumerated, in Conn. Gen. Stat. § 12-407(a)(37)(I).

The definitions of “sales price” and “gross receipts” in Conn. Gen. Stat. § 12-407(a)(8) and (9), respectively, exclude “the amount charged for labor rendered in installing or applying the property sold, provided such charge is separately stated and exclusive of such charge for any service rendered within the purview of [Conn. Gen. Stat. § 12-407(a)(37)(I)].” A regulation provides more detail on this exclusion, stating that:

[A] person, whether the person is a contractor, subcontractor or otherwise, acts as a retailer selling tangible personal property in the same manner as other retailers and is required to install a complete unit of standard equipment, requiring no further fabrication but simply installation, assembling, applying or connecting services. In such instances the contract will not be regarded as one for improving, altering or repairing real property. For example, the retailer of an awning or blind agrees not only to sell it but to hang it; an electrical shop sells electrical fixtures and agrees to install them; a retailer sells an electric washing machine and contracts to install the same; a dealer sells cabinets and agrees to install them. A person performing such contracts is primarily a retailer of tangible personal property and should segregate the full retail selling price of such property from the charge for installation, as the tax applies only to the retail price of the property.

Conn. Agencies Regs. § 12-426(18)-1(e).

In contrast to the “simple installation” described above, a service to real property is performed when a contract is for the installation of “systems” that are integrated into real property. Examples of such “systems” include plumbing systems, which contain pumps, tanks, and water heaters, and heating and cooling systems, which contain central air conditioning units and furnaces. When a system is being installed in new construction or in residential real property, the services are not taxable. Contractors are the consumers of the materials used when installing these systems and, therefore, must pay tax on their purchases. Informational Publication 2018(2) , Building Contractors’ Guide to Sales and Use Taxes , “Installation versus Repair or Maintenance of Tangible Personal Property,” pp. 10-11.

Another example illustrating the distinction between installation and a service to real property is the construction of communications tower sites. Such towers typically are tall steel structures mounted on concrete pads on the ground and secured to the ground with guy wires. There may also be buildings constructed at the tower sites. The towers and buildings are real property, not tangible personal property, and so services performed on the towers themselves or the buildings around them are services to commercial, industrial, or income-producing real property. IP 2018(2) , “Antennas and Communications Towers,” pp. 26-27.

Similar to the services involved in constructing communications tower sites, the activities that went into installing the Facility were much more complex than simply the installation of tangible personal property. The installation of the Facility required excavation to prepare the ground for a concrete foundation to be poured, and then the fuel cell was anchor bolted to the foundation. Pipes and electrical wiring were laid underground that would connect the Facility to natural gas, water, and the electric grid. Pipes and conduit were also run above and below ground, to connect the Facility to the school building’s heating and electrical systems. A security fence was installed, with its posts embedded in concrete, and site lighting was installed. Given the scope of work required and the permanent nature of the changes to the real property, the labor performed to install the Facility was a service to real property, and not the installation of tangible personal property.

Despite being located on land belonging to a municipality, the Facility is considered to be income-producing real property because the Company is leasing the land on which it operates the Facility in order to sell the electricity and heat it generates. The tangible personal property that was installed into the Facility, including the fuel cell itself, was taxable to the Contractor as the consumer of such materials.

S ervices are taxable under Conn. Gen. Stat. § 12-407(a)(37)(I) only if the services are rendered to existing industrial, commercial or income-producing real property, thus excluding services to new construction from taxable services. Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c). T he regulation defines “construction of new real property” to include site improvements:

Services involved in the making of improvements to real property that put the property affected to a new use, such as the construction of roadways, walkways (concrete or asphalt), parking lots, patios (concrete or asphalt), swimming pools, tennis courts or decks, will be considered to be rendered in the construction of new real property, whether or not the making of such improvements is directly connected with the construction of a new building. . . .

Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(2). See also Ruling No. 92-9 , which held that the construction of an interstate gas pipeline was an improvement to real property.

As the Facility was an improvement to real property that put such property to the new use of producing and supplying electricity and heat to the school building, the labor performed in the installation of the Facility is considered rendered in the construction of new real property and is not subject to sales and use taxes.

LEGAL DIVISION

June 25, 2019