Was a bank's mortgage servicing taxable when it continued collecting and processing payments after selling the mortgage?

Note -- obsolete historical guidance. DRS marks this ruling "not current" and states that it was obsoleted by Announcement (AN) 94(4).

Plain-English summary

Banks originated residential mortgage loans, usually secured by Connecticut real estate, and often sold them to government agencies, financial institutions, or other investors. A bank could continue servicing a sold loan by collecting and processing borrower payments and remitting them to the mortgage holder after deducting its servicing fee.

DRS classified mortgage servicing as a business analysis and management service under the historical version of Conn. Gen. Stat. § 12-407(2)(i)(J). The cited regulation included specialized management consulting within business management services.

Under the ruling's historical sourcing approach, a taxable service was used in Connecticut if accepted or received here. DRS treated mortgage servicing as accepted or received where the underlying mortgage-loan portfolio was maintained, normally at the bank holding the loans.

The result was that mortgage servicing was taxable when rendered to or received by a Connecticut bank that held the mortgage loans.

What this means for you

The historical ruling focused on the location of the bank maintaining the loan portfolio, not merely the location of the mortgaged real estate or the staff processing payments. AN 94(4) later obsoleted the ruling, so current classification and sourcing must be checked independently.

Common questions

Was mortgage servicing considered a management service? Yes under the cited historical statute and regulation.

Where did DRS say the service was received? Where the underlying mortgage loans were maintained, normally at the bank holding the portfolio.

Did the ruling cover a Connecticut bank holding the loans? Yes. It expressly ruled that servicing rendered to or received by that bank was taxable.

Can this ruling establish the current rule? No. DRS marks it not current and obsoleted by AN 94(4).

Citations and references

• Conn. Gen. Stat. §§ 12-407(2)(i)(J) and 12-411.
• Conn. Agencies Regs. § 12-426-27(10)(b).
• Announcement (AN) 94(4) -- identified by DRS as obsoleting this ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-42

Original ruling text

Ruling 90-42, Business Analysis and Management Services / Mortgage Services

This information is not current and is being provided for reference purposes only

Ruling 90-42

Business Analysis and Management Services

Mortgage Services

This Ruling has been obsoleted by   AN 94(4)

FACTS:

Banks originate residential mortgage loans. In most cases the loans are secured by Connecticut real estate. The mortgage loans are often sold to federal or state agencies, private financial institutions or other private investors. After selling a mortgage, the bank may continue to service it by collecting and processing the payments and remitting the payments to the mortgage holder less a percentage for the bank's fee.

RULING:

Section 12-407(2)(i)(J) provides that sales subject to Connecticut sales and use tax include "business analysis and management services." The taxable incident is the rendering of the services.

The Department considers mortgage servicing to be a service that falls within the definition of business analysis and management services. Section 12-426-27(10)(b) of the Regulations of Connecticut State Agencies includes "specialized management consulting services" within the definition of business management services.

Services taxable pursuant to Section 12-407(2)(i) of the Connecticut General Statutes are taxable where rendered. Pursuant to Section 12-411 of the Connecticut General Statutes, services are deemed to be used within the state if they are accepted or received within the state.

The acceptance or receipt of mortgage servicing is deemed to occur where the underlying mortgage loans are maintained. This would normally be at the bank who holds the portfolio of mortgage loans.

Accordingly it is hereby ruled that mortgage servicing is a taxable service pursuant to Section 12-407(2)(i)(J) of the Connecticut General Statutes. Those services are taxable when rendered to or received by a Connecticut bank who holds the mortgage loans.

LEGAL DIVISION

April 16, 1990