Were mortgage-servicing and related management services performed in Connecticut taxable when the mortgage holders were outside Connecticut?

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

Plain-English summary

X Corporation operated in Connecticut as a servicing agent for holders of commercial mortgages. It collected borrower payments, deducted its fee, sent the balance to the holders, monitored property inspections, taxes and insurance, imposed late charges, and acted when borrowers defaulted. The mortgage holders were outside Connecticut, while the mortgaged real estate could be inside or outside the state.

DRS classified mortgage servicing as a taxable management service. Under the historical sourcing rules, however, the service was accepted or received where the mortgage holder was located. The mortgage servicing and related monitoring/default services for out-of-state holders therefore were not subject to Connecticut sales and use tax.

That did not exempt services X Corporation bought for Connecticut property. Providers of restoration or repair services to Connecticut industrial, commercial, or income-producing property had to charge X Corporation tax. Providers of protective services likewise had to charge tax.

What this means for you

The historical ruling separated the servicer's management service to an out-of-state mortgage holder from property and protective services purchased by the servicer in Connecticut. AN 94(4) later obsoleted that framework.

Common questions

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

Why were services for the out-of-state holders not taxed? DRS sourced acceptance or receipt to the mortgage holder's location.

Were Connecticut repair and protective services also untaxed? No. Their providers had to charge tax to X Corporation.

Citations and references

• Conn. Gen. Stat. §§ 12-407(2)(i)(J), 12-411(1), 12-407(2)(i)(I), and 12-407(2)(i)(D).
• Conn. Agencies Regs. §§ 12-426-27(10)(b), 12-426-26, and 12-426-27(b)(5).
• Announcement (AN) 94(4) -- identified by DRS as obsoleting this ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-46

Original ruling text

Ruling 90-46, Business Analysis and Management Services / Mortgage Services

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

Ruling 90-46

Business Analysis and Management Services

Mortgage Services

This Ruling has been obsoleted by  AN 94(4)

FACTS:

X Corporation is a foreign corporation with its place of doing business in Connecticut. Pursuant to a "servicing agreement", X Corporation acts as a mortgage servicing agent for the holders of certain commercial mortgage loans. X Corporation collects mortgage payments from the borrowers and forwards these payments to the mortgage holders after deduction of its fees. In addition, X Corporation oversees periodic inspections of the mortgaged properties, monitors the payment of real estate taxes and insurance premiums in connection with the properties, levys any late charges due, and takes such other action as may be necessary in the event of a default by any of the borrowers.

X Corporation renders mortgage servicing to mortgage holders located outside Connecticut with respect to real estate located both within and without Connecticut.

RULING:

Section 12-407(2)(i)(J) of the Connecticut General Statutes imposes the sales and use tax on "business analysis, management, consulting and public relations 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. The Department considers mortgage servicing to be a taxable management service under the above statute and regulation.

Services taxable pursuant to section 12-407(2)(i) are taxable where they are rendered, and, under section 12-411(1), services are deemed to be used within this state if they are accepted or received within the state. Accordingly, the acceptance or receipt of mortgage servicing is deemed to occur where the underlying mortgage holder is located.

Therefore, it is ruled that the mortgage services rendered by X Corporation to mortgage holders located outside the State of Connecticut are not subject to sales and use taxes. Similarly, the Department considers X Corporation's other services, including overseeing periodic inspections of the mortgaged properties, monitoring the payment of real estate taxes and insurance on the properties, levying any late charges due, and taking such other action as may be necessary in the event of default by the borrowers, to be rendered to the mortgage holder and not subject to sales and use tax when the mortgage holder is located outside Connecticut.

However, with respect to payments made by X Corporation for restoration or repair services to mortgaged property located in Connecticut , the Department considers these services to be rendered directly to industrial, commercial and income-producing property under section 12-407(2)(i)(I) of the Connecticut General Statutes and section 12-426-26 of the Regulations of Connecticut State Agencies. Accordingly, the provider of such services must charge sales tax to X Corporation. Similarly, the provider of any protective services must charge sales tax to X Corporation pursuant to section 12-407(2)(i)(D) of the Connecticut General Statutes and section 12-426-27(b)(5) of the Regulations of Connecticut State Agencies.

LEGAL DIVISION

May 2, 1990