Are a tax preparer's charges subject to Connecticut sales tax when it electronically files a client's return at no extra charge, even if the invoice does not separately state an e-filing charge?

Plain-English summary

A business that prepares federal income tax returns also offered to electronically file each return with the IRS. In its ads it promised e-filing "for no additional charge," and its records showed it charged no less when a client chose not to have the return e-filed. It asked whether its charges are fully taxable when the invoice does not separately state a charge for electronic filing.

The starting point is that electronic filing is a taxable computer and data processing (CDP) service. Connecticut taxes the rendering of CDP services (Conn. Gen. Stat. § 12-407(2)(i)(A)), which the regulations define to include storing, filing, retrieving and providing access to information (Conn. Agencies Regs. § 12-426-27(b)(1)), and DRS's TSSN-41 says e-filing a tax return is such a service. Under TSSN-41, when a preparer both prepares and e-files a return, tax applies to the total charge unless the preparation charge is separately stated from the e-filing charge.

But DRS ruled these charges are not taxable — because there is no charge for e-filing in the first place. Since the preparer charged the same amount whether or not it e-filed, no part of the fee is attributable to electronic filing. If nothing is being charged for e-filing, then nothing is being charged for a computer and data processing service, and the whole fee is for (non-taxable) return preparation. To make that clear, DRS recommended the preparer's invoice state "NO CHARGE FOR ELECTRONIC FILING."

What this means for you

Bundle a taxable computer service into a return and the whole bill can be taxed

The default rule cuts the other way: if you both prepare a return and e-file it (a taxable CDP service) and you do charge for the e-filing, tax can apply to the entire charge unless you separately state the e-filing portion. Bundling a taxable service into an otherwise non-taxable service without breaking it out invites tax on the whole amount.

"No charge" only works if you can prove it

DRS accepted "no charge for e-filing" because the preparer's records substantiated that it charged no less when it didn't e-file. The favorable result rests on that proof. If your price is the same with or without the add-on service, keep records showing it — and consider stating "no charge" for the bundled service on the invoice, as DRS suggested here.

This is a snapshot of 1991 law — verify the current rules

Connecticut's treatment of computer and data processing services (including the tax rate applied to them) has changed since 1991. Use this ruling for the principle — a genuinely free bundled service isn't a taxable charge — and confirm today's CDP rules and rate for your situation.

Common questions

Q: Is electronically filing a tax return a taxable service in Connecticut?
A: Yes — e-filing is a computer and data processing service, which is taxable under Conn. Gen. Stat. § 12-407(2)(i)(A) (see TSSN-41). But if the preparer makes no charge for the e-filing, there is no taxable charge.

Q: If I e-file a client's return for free, is my preparation fee taxable?
A: On the facts of this ruling, no. Because the preparer charged the same amount whether or not it e-filed, DRS found no charge was being made for the computer service, so the fee was not subject to sales and use tax.

Q: What if I do charge for e-filing?
A: Then tax can apply to the total charge unless you separately state the e-filing charge from the return-preparation charge (per TSSN-41). Break the charges out on the invoice.

Q: What did DRS recommend putting on the invoice?
A: That the bill or invoice state "NO CHARGE FOR ELECTRONIC FILING," to make clear no charge is being made for the computer and data processing service.

Citations and references

Statutes, regulations and guidance:

• Conn. Gen. Stat. § 12-407(2)(i)(A) — the rendering of computer and data processing services is a taxable "sale"
• Conn. Agencies Regs. § 12-426-27(b)(1) — CDP services include storing/filing information and retrieving or providing access to information
• TSSN-41 (NEW 2/91) — electronic filing of a tax return is a CDP service; total charge taxable unless the preparation charge is separately stated from the e-filing charge

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 91-19

Original ruling text

Ruling 91-19, Sales and Use Taxes / Computer and Data Processing Services

Ruling 91-19

Sales and Use Taxes

Computer and Data Processing Services

ISSUE:

Where a tax return preparer both prepares and electronically files a client's federal income tax return, but, in accordance with its advertisements, makes no charge to the client for electronic filing and charges no less where it does not electronically file the return, are its charges wholly subject to sales and use taxes, if the bill or invoice to the client does not separately state a charge for electronic filing?

FACTS:

A person [hereinafter, "the Tax Preparer/Transmitter"] is engaged in the business of preparing federal income tax returns.

In its advertisements, the Tax Preparer/Transmitter states, that, if engaged to prepare a federal income tax return, it will, for no additional charge, electronically file the return with the Internal Revenue Service.

The Tax Preparer/Transmitter's records substantiate that it does not charge less for preparing a client's federal income tax return where its client does not wish it to file the federal income tax return electronically

DISCUSSION:

"Sale", as defined in Conn. Gen. Stat. §12-407(2), includes the rendering of computer and data processing services; Conn. Gen. Stat. §12-407(2)(i)(A). "Such services mean and include ...storing and filing of information, retrieving or providing access to information ...." Conn. Agencies Regs. §12-426-27(b)(1). "Electronic filing of tax returns is a computer and data processing service." TSSN-41 (NEW 2/91).

Where a tax preparer/transmitter prepares and electronically files a client's tax return, sales and use taxes apply "to the total charge billed to the [client] unless the charge for tax return preparation is separately stated from the charge for electronic filing." TSSN-41.

However, where the same charge is made to a client, whether the tax preparer/transmitter only prepares the federal income tax return or both prepares and files electronically the tax return, then no charge is being made for electronic filing of the tax return. If so, then no charge is being made for computer and data processing services.

RULING:

Where a tax return preparer both prepares and electronically files a client's federal income tax return, and, in accordance with its advertisements, makes no charge to the client for electronic filing, and its records substantiate that it charges no less where it does not electronically file the return, then its charges are not subject to sales and use taxes. In such event, the Department would recommend that the tax return preparer's bill or invoice to its client contain the words "NO CHARGE FOR ELECTRONIC FILING".

LEGAL DIVISION

May 9, 1991