Does a Connecticut manufacturer owe use tax on product displays it buys, stocks with its goods, and gives free to retailers?

Plain-English summary

A company that manufactures hardware (drawer handles, knobs, door stops, coat hooks) bought empty product displays from an out-of-state manufacturer. The displays were shipped to the company in Connecticut, where it stocked them with its own hardware and then shipped the stocked displays free of charge to hardware retailers around the country. The question: does the company owe use tax on its purchases of those displays under Conn. Gen. Stat. § 12-411?

DRS split the answer by where the retailer is located.

First, the resale exclusion doesn't apply. The use tax reaches property purchased for use in Connecticut unless the buyer shows it bought the property for resale. But the resale exclusion is only for a buyer who is in the business of selling that property. Here the company sells its hardware, not the displays — it gives the displays away. Under Conn. Gen. Stat. § 12-411(12), if a buyer who claimed resale then makes any use of the property beyond holding it for sale (retention, demonstration, display), use tax is due. And the courts strictly construe the resale exclusion against the taxpayer (White Oak Corp. v. DRS; Stetson v. Sullivan). So the displays aren't shielded by resale.

Displays given to Connecticut retailers = taxable use. "Use" is defined broadly in Conn. Gen. Stat. § 12-407(5) as exercising any right or power over property incident to ownership (other than selling it in the regular course of business). By stocking the displays and handing them to in-state retailers as a marketing tool, the company uses the displays in Connecticut and must self-assess use tax on those purchases under § 12-411.

Displays shipped to out-of-state retailers = no Connecticut tax. Conn. Gen. Stat. § 12-407(6) carves out of "storage" and "use" property brought into Connecticut for the purpose of subsequently transporting it out of state for use solely outside the state (or to be incorporated into other property transported and used outside the state). When the company ships stocked displays to retailers outside Connecticut and passes title to them there for no charge, its "use" of the display occurs outside Connecticut — so those purchases are not subject to Connecticut use tax.

What this means for you

Manufacturers using promotional displays, racks, or point-of-sale fixtures

If you give away displays, racks, or fixtures rather than sell them, you generally can't buy them under a resale certificate — you're the end user. Expect to owe Connecticut use tax on displays you put into service with Connecticut retailers, and to self-assess it if the vendor didn't charge tax.

The resale exclusion is only for things you actually resell

You sell your product, not the display — so the display isn't held for resale. Using property you claimed for resale (here, giving displays away as a marketing tool) triggers use tax under § 12-411(12). Courts read the resale exclusion narrowly, against the taxpayer.

Interstate shipments can be outside Connecticut's reach

Under § 12-407(6), goods you bring into Connecticut only to send back out for use solely outside the state aren't taxed here. Displays you stock in Connecticut but ship to out-of-state retailers fall outside Connecticut use tax. Keep shipping records that show the out-of-state destination.

Common questions

Q: Do I owe use tax on free promotional displays I give to stores?
A: For stores in Connecticut, yes — you're the user of the displays, not a reseller, so you self-assess Connecticut use tax. For stores outside Connecticut, no Connecticut use tax is due.

Q: Can I buy the displays for resale since they go out with my product?
A: No. DRS held you sell the hardware, not the displays. The resale exclusion is only for property you're in the business of selling, and it's construed strictly against the taxpayer.

Q: Why are out-of-state shipments treated differently?
A: Conn. Gen. Stat. § 12-407(6) excludes property brought into Connecticut for the purpose of transporting it out and using it solely outside the state. Transferring the displays to out-of-state retailers is a use that happens outside Connecticut.

Q: How do I pay the tax on the Connecticut displays if the seller didn't charge it?
A: You self-assess and remit Connecticut use tax under § 12-411 on your purchases of the displays used with Connecticut retailers.

Citations and references

Statutes and case law:

• Conn. Gen. Stat. § 12-411 (use tax); § 12-411(12) (use tax when resale-purchased property is otherwise used)
• Conn. Gen. Stat. § 12-407(5) (definition of "use"); § 12-407(6) (property transported and used outside the state)
• Stetson v. Sullivan, 152 Conn. 649, 211 A.2d 685 (1965)
• White Oak Corporation v. Dept. of Revenue Services, 198 Conn. 413, 503 A.2d 582 (1986)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-17

Original ruling text

Ruling 93-17, Sales and Use Taxes / Storage and Use / Displays

FACTS:

A company that manufactures hardware, such as drawer handles and knobs, door stops and coat hooks (the "Company"), purchases empty hardware displays that it stocks with its hardware and ships to hardware retailers throughout the United States for display at those retail locations. The Company provides these stocked displays to the retailers at no charge. The empty displays are purchased from an out-of-state manufacturer by the Company, and are shipped by the manufacturer to, then filled by, the Company in Connecticut.

ISSUE:

Whether the Company's purchases of permanent displays, which are stocked with its product and then shipped to its retailers, are subject to the use tax under Conn. Gen. Stat. § 12-411.

DISCUSSION:

Conn. Gen. Stat. § 12-411 provides that the storage, acceptance, consumption or use in Connecticut of tangible personal property that was purchased for storage, acceptance, consumption or use in Connecticut is subject to the use tax ( see Stetson v. Sullivan , 152 Conn. 649, 211 A.2d 685 (1965)), until the contrary is established either by a valid resale certificate or by other evidence. The resale exclusion is available only to a purchaser engaged in the business of selling such property who intends to sell it in the regular course of business. However, if a purchaser who purchased property under the resale exclusion makes any use of such property other than retention, demonstration or display while holding it for sale in the regular course of business, Conn. Gen. Stat. § 12-411(12) provides that the use tax must be paid at the time of such use.

"Use" is defined in Conn. Gen. Stat. § 12-407(5) as including the exercise of any right or power over tangible personal property incident to the ownership of that property, except that it does not include the sale of that property in the regular course of business.

In White Oak Corporation v. Dept. of Revenue Services, 198 Conn. 413, 503 A.2d 582 (1986), the court strictly construed the statute creating the resale exclusion against the taxpayer, noting that "[the law allows [the taxpayer] to use this exemption only if the services and rentals were clearly for resale rather than being 'used' by the taxpayer." 198 Conn. at 421. In order to determine whether items are purchased for resale or for use, the intention of the parties to the contract must be reviewed. 198 Conn. at 422.

The Company provides the displays at no cost to retailers to assist in marketing its products to the public. The Company is not in the business of selling the displays themselves, but only the product stocked in the displays. Therefore, when displays are provided to retailers, the Company "uses" the displays in Connecticut within the meaning of Conn. Gen. Stat. § 12-407(5).

However, Conn. Gen. Stat. § 12-407(6) limits the scope of the terms "storage" and "use" to exclude:

[the exercise of] any right or power over tangible personal property shipped or brought into this state for the purpose of subsequently transporting it outside the state for use thereafter solely outside the state, or for the purpose of being processed, fabricated or manufactured into, attached to or incorporated into, other tangible personal property to be transported outside the state and thereafter used solely outside the state.

The Company is exercising its right or power over tangible personal property, thus using such property, outside Connecticut when it transfers title to the property to out-of-state retailers for no consideration. Thus, when the Company purchases displays from an out-of-state source, stocks the displays with its product at its facility in Connecticut, and then ships the stocked displays to retailers outside Connecticut, its purchases of such displays are not subject to the use tax.

RULING:

When the Company purchases displays from an out-of-state manufacturer which it stocks with its products and provides at no charge to retailers located within Connecticut, the Company "uses" such displays within the meaning of Conn. Gen. Stat. § 12-407(5) and must self-assess the use tax on such purchases pursuant to Conn. Gen. Stat. § 12-411. However, if the retailers to which the Company ships the stocked displays are located outside Connecticut, no use tax is due pursuant to the provisions of Conn. Gen. Stat. § 12-407(6).

LEGAL DIVISION

Issued: September 22, 1993