Is a chemist's paid consulting on the chemical properties of a manufacturer's products a taxable business-management service in Connecticut?

Plain-English summary

A chemist with advanced degrees consulted for a company that manufactures and sells hair care and hair color products, advising on the chemical properties of those products. DRS was asked whether that consulting was a taxable business-management service under § 12-407(2)(i)(J).

The first half of the analysis went against the taxpayer. Connecticut taxes business-management services only when they relate to the recipient's "core business" — defined as activities "directly related to a service recipient's lines of business involving sales of products, property, goods or services to others" (Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h)). Because the client's core business is selling hair products, the chemist's advice about those products did relate to its core business. So far, that points toward taxable.

But the regulation contains a professional-services exception (§ 12-407(2)(i)(J)-1(c)(3)): the tax does not apply to "professional services … rendered by a member of a profession, acting in such member's professional capacity, and … commonly associated with such profession," where a "profession" is any generally acknowledged occupation requiring a degree, license, or specialized training. DRS found:

• Chemistry is a "profession." It is "the science of the composition, structure, properties, and reactions of matter," so its practice requires specialized training.
• The chemist's advanced degrees show he is a member of that profession, and he was acting in his professional capacity when advising on the products' chemical properties.
• Such advice is commonly associated with chemistry.

Because the exception applied, the chemist's consulting was not taxable — even though it touched the client's core business.

What this means for you

Scientists and technical experts who consult

If you are a member of a recognized profession — one requiring a degree, license, or specialized training — and you advise a client within your professional field, Connecticut's business-management-services tax generally does not reach that work, even when your advice bears directly on the client's core product or line of business. The professional-services exception, not the "core business" test, controls.

Manufacturers and other companies buying expert advice

You generally should not be charged Connecticut sales tax on genuine professional consulting (a chemist's product-chemistry advice, an engineer's technical analysis, and the like) delivered by the professional in that capacity. If a vendor taxes it as "management consulting," that's worth a closer look.

The "core business" trap — and the way out

Note the two-step logic: advice about a client's core products starts out looking taxable under the core-business rule. What saved this taxpayer was being a professional acting in a professional capacity. A non-professional selling similar product or market advice tied to the client's core business can still be taxable. The companion Ruling 94-12 applied the same exception to a pharmacist consulting to nursing homes; this Ruling expressly amplifies it, and both were cited in Ruling 97-1.

Common questions

Q: The chemist's advice was about the client's own products — why wasn't it taxable "core business" consulting?
A: It would have been, but the professional-services exception overrides. Because a chemist (a profession requiring specialized training) gave the advice in his professional capacity, and such advice is commonly associated with chemistry, the service falls outside the business-management-services tax.

Q: What counts as a "profession" for this exception?
A: Any generally acknowledged occupation requiring a degree, license, or specialized training. The regulation lists medical, legal, accounting, and actuarial as examples, "including but not limited to" — DRS added chemistry here and pharmacy in the companion ruling.

Q: Does this mean anything a professional's firm sells is exempt?
A: No. The exception protects professional services rendered in the professional's capacity and commonly associated with the profession. Other management, PR, or analysis work touching a client's core business can still be taxable.

Q: Can another consultant rely on this ruling?
A: Not as their own. A DRS Ruling binds the Department only for the taxpayer and facts it addressed. It illustrates the reasoning, but your facts may differ, and DRS can later supersede or obsolete a ruling.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-407(2)(i)(J) (tax on business analysis, management, management consulting and public relations services)
• Conn. Agencies Regs. § 12-407(2)(i)(J)-1 (business-management-services regulation); -1(h) (definition of "core business activities"); -1(c)(3) (professional-services exception)

Related guidance (described in prose, not linked):

• Ruling No. 94-12 (companion — pharmacist; this Ruling amplifies it) and Ruling 97-1 (cites this Ruling)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 94-21

Original ruling text

Ruling 94-21, Sales and Use Taxes / Professional Services / Business Management and Management Consulting Services

This Ruling is cited in Ruling 97-1

FACTS:

An individual with advanced degrees in chemistry ("the Chemist") renders consultation services on the chemical properties of hair care and hair color to the manufacturer of hair care and hair color products.

ISSUES:

Whether the Chemist's consultation services are taxable "business analysis, management, management consulting and public relations services" under Conn. Gen. Stat. § 12-407(2)(i)(J) and Conn. Agencies Regs. §12-407(2)(i)(J)-1.

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(i)(J) imposes sales and use taxes on "business analysis, management, management consulting and public relations services" ("business management services"). Conn. Agencies Regs. §12-407(2)(i)(J)-1 provides that to be taxable, business management services must relate to the service recipient's "core business" or "human resource management activities."

"The term 'core business activities' means and includes activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others..." Conn. Agencies Regs. §12-407(2)(i)(J)-1(h). Because the service recipient is in the business of selling hair care and hair color products, the Chemist's consulting services directly relate to the service recipient's core business.

However, Conn. Gen. Stat. §12-407(2)(i)(J) does not apply where

the services rendered are professional services that are rendered by a member of a profession, acting in such member's professional capacity, and that are commonly associated with such profession. The term "profession" means any generally acknowledged professional occupation requiring a degree, license or specialized training, including, but not limited to, the medical, legal, accounting and actuarial professions...

Conn. Agencies Regs. §12-407(2)(i)(J)-1(c)(3).

"Chemistry" is defined as "the science of the composition, structure, properties, and reactions of matter, especially of atomic and molecular systems; the composition, structure, properties and reactions of a substance." Webster, New Riverside University Dictionary . Therefore, the practice of chemistry requires specialized training, and chemistry is a "profession" within the meaning of Conn. Agencies Regs. §12-407(2)(i)(J)-1(c)(3).

The Chemist's advanced degrees indicate that he is a member of a "profession" within the meaning of Conn. Agencies Regs. §12-407(2)(i)(J)-1(c)(3). Furthermore, the Chemist is acting in his professional capacity when he consults on the chemical properties of the service recipient's products. Such services are commonly associated with the Chemist's profession.

RULING:

The Chemist is a member of a "profession" within the meaning of Conn. Agencies Regs. §12-407(2)(i)(J)-1(c)(3). The Chemist renders chemical consultation services in his professional capacity. Such chemical consultation services are commonly associated with the practice of chemistry. Therefore, the professional services exception in Conn. Agencies Regs. §12-407(2)(i)(J)-1(c)(3) applies and the Chemist's consultation services are not taxable "business analysis, management, management consulting and public relations services" under Conn. Gen. Stat. §12-407(2)(i)(J).

This Ruling amplifies Ruling No. 94-12 .

LEGAL DIVISION

November 10, 1994