Ezel / Tax Rulings / CT
CT Ruling 92-7 Sales and Use Taxes 1992-04-20

Are an investment advisory firm's consulting fees subject to Connecticut sales tax, and does it matter whose investments the advice concerns?

Short answer: It depends on whose investments the advice is really about. An investment advisory company asked whether its investment-consulting fees are subject to Connecticut sales and use tax. DRS held: (a) NOT taxable when the company advises a client about investments the client OWNS or CONTROLS (its own accounts, or pension funds over which the client keeps investment authority) -- because Connecticut's regulation specifically EXCLUDES managing the recipient's own investments from the taxable 'core business activities.' (b) TAXABLE when the company advises ANOTHER investment advisor to help that advisor serve its own clients -- because there the advice goes to the recipient's CORE BUSINESS (selling investment services to others), assuming that recipient doesn't itself own or control the investments involved. The tax turns on Conn. Gen. Stat. § 12-407(2)(i)(J) (business management consulting services).

Apply this to your situation

This page answers the general question as of 1992. Ezel answers yours, under current Connecticut tax law, with citations.

Currency note: this ruling is from 1992
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official Ruling of the Connecticut Department of Revenue Services (DRS), typically issued to a specific taxpayer in response to that taxpayer's request and based on the specific facts presented and the Connecticut tax law in effect when it was issued. DRS may later declare a Ruling obsolete or supersede it by a subsequent Ruling, Policy Statement, or Announcement, so a taxpayer with different facts should not assume it still applies; the taxation of business management consulting services has been refined over time, so confirm the current law. Taxpayer-identifying details are redacted. Connecticut imposes its sales and use tax solely at the state level: there are no local or municipal sales taxes. This summary is informational only and is not legal or tax advice. Consult a licensed Connecticut tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.
View original ruling (PDF)

Plain-English summary

An investment advisory company helps clients evaluate investment policies, asset mixes, and the selection and monitoring of investment managers. It asked whether Connecticut's tax on business analysis, management, consulting, and public relations services (Conn. Gen. Stat. § 12-407(2)(i)(J)) reaches two kinds of work:

  • (a) Advising business clients about their pension plans and investments held for their own accounts; and
  • (b) Advising other investment advisors, to help them give investment advice to their clients.

The advice itself is "business management consulting." DRS agreed the company furnishes "advice and assistance pertaining to the management" of investment activities — the definition of business management consulting in the regulation. But that only makes a service taxable if it concerns the recipient's "core business activities."

(a) A client's own investments = not a core business activity = NOT taxable. The regulation (Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h)(3)) specifically excludes "the management of, or consultation regarding, the service recipient's investments" — regardless of the recipient's business — from core business activities. So advising a client on investments the client owns, or on pension funds the client keeps investment authority over, is not taxable.

(b) Advising another investment advisor = its core business = TAXABLE. When the company advises another investment advisory firm about the very service that firm sells (advising its clients), the advice does relate to that firm's core business — selling investment services to others. So that consulting is taxable under § 12-407(2)(i)(J), as long as the advisor-recipient doesn't itself own or retain investment authority over the investments at issue (which would flip it back into the excluded "own investments" category).

What this means for you

For investment consulting, ask "whose investments — and whose business?"

The same advice can be taxable or not depending on the recipient. Consulting about a client's own portfolio or self-directed pension assets is carved out of "core business activities" and is not taxable. Consulting that feeds another firm's investment-advice business is taxable, because it touches that firm's core business.

The "own investments" exclusion is broad — but authority matters

The exclusion for managing/consulting on the recipient's investments applies regardless of the recipient's line of business. The pivot is investment authority: if the recipient owns or retains authority over the investments, the advice is excluded (not taxable); if the recipient merely advises others on investments it doesn't control, advice about that business is taxable.

Effective date

The regulation defining these terms applies to sales made on or after July 1, 1991, so the analysis tracks the version of the rule in effect for the period in question.

Common questions

Q: Is investment advice about a client's own portfolio taxable in Connecticut?
A: No. Managing or consulting on the service recipient's own investments is excluded from "core business activities," so it is not taxable under § 12-407(2)(i)(J).

Q: What about advice on a client's pension plan?
A: Not taxable to the extent the client retains investment authority over the pension funds — that falls in the same excluded "own investments" category.

Q: When is investment consulting taxable?
A: When it is provided to another investment advisor to help that advisor serve its own clients — that goes to the recipient's core business — assuming the recipient doesn't own or control the investments involved.

Q: Why does the recipient's business matter so much?
A: Because § 12-407(2)(i)(J) taxes management-consulting advice only when it concerns the recipient's core business activities, and managing one's own investments is specifically excluded from that category.

Citations and references

Statutes and regulations:

  • Conn. Gen. Stat. § 12-406 et seq. (Sales and Use Taxes Act); § 12-407(2)(i)(J) (business analysis, management, consulting, and public relations services)
  • Conn. Agencies Regs. § 12-407(2)(i)(J)-1(f) (business management consulting services defined)
  • Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h), (h)(3) (core business activities; managing the recipient's own investments excluded), applicable to sales on or after July 1, 1991

Source

Original ruling text

Ruling 92-7, Sales and Use Taxes / Business Management Consulting Services

Ruling 92-7

Sales and Use Taxes Business Management Consulting Services

FACTS:

An investment advisory company (hereinafter "Company") enters into written agreements whereby it provides a variety of investment related services to clients. The Company assists clients in evaluating their investment policies, objectives, guidelines and restrictions, their asset mixes and allocations, the selection, monitoring and retention of investment managers, and other investment-related matters. In most cases, these services are provided to business clients with respect to the management of their pension plans or of investments they hold for their own accounts.

The Company also provides investment consulting services to other investment advisors, to assist them in providing investment advice to their own clients.

ISSUES:

(a) Whether the Company's investment consulting services provided to clients with respect to their pension plans or investments held for their own accounts are subject to sales and use taxes.

(b) Whether the Company's investment consulting services provided to other investment advisors, to assist them in providing investment advice to their own clients, are subject to sales and use taxes.

DISCUSSION:

The Sales and Use Taxes Act, Conn. Gen. Stat. §12-406 et seq. , imposes sales and use taxes, inter alia, on certain enumerated services. Conn. Gen. Stat. §12-407 provides, in pertinent part that

"Sale" and "selling" mean and include: . . . (i) the rendering of certain services for a consideration, exclusive of such services rendered by an employee for his employer, as follows: . . . (J) business analysis, management, consulting and public relations services . . .

Conn. Agencies Regs. §12-407(2)(i)(J)-1, applicable for sales made on or after July 1, 1991, defines "business management consulting services," at subsection (f), to include:

. . . the furnishing of advice and assistance on matters pertaining to the management of core business activities, as defined in subsection (h) of this regulation . . .

In subsection (h) of the regulation, "core business activities" are defined as

. . . activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others . . . Activities not generally regarded as directly related to a service recipient's core business activities include . . . (3) the management of, or consultation regarding, the service recipient's investments (including those investments over which the service recipient has investment authority), regardless of the nature of the business of the service recipient . . . [Emphasis added.]

The activities of the Company in providing investment-related advice and consulting, including advice regarding selection, investment policies and management of assets, appear to fall generally within the category of "the furnishing of advice and assistance pertaining to the management" of the investment activities of the service recipients, as provided in the definition of "business management consulting" in Conn. Agencies Regs. §12-407(2)(i)(J)-1(f). It remains to be determined whether the "object" of the Company's business management consulting activities is within the ambit of "core business activities" as defined in subsection (h).

In the case of the Company's clients whose assets held for their own accounts are the object of the business management consulting service, the answer is readily apparent--subdivision (3) of subsection (h) of the regulation specifically excludes the management of, or consultation regarding, the service recipient's investments from the "core business activities" category. Clients' pension funds, to the extent that clients retain investment authority over them, would be excluded under subdivision (3) as well.

However, when the Company renders its business management consulting services to other investment advisors, it is doing so with respect to the very line of business of such service recipients, which is to render investment services to others, and this business consulting activity by the Company therefore does relate to the management of the core business of such recipients, to the extent that such recipient do not own or retain investment authority over the investments on which they advise.

RULING:

(a) Consulting services of an investment advisory company involving an investment which the service recipient owns or over which it has investment authority are not subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(J).

(b) Consulting services of an investment advisory company to another investment advisory company are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(J), assuming the service recipient does not own or retain investment authority over the investments involved.

LEGAL DIVISION

April 20, 1992

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