Is managing the redevelopment of a vacant office complex into a leased multi-tenant property a taxable service in Connecticut?

Plain-English summary

A property management company ("M Company") was retained by the owner of a vacant office complex (the owner's former headquarters) to oversee its redevelopment into a fully occupied, multi-tenant complex. Its work included developing a master plan, retaining an architect, hiring a contractor on the owner's behalf, marketing the property, coordinating tenant-improvement work, and obtaining zoning, wetlands, and building permits. Once the complex filled with tenants, this redevelopment contract would end; M Company had a separate day-to-day management contract it already agreed was taxable. It asked whether the redevelopment-management work was taxable too.

DRS said yes — it's a taxable service to existing real property under § 12-407(2)(i)(I). Two points drove the result:

1. The property is "existing," not new. The service is taxable because it is rendered to existing commercial or income-producing real property. The complex already existed and had a commercial purpose; converting it into income-producing property doesn't turn it into "new construction."
2. The work is "management" of that property. M Company's tasks mirror those of taxable construction consultants/construction managers (cost analysis, plan review, code compliance, hiring and approving contractors) and taxable day-to-day property managers (marketing to tenants, arranging tenant improvements). DRS found no rational basis to distinguish tenant-related services performed before the building is full from the (conceded taxable) services performed after it is full.

DRS noted there were two candidate taxing categories — services to real property under § 12-407(2)(i)(I) and business-management services under § 12-407(2)(i)(J) — but § 12-407(2)(i)(J)'s "core business activities" exclude managing the recipient's real property, so this fell under the services-to-real-property category.

What this means for you

Redevelopment/"repositioning" management of existing property is taxable

If you manage the overhaul of an existing commercial building — planning, hiring designers and contractors for the owner, handling permits, marketing, and coordinating tenant build-outs — Connecticut treats that as a taxable service to existing income-producing real property, the same as ordinary property management.

"New construction" is about the property, not the project's ambition

A gut-renovation or repositioning of a building that already exists is still a service to existing property. The nontaxable "new construction" category is for building genuinely new structures (or additions that expand a building's cubic footage), not for reworking or re-tenanting existing space — however extensive the redevelopment.

Before-occupancy vs. after-occupancy doesn't change the tax

DRS rejected splitting tenant-related services by whether the building was full yet. Management services to the property are taxable across the redevelopment timeline, not just once the building is leased up.

Common questions

Q: Is overseeing the redevelopment of a vacant office building a taxable service?
A: Yes. DRS ruled it is management of existing commercial/income-producing real property, taxable under Conn. Gen. Stat. § 12-407(2)(i)(I).

Q: Doesn't a major redevelopment count as "new construction"?
A: No. The building already existed, so the services are rendered to existing real property. New construction means new buildings or additions that expand cubic footage — not reworking existing space.

Q: Why § 12-407(2)(i)(I) and not the business-management category in (J)?
A: Because the business-management category's "core business activities" specifically exclude managing the recipient's real property, so management of the property falls under the services-to-real-property category instead.

Q: Are the services taxable only after the building is fully leased?
A: No. DRS found no basis to treat services before full occupancy differently from those after, so the redevelopment-management services are taxable throughout.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-406 et seq. (Sales and Use Taxes Act); § 12-407(2)(i)(I) (services to industrial/commercial/income-producing real property, including management)
• Conn. Gen. Stat. § 12-407(2)(i)(J) (business analysis, management, consulting, and public relations services)
• Conn. Agencies Regs. § 12-407(2)(i)(I)-1(c)(1), (e), (f) (existing vs. new real property; commercial/income-producing property defined)
• Conn. Agencies Regs. § 12-407(2)(i)(J)-1(e), (h) (business management services; core business activities exclude managing the recipient's real property)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 92-8

Original ruling text

Ruling 92-8, Sales and Use Taxes / Services to Real Property

Ruling 92-8

Sales and Use Taxes Services to Real Property

FACTS:

A property management company (hereinafter "M Company") has been retained by the owner of a vacant office complex to oversee the redevelopment of the property (the owner's former business headquarters) into a fully occupied, multi-tenant complex. M Company's services to the owner will include: developing a conceptual master plan for the redevelopment of the complex; retaining an architect to design any necessary changes; hiring a contractor on behalf of the owner to construct the necessary changes; overseeing and managing the marketing of the property; supervising and coordinating tenant improvement work; and obtaining all necessary zoning, wetlands and building permits.

When the complex becomes fully occupied with new tenants, M Company's services under its redevelopment contract with the owner will be complete. M Company has also entered into a contract with the owner for the day-to-day management of the property, which it acknowledges to be a taxable service.

ISSUE:

Whether M Company's overall management of the redevelopment of the owner's vacant commercial property into a fully occupied multi-tenant complex involves services 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: . . . (I) services to industrial, commercial or income-producing real property, including but not limited to, such services as management . . . (J) business analysis, management, consulting and public relations services . . .

There are, potentially, two taxable categories into which M Company's services involving "management" could be placed. Conn. Gen. Stat. §12-407(2)(i)(J), cited above, taxes business management services, when provided with respect to the "core business activities" of the service recipient. Conn. Agencies Regs. §12-407(2)(i)(J)-1(e). "Core business activities" include "activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others," but do not include "the management of the service recipient's real property . . ." Conn. Agencies Regs. §12-407(2)(i)(J)-1(h).

The other service category involving taxable management services is Conn. Gen. Stat. §12-407(2)(i)(I), cited above, involving services to industrial, commercial or income-producing real property. Conn. Agencies Regs. §12-407(2)(i)(I)-1(c)(1) specifies that such services will be within the purview of the statute "if and only if the services are rendered to existing . . . real property" as opposed to the construction of new real property, i.e., new buildings or additions.

Under the facts presented herein, it is clear that M Company will be rendering services to existing commercial or income-producing real property as those terms are defined in Conn. Agencies Regs. §12-407(2)(i)(I)-1(e) and (f). The building complex in question had a commercial purpose for the owner, and is being converted into income-producing commercial property for the owner. The only remaining area of consideration is whether the services of M Company constitute "management" as that term is used in the statute.

It is well settled and conceded by M Company that the day-to-day management of real property is a service subject to tax under Conn. Gen. Stat. §12-407-(2)(i)(I). Day-to-day management services involve the supervision of a wide variety of ongoing maintenance and upkeep activities, as well as matters relating to the marketing and tenancy of the property. The Department also includes within the category of services to real property the activities of "construction consultants" and "construction managers," who are responsible for cost analysis; budgeting; reviewing preliminary plans; construction inspection, supervision and approval; planning; and code compliance, among other things.

The services of M Company will include developing plans, hiring and approving contractors on behalf of the owner, and responsibility for zoning and code compliance, activities essentially the same as those of construction consultants and construction managers. M Company's services will also include marketing the property to obtain tenants and working with them on the types of improvements they wish to have made to the property ("tenant improvement work"), activities similar to those of day-to-day property managers. There appears to be no rational basis on which to distinguish between services involving tenants before the building becomes fully occupied and services involving the tenants after the building becomes fully occupied. M Company acknowledges that its day-to-day property management services will be taxable.

RULING:

Services involving the overall management of the redevelopment of an owner's vacant commercial property into a fully occupied multi-tenant complex are taxable under Conn. Gen. Stat. §12-407(2)(i)(I) as management of industrial, commercial or income-producing real property.

LEGAL DIVISION

April 20, 1992