When were a sales agent's fees subject to Connecticut sales tax on the sale of a business's tangible property?

Note: DRS marks this Ruling "not current" and "being provided for reference purposes only." It was cited by Ruling 94-22 and obsoleted by Announcement AN 2000(8). It is preserved here as grounded historical guidance; do not rely on it, and confirm the current law before acting.

Plain-English summary

A company acted as a finder for buyers and sellers of businesses and business assets across the country. It had contingent-fee agreements with both sides — it earned a fee only if it successfully initiated a purchase or sale — and it did not negotiate the deals; it just introduced the parties. The things bought and sold could be corporate stock, other intangibles, real estate, tangible property (inventory, equipment) or a mix. DRS was asked, under the (now-obsoleted) tax on "sales agent services," Conn. Gen. Stat. § 12-407(2)(i)(U), when the company's fee was taxable.

DRS laid out four requirements, all of which had to be met:

1. It had to be an "agent." An "agent" is one who acts for another by authority. The company "found" a partner to the transaction and was paid if a sale resulted — that's enough. The service need not be complete or involve the deal's details; the phrase "in relation to the sale" means finding a buyer is enough if it leads to an actual sale. (DRS compared Ruling 91-4, a literary agent.)
2. It had to represent the SELLER, not the buyer. The tax reaches services "in relation to the sale of tangible personal property for [a] person." So only to the extent the company represented a seller could its fee be taxable — representing a buyer was not taxable.
3. The sale had to be of TANGIBLE personal property. Agent services tied to intangibles (stock, goodwill, royalties) or real estate were not taxable. For a mixed sale, the company and seller had to figure the percentage of the total price attributable to the tangible property, and only that percentage of the fee was taxable.
4. Title had to pass in Connecticut. The benefit of the agent's service occurs where the tangible property is sold — i.e., where title transfers — regardless of where the parties are located. (DRS cited Ruling 90-43, auto auctions.) So the fee was taxable only when the tangible property's title was transferred in Connecticut.

Bottom line at the time: the company performed taxable sales agent services only when it (a) acted for a seller, (b) was paid for services leading to an actual sale of tangible personal property, and (c) title transferred in Connecticut — with mixed sales allocated to the tangible portion.

What this means for you

This ruling is obsolete — treat it as history

DRS itself flags this as "not current," and it was obsoleted by AN 2000(8). Connecticut's treatment of sales-agent / finder services has since changed. Use this only to understand how the old rule worked, and confirm the current law for any live question.

The old rule was narrow and fact-specific

Even when the sales-agent-services tax was in force, a finder's fee was taxable only in a specific slice of situations — seller-side, tangible property, Connecticut title transfer. Buyer-side work, intangible/real-estate deals, and out-of-state closings fell outside it.

Mixed deals required an allocation

When a sale bundled tangible property with stock, goodwill or real estate, only the tangible-property share of the fee was taxable — and the parties had to compute that fraction. That allocation concept is a common feature of transaction taxes, though the specific sales-agent tax here is gone.

Common questions

Q: Is this ruling still good law?
A: No. DRS marks it "not current," and it was obsoleted by AN 2000(8). Confirm the current law; the sales-agent-services tax has since changed.

Q: When was a finder's or sales agent's fee taxable under the old rule?
A: Only when the agent represented a seller, was paid for services leading to an actual sale of tangible personal property, and title to that property transferred in Connecticut.

Q: Did representing the buyer make the fee taxable?
A: No. The old tax reached only services "for" a seller. Buyer-side representation was not taxable.

Q: What about deals mixing tangible property with stock or real estate?
A: Only the portion of the fee attributable to the tangible personal property was taxable; the parties had to determine that percentage of the total sales price.

Citations and references

Statutes and authorities:

• Conn. Gen. Stat. § 12-407(2)(i)(U) (sales agent services — since obsoleted)
• Conn. Gen. Stat. § 12-407(2)(a) ("sale"); § 12-407(2)(i); § 12-407(15) ("engaged in business"); § 12-408(1) (tax on gross receipts); § 1-1(a) (common usage)

Related guidance (described in prose, not linked):

• Ruling Nos. 90-43 (auto auctions — situs) and 91-4 (literary agent — "agent")
• Ruling 94-22 (cites this Ruling); Announcement AN 2000(8) (obsoletes this Ruling)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-3

Original ruling text

Ruling 93-3, Sales and Use Taxes / Sales Agent Services

This information is not current and is being provided for reference purposes only

This Ruling has been cited by Ruling 94-22 ; obsoleted by AN 2000(8)

FACTS:

A company (hereinafter referred to as "the Company") initiates sale transactions for buyers and sellers of businesses and business assets. The Company has contingent compensation agreements with both buyers and sellers located throughout the country, whereby a fee is paid if the Company is successful in initiating either a purchase or a sale, depending upon whether the Company represents the buyer or seller.

The Company is not authorized to negotiate for buyer or seller; the function performed by the Company is introducing the parties and initiating the transaction.

The items bought or sold may include the stock of a corporation, other intangible assets, real estate, tangible personal property (such as inventory, equipment, etc.), or a combination thereof.

ISSUES:

(a) Whether a sales agent must be directly involved in the consummation of a sale for the agent's services to be subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(U);

(b) whether a sale must be consummated before the services of a sales agent can be subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(U);

(c) whether the services of a sales agent are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(U) if the agent represents the buyer, rather than the seller;

(d) whether the services of a sales agent are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(U) if the property being sold consists of both tangible personal property and other types of property; and

(e) whether the services of a sales agent are subject to sales and use taxes under Conn. Gen. Stat. §12-407(2)(i)(U) if the transfer of title to the tangible personal property takes place in Connecticut.

DISCUSSION:

Conn. Gen. Stat. §12-407(2)(i) provides, in pertinent part, as follows:

(2) "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: . . . (U) services of the agent of any person in relation to the sale of any item of tangible personal property for such person . . .

Based upon the plain language of the statute, there are several important prerequisites for the imposition of tax under Conn. Gen. Stat. §12-407(2)(i)(U). First, to be taxable, the gross receipts of the service provider, or the sales price paid by the service recipient, must be for services of an "agent." The word "agent" must be construed according to the commonly approved usage of the language; Conn. Gen. Stat. §1-1(a). "Agent" means "one who acts for or in the place of another by authority from him . . . ." Webster, Third New International Dictionary . According to the facts presented, the Company "finds" buyers for sellers and vice versa, with the object of accomplishing a sale. The Company is compensated on a contingency basis if a sale takes place. Although the Company states that it does not engage in the actual negotiation of a sale or purchase, it clearly is authorized to represent one side in "finding" a partner to a transaction. These facts reasonably lead to the conclusion that the Company represents either a buyer or seller as its "agent." Further, the phrase "in relation to the sale" in the statute indicates that the services of a sales agent need not be of a precise or complete nature--in other words, the "finding" of a buyer, for which the agent is compensated, is enough, as long as it leads to an actual sale, even if the agent does not involve itself directly in the details of the sale. See also Ruling No. 91-4, where the Department held that the services of a literary agent, whose job it was generally to "find" or arrange for a publisher for an author's work, were the services of an "agent" for purposes of Conn. Gen. Stat. §12-407(2)(i)(U) (although because the sale of the literary work was of intangible property, the services of the agent were not taxable).

Next, the agent must be representing a seller, as opposed to a buyer. According to the facts, the Company may represent, and be compensated by, either a buyer or a seller. Only to the extent that the Company represents a seller would its services be potentially taxable under Conn Gen. Stat. §12-407(2)(i)(U). This conclusion is supported by the plain language of the statute, which refers to the "sale of any item of tangible personal property for [a] person."

Another requirement is that the agent must be representing a seller in relation to the sale of "tangible personal property," as differentiated from intangible property or real property. The facts indicate that the Company may be an agent in connection with the sale of either intangibles such as stock, goodwill, royalties, etc., of real estate, or of tangible property such as equipment and inventory. When the sale is mixed, it is incumbent upon the agent and the seller to determine the percentage of the entire sales price which is attributable to the sale of tangible personal property. This fraction must then be used to determine what portion of the agent's fee or commission is taxable.

The final area of examination relates to the situs of sales agent services. Conn. Gen. Stat. §12-408(1) imposes a tax on "gross receipts of any retailer . . . from the rendering of any services constituting a sale in accordance with [§12-407(2)(i)] . . ." A retailer is considered to be "engaged in business in this state" when it is "rendering in this state any service described in [§12-407(2)(i)] . . ."; Conn. Gen. Stat. §12-407(15). In the instant matter it is not known whether the Company will be located within Connecticut, and the purchaser and seller may each be located in different states. Therefore, an objective and easily ascertainable standard is needed for determining when the benefit of the service of a sales agent occurs in Connecticut.

Other Departmental rulings on services of sales agents have been based on where the tangible personal property that was sold (e.g., motor vehicles) was situated at the time of the sale, and not where the purchaser or seller was located. For example, in Ruling No. 90-43, where it was assumed that automobile auctions took place in Connecticut, it was noted:

[The agent's] services are rendered in Connecticut and the benefit of [the agent's] services are received by sellers at the time the motor vehicle is sold at auction. The fact that some of the sellers at [the agent's] auctions may be from outside of Connecticut is immaterial to the imposition of section §12-407(2)(i)(U).

As previously indicated, whether taxable sales agent services occur is directly dependent upon and related to whether a sale of tangible personal property takes place. If there is no sale of tangible personal property, there can be no taxable sales agent service-- §12-407(2)(i)(U) quite specifically refers to "the sale of any item of tangible personal property," implying that an actual sale is essential. Conn. Gen. Stat. §12-407(2)(a) defines "sale" as "[any transfer of title . . . of tangible personal property for a consideration . . ." Therefore it is reasonable to conclude that the benefit of a sales agent service occurs in Connecticut when the tangible personal property is sold in Connecticut, that is, when title to the property is transferred in Connecticut, irrespective of where the parties are located.

RULING:

The Company is performing taxable sales agent services under Conn. Gen. Stat. §12-407(2)(i)(U) when it acts on behalf of a seller and is paid for services which lead to the actual sale of tangible personal property, when the transfer of title to such property from the seller to the buyer takes place in Connecticut. When a sale involves tangible as well as intangible or real property, the Company and the seller must determine the percentage of the total sales price attributable to the sale of the tangible property, and that percentage of the Company's fee or commission will be subject to sales and use taxes.

LEGAL DIVISION

May 11, 1993