Are a management company's nutrition and food-service charges to a nursing home taxable business management services in Connecticut?

Plain-English summary

A nonprofit nursing home (the "Home") hired a management company (the "Company") to run its food service. The Company bought food and supplies as the Home's agent, prepared meals, delivered them to the floors for the Home's own staff to hand out, retrieved trays, cleaned the kitchen equipment, and kept the floor supplies stocked and rotated according to the Home's policies. It also prepared and served food at the Home's religious, social, business, and other catered functions. DRS was asked whether those charges are taxable business management services under Conn. Gen. Stat. § 12-407(2)(i)(J).

Connecticut taxes "business management services," which the regulation (Conn. Agencies Regs. § 12-407(2)(i)(J)-1(e)) defines as managing a client's personnel for, or controlling or directing, all or part of the client's "core business activities" — and expressly not the controlling or directing of activities other than core business activities. "Core business activities" (subsection (h)) are activities directly related to the client's lines of business — its sales of products or services, its capital structure, its budgeting, and its planning.

Meals for residents = taxable. DRS reasoned that a nursing home's core business is caring for its residents, and providing them nutritionally balanced meals is directly related to that line of business ("directly" meaning "in close relational proximity"). So the Company's charges are subject to sales and use tax to the extent they relate to meals served to residents.

Meals for staff, visitors, and guests = not taxable. The regulation's own illustration (subsection (h)(1)) lists the administration of a client's "employee food service operations" as an example of an activity not directly related to core business. DRS concluded that if feeding the Home's employees isn't directly related to its core business, then feeding visitors and guests can't be either. So the charges relating to meals for employees, visitors, and guests are not subject to sales and use tax.

This ruling is a companion to Ruling 93-6, issued the same day (May 17, 1993), which used the same "core business activities" analysis to hold that a medical-claims collection service was outside a hospital's core business.

What this means for you

Outsourced food service at a health-care facility

If you manage the dining operation of a nursing home or similar facility, the tax treatment can split within a single contract: the part of your charge tied to feeding the residents (the people the facility exists to care for) is a taxable business management service, while the part tied to staff cafeterias and guest/visitor catering is not.

Bill so the taxable and non-taxable parts can be told apart

Because taxability turns on who the meals are for, keep your records and invoicing detailed enough to distinguish resident meals from employee, visitor, and guest meals. A contract that lumps everything together invites the whole charge being treated as taxable.

"Core business" is the dividing line for business management services

The test isn't whether a service is helpful or important to a client — it's whether it controls or directs the client's core business activities. Back-office and support functions the regulation lists as not directly related to core business (like employee food service) fall outside the tax, even when performed for a client whose core business is closely regulated.

Common questions

Q: Is running a nursing home's kitchen a taxable service in Connecticut?
A: Partly. Under this ruling, the portion of the charge relating to meals for the home's residents is a taxable business management service; the portion relating to meals for employees, visitors, and guests is not.

Q: Why are resident meals treated differently from staff and guest meals?
A: A nursing home's core business is caring for its residents, so feeding residents is "directly related" to that core business. The regulation specifically lists employee food-service operations as not directly related to core business, and DRS extended that to visitors and guests.

Q: Does buying the food "as agent" for the home change the result?
A: The ruling's taxability analysis turns on whether the service directs the client's core business activities, not on the agency purchasing arrangement. The management of the resident food service was the taxable piece.

Q: How should the contract be structured?
A: Separate and clearly document the charges for resident meals versus staff/visitor/guest meals, so the non-taxable portion is identifiable. This ruling was issued to one taxpayer on its specific facts and definitions that have since changed — confirm the current rules for your situation.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-407(2)(i)(J) (business analysis, management, management consulting and public relations services)
• Conn. Agencies Regs. § 12-407(2)(i)(J)-1(e) (definition of "business management services")
• Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h) (definition of "core business activities"); § 12-407(2)(i)(J)-1(h)(1) (employee food service operations not directly related to core business)

Related guidance (described in prose, not linked):

• Ruling 93-6 (same-day companion; medical-claims collection outside a hospital's core business)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-5

Original ruling text

Ruling 93-5, Sales and Use Taxes / Business Management Services

FACTS:

A nonprofit nursing home [hereinafter referred to as "the Home"] has contracted with a management company [hereinafter referred to as "the Company"], under which contract the Company will provide nutrition-related management services in connection with the Home's residents, employees, visitors and guests. These services involve purchasing food and supplies as agent for the Home, preparing meals, distributing meals to floors for final distribution by the Home's staff, retrieving trays from floors after meals, cleaning kitchen equipment, and keeping supplies on the floors stocked and rotated in accordance with the Home's policies. In addition, the Company also prepares and serves food and beverages at the Home's religious, social, business or other catered functions.

ISSUES:

Whether providing nutrition-related management services to a nursing home in connection with its residents directly relates to the home's core business activities such that the services are taxable as business management services under Conn. Gen. Stat. § 12-407(2)(i)(J).

Whether providing nutrition-related management services to a nursing home in connection with its employees and its guests and visitors directly relates to the home's core business activities such that the services are taxable as business management services under Conn. Gen. Stat. § 12-407(2)(i)(J).

DISCUSSION :

Conn. Gen. Stat. § 12-407(2)(i)(J) defines "sale" and "selling" as including "business analysis, management, management consulting and public relations services." "Business management services" are defined by Conn. Agencies Regs. § 12-407(2)(i)(J)-1(e) as meaning "the provision of day-to-day management of a service recipient's personnel with respect to, or the controlling or directing of, all or a portion of the core business activities" of a service recipient, but as not including "controlling or directing activities other than the service recipient's core business activities ...." "Core business activities" are defined in Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h) as "activities directly related to a service recipient's lines of business involving sales of products, property, goods or services to others ...."

The Home's core business is caring for its residents. Providing nutritionally balanced meals to its residents is an activity that is directly related to the Home's line of business. "Directly" means "in close relational proximity ...." Webster, Third New International Dictionary . Thus, the Company's charges for providing nutrition-related management services to the Home are subject to sales and use taxes to the extent the charges relate to meals served to the Home's residents. Conn. Agencies Regs. § 12-407(2)(i)(J)-1(h)(1) also provides, as an illustration of "[activities not generally regarded as directly related to a service recipient's core business activities," "the administration of, and recordkeeping relating to, the service recipient's ... employee food service operations ...." If providing nutritionally balanced meals to the Home's employees is not directly related to the Home's core business activities, then providing nutritionally balanced meals to the Home's visitors and guests cannot be an activity that is directly related to the Home's line of business. Thus, the Company's charges for providing nutrition-related management services to the Home are not subject to sales and use taxes to the extent the charges relate to meals served to the Home's visitors and guests.

RULING:

Providing nutrition-related management services to a nursing home in connection with its residents directly relates to the home's core business activities and, thus, these services are taxable as business management services under Conn. Gen. Stat. § 12-407(2)(i)(J).

Providing nutrition-related management services to a nursing home in connection with its employees and its guests and visitors does not directly relate to the home's core business activities and, thus, these services are not taxable as business management services under Conn. Gen. Stat. § 12-407(2)(i)(J).

LEGAL DIVISION

May 17, 1993