The Connecticut Supreme Court recently decided an unusual sales tax case. The allegedly delinquent taxpayer was actually a town that challenged the state’s decision to collect sales tax on fees charged for municipal waste removal services. Connecticut imposes a 6.35% sales tax on the “rendering of any services constituting a sale.” The town argued its “services” were not taxable in this context since it did not actually profit from providing waste removal services.
Groton v. Commissioner of Revenue Services
Groton is a town of about 40,000 people. In 1985, Groton joined a regional authority which operates a waste facility. Groton is contractually obligated to provide a certain amount of waste to the regional waste facility for a per-ton fee. Three years later, in 1988, Groton created a town authority which provides waste removal services to “end users,” including industrial, commercial and rental properties in the town.
The town authority uses a private contractor to serve as an intermediary, picking up waste from end users and delivering it to the regional facility. The regional authority and the private contractor each charge the town authority, which pays the bills and then invoices the end users for the total cost. The town authority adds a small per-ton charge to cover its overhead and administrative costs, so the entire program is “break even” for Groton.
In 2011, Connecticut’s Commissioner of Revenue Services performed a sales tax audit on the town of Groton and declared it owed over $240,000 for unpaid sales taxes dating back to 2007. The commissioner said Groton failed to charge sales tax on the “services” it provided, namely its invoices for waste removal. Groton argued since end users merely reimbursed the town authority for its costs in administering the waste removal program, there was no “sale of services” as required by the sales tax law.
A trial court rejected the town’s argument and upheld the state’s sales tax assessment. On appeal, the Connecticut Supreme Court reversed and entered judgment for the town. Writing for a unanimous court, Justice Richard A. Robinson said while Connecticut law subjects private waste removal contracts to state sales tax, the same is not true for municipal agreements. Robinson said the “true object” of Groton’s town authority was promoting “safe and efficient waste disposal,” as opposed to making a profit by competing with private waste removal companies. In other words, Groton carried out a purely governmental function when it billed end users for waste removal.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info