Taxation and the HOA

M.C. from Hartford County, Connecticut writes:

Dear Mister Condo,

I am one of the board members of a small PUD HOA, we usually file 1120-H for federal income tax return.  Is the HOA exempt from paying state taxes or do we have to pay sales and use taxes on goods or services purchased?  To my knowledge we are not a 501(c)3.

Mister Condo replies:

M.C., questions like yours really tax my brain. Fortunately, I have friends who specialize in understanding the tax codes and laws that apply to common interest communities in our state so I asked Marsha Elliott, Accounting and Auditing Supervisor of at the CPA firm of Tomasetti, Kulas & Company, P.C. for an answer that makes cents as well as sense! Here’s what Marsha had to say:

First, you are correct, you are not a 501(c)3 organization.  A 501(c)3 nonprofit organization has met certain criteria as required by the IRS and has received a federal determination letter indicating that it is exempt from federal taxes.

Secondly, you indicate that you usually file an 1120-H annually.  Although this election is important, it does not influence your liability for sales and use tax.  Each year, a homeowners association elects to file an 1120-H or an 1120 for federal tax purposes under IRC Section 528 (1120-H) or IRC Section 277 (1120).  If a homeowners association, as in your case, elects to file an 1120-H, the election may provide you with certain income tax benefits as well as exemption from Connecticut corporation income tax, but your election for purposes of filing your federal tax return, once again, has no impact on your requirements to pay Connecticut sales and use tax.

Now let’s look at your sales and use tax question.  There are two questions to consider when addressing sales and use tax.  The first is what types of services can be subject to sales and use tax and the second is will your homeowners association be charged?  The state requires that you provide a CERT 103 form to any contractor who provides services to any common elements of the association.  The CERT 103 form provides the service provider with a breakdown of the percentage of units which are being occupied by the owner and those which are being rented by a unit owner; the form is filled out annually.  Services such as roofing, siding and carpeting are only taxed based on the number of rented or non-owner occupied units.  For example, there are 10 units in your association and 2 of them are non-owner occupied and are being rented.  Well, if you are getting roofing work done at the association for a cost of $10,000 then 20% (2 of 10 units) of the cost or $2,000 is subject to sales and use tax.  On the other hand, if there are no units being rented, then you should not be charged sales and use tax.  Other services such as carpet cleaning, power washing and exterminating are taxable to both owner and non-owner occupied units so if the association is having carpet cleaning done for $10,000 then 100% of the cost would be subject to sales and use tax.  As you have read, I hope that you can see how important it is that your association obtains and provides the CERT 103 form to ensure that the association is not being under or over taxed.  For more detail on taxable and nontaxable services please see the reference guide, Building Contractors’ Guide to Sales and Use Taxes, to obtain a CERT 103 form and to get answers to more detailed sales tax related questions, visit www.ct.gov/drs or contact the Department of Revenue Services (DRS) Taxpayer Services Division by phone or email.