On June 26, 2019, Connecticut Gov. Ned Lamont signed the new $43.4 billion biannual state budget. The overall budget package included House Bill 7424 and House Bill 7373. Both of these bills address a number of significant changes to Connecticut tax laws. A summary of the significant tax provisions is highlighted below.
Corporation Business Tax
Historically, the Corporation Business Tax was imposed on the greater basis of either income or capital/net worth. The new budget will phase out the capital base tax over a four-year period beginning Jan. 1, 2021. Additionally, the budget extends the 10% surcharge on the corporation business tax, which was scheduled to expire in 2020.
Pass-through Entity Tax
The budget bills make amendments to the state’s pass-through entity tax that was passed last year, effective for periods beginning on or after Jan. 1, 2018. As originally enacted, the tax was imposed on the ultimate individuals. Additionally, a credit is provided to individual owners receiving income by K-1s on entities subject to this tax. Changes to the tax are effective for tax years beginning on or after Jan. 1, 2019. Below are the highlights of the amendments:
- The pass-through entity tax credit is reduced from 93.01% to 87.5%
- Pass-through entity taxpayers when calculating income subject to the tax will now be required to include guaranteed payments with respect to the partnership, and any item treated as an itemized deduction for federal income tax purposes is excluded from the pass-through entity’s gross income
Business reporting responsibilities are not limited to or singularly under the jurisdiction of a given taxing authority. Connecticut has long-imposed the business entity tax on non-corporate entities required to register with the Connecticut Secretary of State. However, effective Jan. 1, 2020, the $250 every other year filing will be eliminated. Moreover, effective July 1, 2020, there will be an increase in business filing fees from $20 to $80 the fee that foreign and domestic limited partnerships, limited liability companies, and limited liability partnerships pay for filing an annual report with the Connecticut Secretary of State. Businesses should review the impact of these changes and consult with their legal counsel as appropriate.
A brief summary of several changes to state tax credits are as follows:
- Corporation Business Tax Credits Cap: Repealed a scheduled increase in the cap to 70%. Under existing law, the 50.01% credit cap applies to all other corporation business tax credits
- Angel Investor Tax Credit Program: Extended by five years, to July 1, 2024, and increases the aggregate amount of angel investor credits investors may reserve each fiscal year from $3 million to $5 million and increases the total amount of tax credits allowed to any angel investor from $250,000 to $500,000
- Urban and Industrial Sites Reinvestment Act (URA) Tax Credits: Prohibits the application of URA tax credits against the 1) ambulatory surgical center gross receipts tax, 2) dry-cleaning gross receipts tax and 3) public service companies tax
Sales and use tax
Connecticut has amended the state’s remote seller provisions and addressed various rate and taxability changes. Effective July 1, 2019, remote sellers without a physical presence in the state and who make sales of tangible personal property or services in excess of $100,000 in gross receipts and complete at least 200 separate retail sales transactions to Connecticut residents are required to collect and remit sales tax. This is a reduction of the prior gross receipts threshold that required $250,000 of sales.
Effective Oct. 1, 2019, the sales tax rate on digital goods and certain electronically delivered software is increased from 1% to the general state rate of 6.35%. “Digital goods” include audio and visual works, or audio-visual works, and reading materials or ring tones, that are electronically accessed or transferred. Taxable canned or prewritten software includes software that is electronically accessed or transferred, other than when purchased by a business for use by such business, and any additional content related to such software.
Other rates and taxability amendments include:
- Meals sold by eating establishments: Effective Oct. 1, 2019, sales tax on these purchases is increased from 6.35% to 7.35%
- Effective Jan. 1, 2020, sales and use tax will be imposed on motor vehicle parking services, dry cleaning services, laundry services, interior design services, and safety apparel.
Payroll tax information return and analysis
The budget requires the department to collect the data necessary to evaluate the implementation of an employer payroll tax beginning Jan. 1, 2021. The data will be collected using an information return. Each employer that receives such information return form must provide the data requested no later than Oct. 1, 2019. The department is required to analyze the data collected from the information return forms to establish the wage base assumptions on which to impose a payroll tax.
Real estate conveyance tax – “mansion tax”
Effective July 1, 2020, the state will increase the so-called mansion conveyance tax from 1.25% to 2.25% for Connecticut homes sold in excess of $2.5 million. A credit, claimable against the income tax, will be allowed for taxpayers remaining in Connecticut in subsequent periods not immediately following the sale.
Tax controversy provisions
In recent years the department has sought efficiency changes within the taxpayer review and appeal process. The changes identified below provide more clarity to controversy matters as follows:
- Tax appeals timeframe: The bill modifies the timeframe for taxpayers to bring tax appeals to the Superior Court by requiring that they do so within 30 days, rather than one month, after receiving notice
- Order of applying partial payments: For periods ending on or after Dec. 31, 2019, the bill requires the department commissioner to apply partial payments to penalties first, then to interest, and any remaining balance to the tax
- Penalty Review Committee: The bill increases, from $1,000 to $5,000, the threshold over which a penalty waiver requires Penalty Review Committee review and approval
- Penalties for ETF Payments: The bill replaces graduated penalties that apply to late tax payments paid by ETF with the existing penalties that apply to late payments for the respective tax being paid
Finally, the department is required to waive penalties, interest, and any addition to the tax due for late personal income or pass-through entity tax payments for the 2018 tax year if 1) such amounts were increased or created as a result of the pass-through entity tax’s enactment and 2) taxpayers make the tax payments within one year of their due date.
The 2019-2020 fiscal year budget package includes extensive tax changes to most state taxes and to various compliance and administrative reporting obligations. In addition to the more significant items noted above, other changes enacted in the bills address Alcoholic Beverage and Tobacco Taxes, Admission Tax, Occupancy Tax, Plastic Bag Tax, Transportation Company Fees, dealer fees on used car trade-ins, hospital provider tax, and the estate tax on specified business property.
This year’s tax bills impact almost all Connecticut taxpayers. Taxpayers should evaluate whether and how these provisions impact their Connecticut filing positions and compliance obligations.