Connecticut Governor Signs Off on State Budget
Connecticut Gov. Ned Lamont has signed the biennial budget for the 2020 and 2021 fiscal years and is also expected to sign House Bill 7373 (the Department of Revenue Services’ (DRS) Bill, collectively, the “Bills”) any day. Although there was much debate during this legislative session regarding tolls and a new tax on capital gains, neither of these provisions are included in the Bills.
Below is a list of the more significant tax changes contained in the Bills.
Personal income tax (generally effective on passage of the budget for tax years as noted below)
- State teachers’ retirement pay exclusion is delayed.
o The 25% exclusion for state teachers’ retirement income, which was to take effect Jan. 1, 2019, has been delayed until Jan. 1, 2020. Likewise, the 50% exclusion will be delayed until 2021 (it was to take effect in 2020).
o Underpayment penalties and interest do not apply to additional personal income tax due as a result of this change.
- Effective Jan. 1, 2019, the pass-through entity tax credit (PE Tax Credit) will be reduced to 87.5% from 93.01%. Note this applies to corporate partners as well.
o Underpayment penalties and interest do not apply to additional tax due as a result of the decreased PE Tax Credit amount.
- Property tax credit extended.
o The limitation of the property tax credit to individuals who: (1) are age 65 or older before the end of the tax year; or (2) validly claim at least one dependent on their federal income tax return, has been extended to the 2019 and 2020 tax years (previously it only applied through 2018).
- Effective Jan. 1, 2021, the budget creates an income tax credit to partially offset the new 2.5% tax rate on sales of residences over $2.5 million (see real estate conveyance tax, discussed below) paid during the year.
o The conveyance tax credit is 33.3% of the amount of the new conveyance tax paid for each of the three taxable years next succeeding the second taxable year after the taxable year in which the conveyance tax was paid.
o This credit is in lieu of any other property tax credit available. Unused credit can be carried forward six years. (Effective in taxable years beginning Jan. 1, 2021).
- Effective Jan. 1, 2019, numerous changes were made to the angel investor tax credit. Of these changes, one of the most important is that the credit limit of $250,000 per angel investor has been expanded to $500,000.
- Effective Jan. 1, 2019, the budget repeals the refundable personal income tax credit for college graduates in science, technology, engineering, or math fields.
Sales and use tax changes (effective on passage of the budget)
- The budget will require the Commissioner of Revenue to consult with the Streamlined Sales Tax Governing Board to develop a list of certified service providers that can facilitate sales tax collection and remittance to the state. A plan must be developed and submitted to the joint standing committee no later than Feb. 5, 2020. This plan may include the requirement that retailers use such providers.
Sales and use tax changes (effective July 1, 2019)
- Economic nexus
o The budget changes the definition of retailers by excluding any reference to regular and systematic solicitation and lowering the previous economic nexus threshold. Under the budget, a retailer is defined as a business that has $100,000 (was $250,000) of retail sales of tangible personal property or services and 200 transactions into Connecticut during the 12-month period ending September 30 of the preceding year.
- Click-through nexus
o The budget similarly lowers the click-through nexus (nexus for paid referrals from in-state businesses) threshold for sales resulting from the referral from $250,000 to $100,000 of retail sales of tangible personal property or services during the preceding four quarterly periods ending on the last day of March, June, September, and December.
- Credit for uncollectible sales tax that was paid on accounts later deemed worthless has been revised to require retailer to only include the amount of sales tax for which it claimed a credit and any payment made on account must be first applied to sales tax (effective upon passage and applicable to credit claims received on or after such date).
Sales and use tax changes (effective Oct. 1, 2019)
- The definition of tangible personal property (TPP) now includes electronically accessed canned software, except when purchased by a business for its own use. TPP has also been modified to include digital goods (electronic audio, visual, or audio-visual works, reading materials, or ring tones).
o In effect these changes increase the tax rate from 1% to 6.35% on these items.
- The budget addresses the use of resale certificates with respect to digital goods, canned software, and services. The most important of these is a requirement that a reseller of canned software document that the software was provided unaltered to the ultimate customer to qualify for the resale exemption.
- The sales tax on meals and beverages will, in certain situations, increase to 7.35%. This is applicable to: (1) meals sold by eating establishments, caterers, and grocery stores; and (2) spirituous malt or vinous liquors, soft drinks, sodas, or beverages.
- The sales tax rate on dyed diesel fuel sold by marine fuel docks will be reduced to 2.99% (currently 6.35%).
- The budget requires “short-term rental facilitators” to collect the room-occupancy tax (15% sales tax for hotels and 11% for bed-and-breakfasts) for sales they facilitate on their platform (e.g., store, booth, website, catalog, or software application).
o A short-term rental facilitator is any person who maintains a platform and has received fees for: (1) facilitating sales during the prior 12 months of at least $250,000 for “short-term rental operators”; and (2) collecting/remitting payments (directly or indirectly) to short-term rental operators.
o A short-term rental operator is any person who has an agreement with the rental facilitator regarding the listing or advertising of a short-term rental (a furnished residence for 30 days or less).
Sales and use tax changes (effective Jan. 1, 2020)
- The budget subjects the following new services to tax:
o Dry-cleaning services and laundry services, excluding coin-operated services.
o Interior design services described in Industry Group 54141 of the North American Industry Classification System, 2017 edition, except if purchased by a business for use by such business.
o Motor vehicle parking in: (1) lots with fewer than 30 spaces (certain employer-provided lots remain exempt); (2) certain railroad parking facilities owned or operated by the state or municipalities; (3) seasonal lots operated by the state; and (4) lots owned by municipalities.
- Safety apparel will no longer be exempt from sales and use tax.
- Use tax notice and reporting requirements for referrers (those that connect sellers and consumers for a fee) have been delayed to Jan. 1, 2020, (current law required referrers to begin notice and reporting July 1, 2019).
o Also delays the due date of the annual report for referrers to Jan. 31, 2021, (current law required referrers to begin filing annual reports beginning Jan. 31, 2020).
PE tax (effective July 1, 2019, and applicable to tax years beginning on or after Jan. 1, 2019)
- The PE Tax Credit received by PE members, which represents the members’ share of PE tax paid and which can be used to offset both personal income tax and corporation business tax, is reduced from 93.01% to 87.5% of the amount of PE tax paid.
o Underpayment penalties and interest do not apply to additional tax due as a result of the decreased PE Tax Credit amount.
- Guaranteed payments made to partners must be included in the base when calculating income subject to tax (applies to both the standard and alternative base methods).
- There is no reduction to Connecticut-source income for itemized deductions taken on the federal return for income tax purposes (applies to both the standard and alternative base methods).
- Entities with less than $1,000 in annual PE tax liabilities are exempt from making quarterly estimated payments.
- Nonresident partner filing requirements
o Under the current law, a nonresident individual member is not required to file an individual return if the member’s only Connecticut-source income is from one or more PE and the PE(s) file and pay the PE tax due.
o Under the new rule, a nonresident individual member is not required to file an individual return if the member’s only Connecticut-source income is from one or more PEs and the individual member’s income tax is fully satisfied by PE credit(s).
o Due to the reduction in PE Tax Credit discussed above, many PE members will now have a filing requirement.
- Penalties and interest on underpayments of personal income tax or PE tax for the 2018 tax year due to the enactment of the PE tax will be waived, provided the tax is paid within one year of the due date (effective upon passage).
Corporate tax (effective as noted below)
- The capital base tax will be phased out for tax years beginning on or after Jan. 1, 2021.
o Jan. 1, 2021, rate reduced to 2 6/10 mills from 3 1/10 mills.
o Jan. 1, 2022, rate reduced to 2 1/10 mills.
o Jan. 1, 2023, rate reduced to 1 1/0 mills.
o Phased out for tax years beginning Jan. 1, 2024.
- The budget extends the 10% surtax to taxable years beginning Jan. 1, 2020, and Jan. 1, 2021.
- The R&D and Urban and Industrial Sites Reinvestment Act (URA) credit allowance is reduced from 70% to 50.01% of the corporation’s tax liability for tax years beginning Jan. 1, 2019 and later.
o The URA credit cannot be used to offset any of the following taxes:
The ambulatory surgical center gross receipts tax
Dry-cleaning gross receipts tax
Public service companies tax
Effective upon passage of the Department of Revenue Services (DRS) bill and applicable to income years beginning on or after such date
Business entity tax (effective as noted below)
- Repeals the business entity tax of $250 as of Jan. 1, 2020.
Real estate conveyance tax (effective as noted below)
- New 2.25% rate on residential sales.
o The prior law taxed a residential real estate conveyance at: (1) 0.75% of the first $800,000 of the sales price; and (2) 1.25% of any excess. Beginning July 1, 2020, the budget establishes a new rate of 2.25% on the portion of the sales price that exceeds $2.5 million.
- Residences with crumbling foundations are exempt.
o Effective July 1, 2019, the budget creates a new exemption from the real estate conveyance tax for transfers of a principal residence with concrete foundation that deteriorated due to the presence of pyrrhotite.
o The exemption requires a written evaluation from a licensed professional engineer indicating that the foundation was made with defective concrete.
o The exemption is only available for the first transfer of such property and is not available to a transferor who received financial assistance to repair or replace such foundation from the Crumbling Foundations Assistance Fund.
Estate tax (effective upon passage of the DRS bill)
- Real and tangible personal property owned through a pass-through entity (including federally disregarded single-member LLCs) must be treated as personally owned by the nonresident decedent in proportion to his or her constructive ownership in the pass-through entity if the entity:
o Does not carry on a business for profit or gain.
o Did not own the property for a valid business purpose.
o Did not acquire the property through a bona fide sale for full and adequate consideration and the decedent retained power with respect to or interest in the property that would bring the real property located in the state within the decedent’s federal gross estate.
Generation-skipping transfer tax (effective upon passage of the DRS bill)
- Obsolete Connecticut statutes related to the generation-skipping transfer tax have been repealed due to federal repeal of the tax.
Admissions tax (effective as noted below)
- The budget reduces the admission tax rate at certain venues to 7.5% from 10% for sales occurring on or after July 1, 2019, and to 5% for sales on or after July 1, 2020. Affected venues are The XL Center, Dillon Stadium, certain events at New Britain Stadium, Webster Bank Arena, Harbor Yard Amphitheater, Dodd Stadium, Oakdale Theater, and certain interscholastic events at Rentschler Field.
- Dunkin Donuts Park admissions tax is reduced to 5% from 10% beginning July 1, 2019, and is fully exempt as of July 1, 2020.
Excise taxes (effective as noted below)
- Effective Oct. 1, 2019, the budget taxes wholesalers monthly for sales of e-cigarette products (e.g., electronic nicotine delivery systems, liquid nicotine containers, paper products, and liquids producing paper). The tax rate is:
o Forty cents per milliliter of prefilled e-cigarette products and liquids.
o Ten percent of wholesale price for all other e-cigarette products.
- Effective Oct. 1, 2019, the budget generally increases the excise tax on alcoholic beverages (except beer) by 10% and reduces the excise tax on beer for off-premises consumption and certain wines by 50%. Further, the budget imposes an additional floor tax on the alcoholic beverages (except beer) in their inventories as of the opening of business on Oct. 1, 2019.
- Plastic single-use bags will carry a $0.10 fee at the point of sale beginning Aug. 1, 2019, through June 30, 2021. Any fees collected related to this single-use fee will be excluded from gross receipts for sales tax purposes. Plastic bags are banned beginning July 1, 2021.
Hospital provider tax (effective on passage of the budget)
- The budget eliminates the scheduled rate reduction for inpatient and outpatient hospital services. Rates remain the same as 2019.
Refunds collected by businesses (effective July 1, 2019)
- Businesses receiving a tax refund of tax collected from a customer must provide substantiation to the DRS commissioner that the tax amount being refunded will be repaid to the customer.
Partial payments (effective for periods ending on or after Dec. 31, 2019)
- DRS commissioner is required to apply partial payments to penalties first, then to interest, and then remaining balance to tax (current law requires commissioner to apply partial payments to penalties, then tax, and then interest).
Penalties and interest (effective as noted below)
- Threshold requiring Penalty Review Committee opinion is increased to $5,000 from $1,000 (effective upon passage).
- Electronic fund transfer (EFT) penalties have been revised to require that any late tax payments made by EFT are now subject to interest and penalty provisions that apply by law to the specific tax being paid. Current law uses a graduated penalty applicable to all tax types (effective for periods ending on or after Dec. 31, 2019).
This has been prepared for informational purposes, is general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without first obtaining professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightIRS Proposes Expanding Highly Taxed Exclusions for GILTI Tested IncomeThe IRS recently proposed allowing taxpayers to elect to exclude highly taxed income generally from CFC tested income for purposes of the GILTI provisions. The new rule is unlikely to apply before the 2020 tax year, depending on taxpayer’s situation and when IRS finalizes change.
InsightTax-Exempt Groups Face New IRS E-Filing Rules Under TFAOn June 13, the Senate voted to approve the Taxpayer First Act (TFA), H.R. 3151. Previously approved by the House, the bill now awaits President Trump’s signature. The main focus of the TFA has been to improve overall customer service by the IRS through changes within the agency’s management and oversight.
InsightSupreme Court Rules Against North Carolina’s Imposition of TaxIn North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, U.S., No. 18-457, the U.S. Supreme Court unanimously ruled against North Carolina’s imposition of tax as unconstitutional.
InsightIRS Issues Proposed Regulations Regarding Withholding on Retirement Payments Made Outside U.S.The IRS recently issued proposed regulations under IRC Section 3405 regarding income tax withholding on U.S.
Tax Reform Resource Center:
A collection of insights on the impact of the Tax Cuts and Jobs Act