Earlier this month, the Connecticut legislature passed House Bill 7424 (the Budget) and House Bill 7373 (the Department of Revenue Services (DRS) Bill). It is expected that Gov. Ned Lamont will sign the bills shortly. 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 Budget.

Below is a list of the more important tax changes contained in the Budget. 

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).

• Effective Jan. 1, 2019, the pass-through entity tax credit will be reduced to 87.5% from 93.01%. Note this applies to corporate partners as well.
• Property tax credit extended.

o The limitation of the property tax credit to people 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 based on the new 2.5% rate on sales of residences over $2.5 million (see real estate conveyance tax) 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.

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 purposes. 

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.

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.

(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.

• 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.

• 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). 

(effective Oct. 1, 2019) 

• The definition of computer and data processing services (taxed at a 1% rate) has been modified to specifically exclude electronically accessed digital goods.
• Digital goods and electronically accessed canned software are now treated as tangible personal property. 

o This raises the tax on these items to 6.35%. 

o Digital goods are defined as electronic audio, visual, or audio-visual works; reading materials; or ring tones.

o An exclusion for canned software has been provided for businesses that purchase it for their own use. 

• 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 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).

(effective Jan. 1, 2020)

• The Budget will tax the following new services:

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/use tax.
• Use tax notice and reporting requirements for referrers (those that connect sellers and consumers for a fee) has 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).

Corporate tax 

(effective as noted below)

• The Capital Base Tax will be phased out for tax years beginning 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 DRS Bill and applicable to income years beginning on or after such date

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. 

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. 

Business entity tax 

(effective as noted below)

• Repeals the business entity tax of $250 as of Jan. 1, 2020. 

Pass-through entity tax (PE) 

(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 member’s 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.
• 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).
• Itemized deductions taken on the federal return for income tax purposes are excluded from income subject to tax (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 (CT) source income is from one or more PEs 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 CT source income is from one or more PEs and the individual member’s income tax is fully satisfied by PE credit(s). 

• Penalties and interest associated with late personal income tax or PE tax payments that resulted from an increase in 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).
• Underpayment penalties and interest do not apply to additional PE tax due as a result of the required add-back modification for the federal Section 179 deduction or as a result of the decreased PE tax credit amount (described above).

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 for 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 for 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.

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, then interest).

Penalties and interest

(effective as noted below)

• Threshold requiring Penalty Review Committee review 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).

What does CohnReznick think?

While we expect the governor to sign this budget, Connecticut’s fiscal climate remains cloudy. The current budget raises taxes by about $340 million for the next fiscal year and the state has a budget surplus of $2 billion. However, the projected deficits for the next two fiscal years exceed $3.7 billion. Moreover, the transportation budget and state-mandated pension contributions remain delayed or unfunded. Clearly, state expenses will keep pressure on revenue enhancement for the near future. As always, we will keep you apprised of any new taxes as they are released. 

Contact

Coral Bernier

Matthew Nick , Director 860-841-0778