Connecticut Governor Signs State Budget; Expected to Sign Sales Tax Marketplace Bill and a State Charitable Deduction Bill


    With near unanimous support, the Connecticut General Assembly approved a bipartisan – $20.86 billion – budget (Bill 543) for the 2018-2019 fiscal year. The bill does not mandate any increase in taxes but it reverses prior cutbacks of Medicaid funds and provides additional municipal funding. 

    The General Assembly also enacted two companion bills which address recent federal tax legislation (Senate Bill 11) and sales tax collection and reporting responsibilities (Senate Bill 417). Governor Malloy signed Bill 543 on May 15 and is expected to sign Senate Bills 11 and 417 in the next few days. 
    Highlights of the bills include the following:  


    Senate bill 11 response to the Tax Cuts and Jobs Act of 2017

    Provides workarounds for the federal $10,000 cap on the deduction for state and local taxes enacted as part of the federal Tax Cuts and Jobs Act of 2017.

    Beginning July 1, 2018, the Bill allows municipalities to provide a residential property tax credit to taxpayers who make voluntary donations in the amount of property tax due to a municipality approved “community-supporting organization.”

    Caveat: The state of Connecticut intended that such a donation would, for federal income tax purposes, be characterized as a federally deductible charitable contribution, rather than a state and local property tax deduction. However, on May 23, the Internal Revenue Service released Notice 2018–54 which provides that the IRS is drafting regulations to address the issue, casting additional doubt on the charitable contribution characterization. In this context, taxpayers should be mindful that federal law controls the proper characterization and treatment of payments for federal income tax purposes. If the IRS denies charitable deduction treatment to such payments, the resulting adjustment to the taxpayer’s federal taxable income could result in both interest and penalties being assessed by the IRS. 

    Beginning January 1, 2018, the bill imposes an entity level tax on most pass-through entities. The new tax is levied at the top personal income tax rate (6.99%) and a credit for the tax paid may be taken at the personal or corporate income tax level. The credit would typically offset the individual’s Connecticut personal income tax on the income from the pass-through entity and therefore, no state and local tax deduction will be claimed on the individual’s federal return with respect to such income. Due to the number and complexity of potential issues relating to the implementation of this tax, we expect the Connecticut Department of Revenue Services (“DRS”) to provide administrative guidance if this bill is signed. 

    Individual income tax

    Beginning January 1, 2017, individuals must add back the federal bonus depreciation deduction for property placed in service after September 27, 2017. The disallowed amount is then deducted ratably over the four succeeding tax years (25% per year).

    Note: It appears that taxpayers who have already filed their 2017 Connecticut tax returns claiming bonus deprecation may be required to file amended returns. Further guidance on this topic is expected. 

    Beginning January 1, 2019, the bill requires that, if a nonresident's home state uses the “convenience of the employer” test to source nonresident compensation to their state, Connecticut will use the same test in sourcing that nonresident's compensation to Connecticut.  

    Beginning January 1, 2018, individuals must add back 80% of the federal section 179 deduction. The 80% added back is then deducted ratably over the four succeeding tax years (25% per year).

    Corporate business tax

    Under existing law, corporations entitled to the Connecticut dividends received deduction cannot deduct expenses related to such dividends. Beginning January 1, 2017, the bill defines the disallowed related expenses as 5% of the dividend received during the income year. 

    Note: As with the bonus deprecation matter discussed above, taxpayers who have already filed their 2017 Connecticut tax returns claiming a deduction for expenses related to dividends may need to file amended returns due to this change.  Further guidance on this topic is expected.

    Beginning January 1, 2018, corporations must add back 80% of the federal section 179 deduction. The 80% add back is then deducted ratably over the four succeeding tax years (25% per year).

    Bill 543 the budget

    Sales tax

    Effective July 1, 2018, the sales tax rate on the sale and storage of vessels, motors for vessels, trailers used to transport vessels and marine dyed diesel will be reduced from 6.35% to 2.99%.

    Property tax

    Effective July 1, 2018, the statewide cap on municipal property taxes on motor vehicles is raised from the maximum rate of 39 mills to 45 mills.

    Estate and gift tax

    Effective upon passage, the budget extends the phase-in of the Connecticut estate and gift tax threshold to the federal threshold to 2023. The gift and estate tax threshold is set at $5.1 million for 2020, $7.1 million for 2021, $9.1 million for 2022, and the federal basic exclusion amount for 2023 and thereafter.

    Senate bill 417 sales-tax provisions effective December 1, 2018

    Sales tax economic nexus rules modified 

    The definition of “engaged in business in the state” has been modified such that a non-Connecticut business is considered engaged in business in the state if:

    • It has regular or systematic solicitation of sales of tangible personal property in Connecticut via the Internet; and 
    • During the prior 12-month period, ending on September 30, has Connecticut gross receipts of at least $250,000 and 200 or more retail sales from outside Connecticut to destinations within Connecticut.

    The bill also redefines the definition of retailers to include non-Connecticut businesses meeting the thresholds defined above and marketplace facilitators (see below). 

    Click-through nexus rules modified

    The bill expands the threshold sales amount that creates nexus for out-of-state retailers under the Connecticut “click-through” nexus provision from $2,000 annually to $250,000.

    Marketplace facilitators must collect tax 

    A marketplace facilitator is a person who:

    • Facilitates retail sales of at least $250,000 during the prior 12-month period for sellers by providing a forum that advertises tangible personal property (including digital goods) or services for sale by marketplace sellers; 
    • Directly or indirectly through agreements with third parties collects receipts from the customer and remits payments to the marketplace sellers; and 
    • Receives compensation or other consideration for their services.

    Marketplace facilitators will be required to collect sales tax on behalf of the marketplace sellers. 

    Reporting obligation by “referrers”

    The bill includes a new provision that requires “referrers” to provide certain information to customers, sellers and the state.

    Referrers are defined as any person who contracts with a seller to advertise property and refer customers to the seller by any means (including the Internet) and:

    • Whose listing or advertisement includes the seller's shipping terms or a statement of whether the seller collects sales tax,
    • Whose listing or advertisement offers a comparison of similar products offered by multiple sellers, 
    • Receives commissions or fees from all sellers in excess of $125,000 during the prior 12-month period, and
    • Does not collect payments from the customer for the seller.

    The information they must provide is: 

    • Notice on the referrer's medium informing consumers that, pursuant to the Connecticut statute: 
    • A quarterly notice to the seller if, in the prior calendar year, the referrer transferred a potential customer to the seller. The first notice is due July 1, 2019. The notice is merely a general declaration that states : 
    • An annual electronic report to the DRS (first report due January 31, 2020) that contains: 

    What does CohnReznick think?

    Connecticut’s legislative proposals to decouple from federal legislation are not unexpected and is a trend we are seeing in other states. Since the IRS appears intent on disallowing Connecticut’s charitable deduction approach, taxpayers are cautioned that the probability of the IRS denying such deductions is real, and taking such deduction could result in interest and penalties being owed the IRS. Taxpayers need to ensure that they consult with their tax advisors to ensure they understand how these rules may – or may not – be helpful to them. Similarly, Connecticut’s continued pursuit of sales tax on online sales transactions is a trend that we are seeing across the United States. These enhanced sales tax collection rules put Connecticut on par with many other states and Connecticut based businesses should ensure they understand how rules outside Connecticut impact them, as non-compliance can be costly. Lastly, Connecticut’s new collection and reporting rules will have significant consequences to retailers not currently remitting tax on Connecticut sales. Connecticut’s enacted and proposed legislation is in-line with what many other states are doing to (a) lessen the impact of the recent federal tax reform on their taxpayers and (b) expand “doing business rules” to draw in additional (non-traditional) taxpayers.  Our final thoughts –there is significant activity on the state and local tax front; buckle up – we expect that it’s going to be a bumpy ride.


    Please contact Matt Nick, Director, State and Local Tax Services, at or 860-271-7933 or Cindy Galamgam, Senior Manager, State and Local Tax Services, at or 959-200-7239 to talk about how these changes may impact you.

    Subject matter expertise

    • Patrick Duffany headshot
      Contact Patrick Patrick+Duffany
      Patrick Duffany

      CPA, JD, Managing Partner - Tax

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    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific 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.