Connecticut’s Governor Lamont recently signed the state’s Fiscal Years 2022 and 2023 State Budget, along with legislation legalizing and taxing adult-use cannabis. Significant changes to the state unemployment tax are also likely to be finalized soon. Read on for highlights of this new and evolving legislation. 

Fiscal Years 2022 and 2023 State Budget

On June 23, Governor Lamont signed House Bill 6689, the budget bill, and Senate Bill 1202, implementing the state budget, into law. The two pieces of legislation do not contain any income or sales tax rate increases. The legislation focuses on investments in education, healthcare, childcare, workforce development, cities and towns, and nonprofit social services, according to a Governor’s Office news release. 

Tax-related highlights of the new budget include the following:

• The 10% corporation business tax surcharge, which was scheduled to sunset, is extended through tax years beginning before Jan. 1, 2023.
• The graduated repeal of the capital base tax has been delayed, with the full repeal pushed from 2024 to 2028.
• The state earned income tax credit (EITC) will be increasing from 23% of federal EITC to 30.5%. 
• Certain “establishments that sell meals” (e.g., certain restaurants, hotels, and bars) will be allowed to keep the sales tax collected on meals and beverages for one of three specified seven-day periods (Aug. 1-7, 2021; Dec. 12-18, 2021; and May 15-21, 2022).
• The R&D tax credit is restored to 60% in 2022 and 70% in 2023, and the carryforward for new R&D credits is limited to 15 years.
• The admissions tax is repealed as of July 1, 2021, for all venues other than movie theaters.
• There are changes to the tax on ambulatory surgical centers, including a reduced tax rate beginning July 1, 2023.
• A tax amnesty program is established for the period Nov. 1, 2021, to Jan. 31, 2022. 

Other areas impacted by the new budget legislation include:

• Film production tax credit – expansion of use of credit to include sales and use tax under certain conditions as of Jan. 1, 2022
• Limits on property tax credits against personal income tax extended through income year 2022
• Tax exemption for pensions and annuities expanded to include income from non-Roth IRAs on a gradual basis beginning in 2023 until fully phased in in 2026 
• Reduced alcohol excise tax rate for beer, and new sales tax exemption for beer manufacturers

Cannabis tax

On June 22, Governor Lamont signed Senate Bill 1201, allowing for the legal possession – and taxation – of adult-use cannabis. 

Under the new law, the retail sale of cannabis will be subject to the following taxes:

• 6.35% state sales tax,
• 3% municipal sales tax “directed to the town or city where the retail sale occurred,” and
• A state cannabis tax based on the amount of Tetrahydrocannabinol (THC) in the cannabis product: 
  • 2.75 cents per milligram of THC for cannabis edibles 
  • 0.625 cents per milligram of THC for cannabis flower  
  • 0.9 cents per milligram of THC for all other product types 

All three taxes must be collected from consumers at the time of sale and include limited exceptions. There is specific guidance on how and when to remit each tax, and additional guidance will follow. Further, the Department of Revenue Services is authorized to impose penalties for late payment and willfully evading the collection of tax; however, the Department cannot issue a refund of any tax paid by a cannabis retailer. 

According to a Governor’s Office press release, Connecticut’s overall tax rate for cannabis will be about 4% lower than New York’s, and similar to Massachusetts’. 

Although possession of cannabis will be legal in Connecticut beginning July 1, 2021, retail sales are targeted to begin “by the end of 2022,” according to the release. Cannabis and hybrid retailers and micro-cultivators must be licensed before making any sales. 

State unemployment tax

House Bill 6633, which includes significant state unemployment changes, has been signed by the House and Senate, and is awaiting the governor’s signature. 

Among other changes, the bill would:

• Increase the taxable wage base from $15,000 to $25,000, and require it to be adjusted for inflation annually
• Expand the range of experience tax rates from the current range of 0.5% to 5.4% to a new range of 0.1% to 10%

All changes would be effective beginning in 2024. We will continue to monitor this bill and provide updates. 

What does CohnReznick think?

Two significant developments occurred in Connecticut with these signatures. First, Connecticut adopted a new budget noticeably missing any major tax increases. This deviation from prior years is likely due in large part to the state’s receipt of significant federal COVID-19 relief funds over two years. Second, Connecticut follows neighboring states Massachusetts and New York in legalizing marijuana as the booming cannabis industry quickly evolves. Cannabis industry participants should contact their advisors for help navigating through the complexities and tax implications of the new and evolving legislation around the country. 

For more information on each piece of legislation, see the corresponding Office of Legislative Research (OLR) bill analyses and Office of Fiscal Analysis (OFA) Fiscal Notes, available at the links above.

Contact

Corey L. Rosenthal, JD, Principal, Practice Leader, State and Local Tax Services

646.625.5729

Cynthia Galamgam, JD, LLM, Senior Manager, State and Local Tax Services

959.200.7239

Xheni Gallagher, Manager, State and Local Tax Services

959.200.7090

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