On June 26, Connecticut Governor Ned Lamont signed the biennial state budget for the 2020 and 2021 fiscal years; on July 8, he also signed House Bill 7373, which implemented the recommendations of the Department of Revenue Services (DRS) for minor revisions to the tax and related statutes. This article summarizes the more significant tax changes contained in these bills. (See also the April 2019 installment of this column, “2018 Connecticut Legislative Changes Affecting the Income Tax Filing,” http://bit.ly/2MpXnrR.)
Personal Income Tax
The 25% exclusion for state teachers’ retirement income, which was to take effect January 1, 2019, has been delayed until January 1, 2020. Likewise, the 50% exclusion will be delayed until 2021 (it was to take effect in 2020). Underpayment penalties and interest do not apply to additional personal income tax due as a result of this change.
The limitation of the property tax credit to individuals who are age 65 or older before the end of the tax year or 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 January 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 (discussed below) paid during the year. The conveyance tax credit is 33.3% of the amount of the new conveyance tax paid for each of the three taxable years succeeding the second taxable year after the taxable year in which the conveyance tax was paid. This credit is in lieu of any other property tax credit available. Unused credit can be carried forward six years. The credit is effective for taxable years beginning January 1, 2021.
Effective January 1, 2019, numerous changes were made to the Angel Investor Tax Credit. One of the most important changes is that the credit limit of $250,000 per angel investor has been expanded to $500,000.
Effective January 1, 2019, the refundable personal income tax credit for college graduates in science, technology, engineering, or math (STEM) fields is repealed.
Sales and Use Tax Changes
The passage of the budget requires 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 February 5, 2020. This plan may include the requirement that retailers use such providers.
The budget changes the definition of retailers by excluding any reference to regular and systematic solicitation and lowering the previous economic nexus threshold. Effective July 1, 2019, a retailer is now defined as a business that has $100,000 (formerly $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.
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 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 retailers to only include the amount of sales tax for which they claimed a credit; any payment made on account must be first applied to sales tax. This provision is effective upon passage and applicable to credit claims received on or after such date.
Effective October 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 audiovisual works, reading materials, or ringtones). 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 meals sold by eating establishments, caterers, and grocery stores, and 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% (previously 6.35%).
The budget requires short-term rental facilitators to collect the room occupancy tax (15% sales tax for hotels, 11% for bed and breakfasts) for sales they facilitate on their platform (e.g., store, booth, website, catalog, software application). A short-term rental facilitator is any person who maintains a platform and has received fees for facilitating sales during the prior 12 months of at least $250,000 for short-term rental operators, and for collecting or remitting payments (directly or indirectly) to short-term rental operators. 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).
The budget subjects the following new services to tax, effective January 1, 2020:
- Dry-cleaning services and laundry services, excluding coin-operated services
- 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
- Motor vehicle parking in lots with fewer than 30 spaces (certain employer-provided lots remain exempt), certain railroad parking facilities owned or operated by the state or municipalities, seasonal lots operated by the state, and 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 January 1, 2020 (previous law required referrers to begin notice and reporting July 1, 2019). The due date of the annual report for referrers has also been delayed to January 31, 2021 (previous law required referrers to begin filing annual reports beginning January 31, 2020).
Pass-Through Entity Tax
Effective July 1, 2019, and applicable to tax years beginning on or after January 1, 2019, the pass-through entity tax credit received by pass-through entity 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, has been reduced from 93.01% to 87.50% of the amount of pass-through entity tax paid. Underpayment penalties and interest do not apply to additional tax as a result of the decreased pass-through entity 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-sourced income for itemized deductions taken on the federal return for income tax purposes. (This applies to both the standard and alternative base methods.) Entities with less than $1,000 in annual pass-through entity tax liabilities are exempt from making quarterly estimated payments.
Under the previous law, a nonresident individual member was not required to file an individual return if the member’s only Connecticut-sourced income was from one or more PEs and the PEs filed and paid the pass-through entity tax due. Under the new law, a nonresident individual member is not required to file an individual return if the member’s only Connecticut-sourced income is from one or pass-through entities and the individual member’s income tax is fully satisfied by pass-through entity tax credits. Due to the reduction in the PE tax credit, many pass-through entity members will now have a filing requirement.
Penalties and interest on underpayments of personal income tax or pass-through entity tax for the 2018 tax year due to the enactment of the pass-through entity tax will be waived, provided the tax is paid within one year of the due date. This provision took effect upon passage of the bill.
The capital base tax will be phased out for tax years beginning on or after January 1, 2021, on the following schedule:
- January 1, 2021, rate reduced to 26/10 mills from 31/10
- January 1, 2022, rate reduced to 21/10 mills
- January 1, 2023, rate reduced to 11/10 mills
- Phased out for tax years beginning January 1, 2024 and later.
The budget extends the 10% surtax to taxable years beginning January 1, 2020, and January 1, 2021.
The research & development 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 January 1, 2019 and later. 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.
This provision took effect upon passage and is applicable to income years beginning on or after that date.
Business Entity Tax
The business entity tax of $250 is repealed as of January 1, 2020.
Real Estate Conveyance Tax
Prior law taxed a residential real estate conveyance at 0.75% of the first $800,000 of the sales price and 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.
Effective July 1, 2019, the budget also creates a new exemption from the real estate conveyance tax for transfers of a principal residence with a concrete foundation that deteriorated due to the presence of pyrrhotite. The exemption requires a written evaluation from a licensed professional engineer indicating that the foundation was made with defective concrete. It 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.
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 constructive ownership in the pass-through entity if the entity—
- does not carry on a business for profit or gain,
- did not own the property for a valid business purposes, or
- 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.
These provisions took effect upon passage of the bill.
Generation-skipping Transfer Tax
Obsolete Connecticut statutes related to the generation-skipping transfer tax have been repealed due to repeal of the tax at the federal level. This provision took effect upon passage of the bill.
The budget reduces the admission tax rate at certain venues from 10% to 7.5% 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 from 10% to 5% beginning July 1, 2019, and is fully exempt as of July 1, 2020.
Effective October 1, 2019, the budget taxes wholesalers monthly for sales of e-cigarette products (e.g., electronic nicotine delivery systems, liquid nicotine containers, paper products, liquids producing paper). The tax rate is—
- 40 cents per milliliter of prefilled e-cigarette products and liquids, and
- 10% of wholesale price for all other e-cigarette products.
Effective October 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%. Furthermore, the budget imposes an additional floor tax on alcoholic beverages (except for beer) in inventory as of the opening of business on October 1, 2019.
Plastic single-use bags will carry a $0.10 fee at the point of sale beginning August 1, 2019. Any fees collected related to this single-use fee will be excluded from gross receipts for sales tax purposes. Plastic single-use bags will be banned entirely beginning July 1, 2021.
Hospital Provider Tax
The budget eliminated 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 refund of tax collected from a customer must provide substantiation to the DRS commissioner that the amount of tax being refunded will be repaid to the customer.
Effective for periods ending on or after December 31, 2019, the DRS commissioner is required to apply partial payments to penalties first, then to interest, and then to tax (current law requires the commissioner to apply partial payments to penalties, then tax, then interest).
Penalties and Interest
The threshold requiring review by the Penalty Review Committee has been increased to $5,000 from $1,000.
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. Prior law used a graduated penalty applicable to all tax types. This provision is effective for periods ending on or after December 31, 2019.
An Uncertain Future
While Connecticut has passed a budget, the state’s fiscal climate remains cloudy. The current budget raises taxes by approximately $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 state revenues for the near future. CPAs need to continue to monitor state and local tax changes and how such changes will affect the operations of clients and employers.