Connecticut’s Tax Budget Increases TaxesJune 12, 2015
Tony J. Switajewski, CPA
Tax Partner – State and Local Taxes
During its regular session ending on June 3, 2015, the Connecticut General Assembly passed a $40 billion biennium budget (House Bill, H7061). The budget is expected to increase revenues by over $2 billion over the next two years (July 1, 2015 through June 30, 2017), largely by raising taxes and canceling previously approved tax exemptions, tax cuts and phase-outs. Strong opposition to the tax increases contained in the bill has been voiced by the business community, which, in part, has been led by some of Connecticut’s largest employers as well as by the Connecticut Business & Industry Association (CBIA), the state’s largest business association with over 10,000 member businesses. As the legislation has not been signed into law yet, Governor Malloy indicated a willingness to reopen the budget to reduce spending and provide tax relief. As a result, all taxpayers in Connecticut are hopeful that the State will repeal, modify or delay pieces of the tax legislation to make the needed tax increases more palatable to Connecticut businesses and individuals.
Below is a brief summary of the current budgeted tax legislation that has the broadest application. Following the summary is Governor Malloy’s proposed adjustments to the budgeted tax legislation.
Corporation Business Taxation:
Surcharge Extension: The 20% corporation income tax surcharge is extended until 2018 (the 20% surcharge remains for 2015, 2016 and 2017) along with a 10% surcharge commencing on January 1, 2018 (corporations with less than $100 million in annual gross income are exempt from the surcharge, unless they file a combined return or unitary report).
Net Operating Loss Limitation: Effective for tax years beginning on or after January 1, 2015, a limitation is placed on the amount of net operating losses (NOLs) that corporations may carry forward to the lesser of (1) 50% of net income or, for companies with taxable income in other states, 50% of the net income apportioned to Connecticut, and (2) the excess of NOL over the NOL being carried forward from prior income years. It is observed that (1) there are currently no suspension provisions and (2) as a result of the 50% limitation, certain corporations may not be able to monetize their research credits under the state’s research credit exchange program.
Tax Credit Limitation: Effective for tax years beginning on or after January 1, 2015, the limitation on the utilization of the amount of tax credits that a corporation may use to reduce its corporation tax liability is reduced from 70% to 50.01% of the corporation’s tax liability (this limitation also applies to the hospital tax liability, effective July 1, 2015).
Unitary Taxation Required: Effective for tax years beginning on or after January 1, 2015 (retroactively for calendar year corporations), Connecticut will be the final New England state to require large affiliated and closely held multiple corporations (including those incorporated in a “tax haven”), that are related through common ownership and are engaged in a unified business, to compute their Connecticut corporation business tax on a combined basis rather than on a standalone basis. Effective in 2015, all of the New England states, as well as New York State (and New York City), now require unitary businesses to compute their tax based on the aggregated taxable income of all the related corporations, whether or not all of the corporations of the group are doing business in their state. In addition, mandatory unitary reporting is being considered in New Jersey and Pennsylvania, as well. Throughout the United States, approximately 25 states utilize mandatory unitary combined reporting, which is heavily concentrated in the midwest and west. For Connecticut tax purposes, the unitary taxation legislation only applies to regular corporations (so called “C Corporations”) and not to S Corporations or other pass-through entities, such as partnerships and limited liabilities companies.
- Apportionment Methodologies Remain: Although there was some discussion during this legislative session to change Connecticut’s approach to sourcing service and intangible revenue from a performance to a market-state methodology for corporations and pass-through entities (such as partnerships and S corporations), no legislation was enacted; however, it is our understanding that this may be considered in future legislation.
Sales and Use Taxation:
General Sales and Use Tax Rate Remains: Although there were proposals to reduce the general sales and use tax rate, the general sales and use tax rate will remain at 6.35%; however, a portion of the sales and use tax collected will be dedicated to certain endeavors (i.e., shared with municipalities and for transportation funding).
Luxury Item Sales and Use Tax Rate Increase: The sales and use tax rate on “luxury items” is increased from 7% to 7.75% with respect to motor vehicles costing $50,000 or more, jewelry costing $5,000 or more and clothing, footwear and accessories costing $1,000 or more, applicable to sales occurring on or after July 1, 2015.
Computer and Data Processing Services Tax Rate Increase: The sales and use tax rate on computer and data processing services will increase from 1% to 2% on October 1, 2015, and from 2% to 3% on July 1, 2016 (however, an exemption is now provided for computer and data processing services provided between “affiliates”, effective on or after October 1, 2015).
Website Services Taxable: The creation, development, hosting and maintenance of a website will now be taxable as computer and data processing services and subject to sales and use tax, effective July 1, 2015.
Car Washing Taxable: Sales tax will now apply to car washing services, excluding coin-operated car washes, applicable to sales occurring on or after July 1, 2015.
Clothing: The sales tax holiday held each August for items of clothing and footwear would be limited to items costing less than $100, instead of $300; outside of the sales tax holiday period, clothing and footwear costing less than $50 would continue to be taxable (it was scheduled to be exempt July 1, 2015).
Accounting and Tax Services: Although certain accounting and tax services were included as taxable services in the original budget bill, these services were removed from the H7061 and continue to be exempt services.
Sales and Use Tax Exemptions Eliminated: The legislation, effective July 1, 2015, eliminates the following two sales and use tax exemptions: (A) Non-metered parking in season lots with 30 or more spaces provided by a: (1) non-profit charitable hospital, nursing home, rest home, residential care home, certain acute-care for-profit hospitals; or (2) nonprofit organization exempt from federal income taxes; and (B) goods or services purchased by a water company in maintaining, operating, managing or controlling a pond, lake, reservoir, stream, well or distributing plant or system to supply water to at least 50 customers.
- Rental Surcharge Tax Expanded: The legislation expands the 1.5% machinery rental surcharge, which is currently applicable to rentals for 30 days or less of heavy construction, mining and forestry equipment without an operator, to apply to (1) all equipment a rental company owns and (2) rentals of 364 days or less, effective July 1, 2015 (the imposition of this tax is limited to rental companies that generate at least 51% of their total annual revenue from rentals, excluding retail or wholesale rental equipment sales. As under current law, the 1.5% tax applies to companies that (1) are in the business of renting cars, trucks or machinery and (2) have a fleet of at least five cars, trucks or pieces of machinery in Connecticut).
Individual and Trust/Estate Income Taxation:
Individual Income Tax Rate Increase: The legislation increases the marginal personal income tax rate from 6.7% to 6.9% on individuals with taxable income over $500,000 for joint filers, $250,000 for single filers and married taxpayers filing separately, and $400,000 for heads of household, effective for tax years beginning on or after January 1, 2015 (retroactively); In addition, also effective for tax years beginning on or after January 1, 2015, the legislation imposes a new top income tax rate of 6.99% on individuals with taxable income over $1 million for joint filers, $500,000 for single filers and married taxpayers filing separately, and $800,000 for heads of household.
Trust and Estate Income Taxation Rate Increased: The legislation enacts a flat 6.99% (from 6.7%) income tax rate for trusts and estates, effective for tax years beginning on or after January 1, 2015.
Military Pay Exemption: All military retirement pay (currently a 50% exemption) will be exempt from income taxation, applicable to taxable years commencing on or after January 1, 2015 (the exemption applies to taxable federal retirement pay for retired members of the U.S. Army, Navy, Air Force, Marine Corps, Coast Guard and Air National Guard).
Property Tax Credit Reduction: The property tax credit against the personal income tax will be reduced from $300 to $200, commencing on or after January 1, 2016.
- Miscellaneous: The legislation delays the schedule increases for single filers of the personal income tax exemption and the income thresholds for phasing out personal exemptions and credits until 2016; delays the scheduled increase to the earned income tax credit until 2017; and establishes new tax rate benefit recapture schedules, effective January 1, 2015.
Motor Vehicle Mill Rate Cap: Applicable to assessment years beginning on or after October 1, 2015, municipalities and special taxing districts may tax motor vehicles at a different rate than other taxable property and the motor vehicle rate is capped at 32 mills for the 2015 assessment year and 29.36 mills for the 2016 assessment year and thereafter.
Property Taxation on Non-profit Entities: Although the House was in favor, the Connecticut State Senate rejected a bill that would have allowed the state’s municipalities to impose property taxes on certain real and personal property acquired and owned by non-profit hospitals and universities.
- PILOT Program Reform: Legislation was enacted to reform the state’s Payment in Lieu of Taxes (PILOT) Program, which provides payments to municipalities to reimburse them for a part of the revenue loss for certain state, municipal and tribal property and private non-profit college and hospital property.
Estate and Gift Taxation:
- Estate and Gift Transfer Maximum Tax Liability: The legislation enacted a $20 million estate and gift tax cap on decedents (resident or non-resident) dying on or after January 1, 2016 and for gifts made in 2015. The estate and gift tax exemption remains at $2 million for Connecticut estate and gift tax purposes. Generally, the tax cap will affect taxable estates over $170.5 million.
Miscellaneous Taxes and Provisions:
Insurance Premium Tax: The legislation extends the temporary cap on the maximum insurance premium tax liability that an insurer may offset through tax credits until 2017.
Insurance Reinvestment Act Credit: The insurance reinvestment act credit is revised.
Film and Digital Media Production Tax Credit: The legislation extends the temporary moratorium on issuing film and digital media production tax credits for certain motion pictures to June 30, 2017.
Cigarette Tax: The cigarette tax is increased from $3.40 to $3.65 per pack on October 1, 2015, and from $3.65 to $3.90 per pack on July 1, 2016.
- Ambulatory Surgical Center Gross Receipts Tax: A 6% gross receipts tax will be imposed on Department of Public Health-licensed and Medicare-certified ambulatory surgical centers, effective October 1, 2015.
- State Tax Study Group: As a result of 2014 tax legislation, a mandated 15 member group, with varying experiences in taxation, was created with the responsibility of reviewing Connecticut’s state and local tax structure. The group has been meeting during 2015 and has hired an outside consultant to assist in reporting its findings to the governor and legislatures by the beginning of 2016. The group is considering and evaluating options to modernize Connecticut’s tax policy, structure and administration. Whether any substantive recommendations will be reported in light of the recent tax legislation is not certain.
H7061 - Budget Bill:
For access to the budget bill and the bill analysis, please visit the Connecticut General Assembly website http://www.cga.ct.gov/ and search for Bill No. 7061 in the Quick Bill Search box (at the bottom of the website).
Proposed Modifications to the Budget:
Responding to corporate taxpayers' dissatisfaction with the budget bill, Governor Malloy held a press conference on June 12, 2015 to announce his proposals to mitigate the tax increases included in the budget. To offset the reduced tax revenue, he also proposed a broad based 1.5% reduction in spending, except expenditures legally required to be funded. The following proposals would remove about $224 million of the $700 million in tax hikes that were targeted at businesses:
- Delay mandatory unitary reporting to tax years beginning on or after January 1, 2016, instead of implementing unitary reporting retroactively to January 1, 2015
- Open discussions about the budget’s treatment of limiting net operating loss to 50% of a corporation’s net income
- Lower the 70% cap on the utilization of tax credits to 55% instead of 50%
- Continue to tax computer and data processing services at 1% for sales and use tax purposes, instead of ultimately increasing the tax rate to 3%, but leave in the new affiliate exemption
- Continue to exempt car washing services from sales and use taxes
The General Assembly is planning to return for a special legislative session before the end of June to implement certain bills and address various bills that the General Assembly failed to act upon during the regular session. It is during this special session that the governor would seek for the legislators to adopt his proposals into a revised budget.
Should any tax legislative developments occur during the anticipated special session, we will issue an updated newsletter.
You are encouraged to contact your BlumShapiro tax engagement professional about how the above tax changes will affect you. If you would like to speak directly with Tony Switajewski, he may be reached at (860) 561-6810 or at firstname.lastname@example.org.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.