On June 26, 2019, Governor Ned Lamont signed the new $43.4 billion two-year budget for the 2020 and 2021 fiscal years (Public Act 19-117). The budget addresses the $3.7 billion budget deficit with a combination of spending cuts and, although the budget bill was touted as containing no tax increases, hundreds of millions of dollars in tax and revenue increases. Subsequent to June 26, the Governor also signed into law various tax provisions that were contained outside of the budget bill. In addition, the Connecticut Department of Revenue Services (DRS) bill, H.B. No 7373 (now Public Act 19-186), was signed by the governor on July 8, 2019.
With such a significant budget deficit to start the legislative session, the business community expected significant increases to the cost of doing business in the state. Although the increases were not as significant as initially feared, the business community will still have to contend with an increase to the minimum wage (phasing-in to $15 per hour), the new paid family and medical leave legislation, the extension of the 10% corporation business tax surcharge, a reduction in the cap on the use of corporation business tax credits, and a reduction in the credit arising from the payment of the new Connecticut pass-through entity tax. In addition, businesses should be aware the General Assembly also commissioned a study to evaluate the possible implementation of a payroll tax on employers in Connecticut commencing on January 1, 2021. On the other side of the coin, the business community got some relief in certain areas such as the phase-out of the corporation business capital tax base, an extension to the angel investor tax program and a repeal of the biannual business entity tax (in exchange for an increase in business filing fees).
Individual taxpayers did not come out of this session unscathed. The General Assembly extended the current limitation on the availability of the property tax credit, delayed the increase in the state teachers’ retirement systems payment deduction and repealed the STEM graduate tax credit. Even more impactful, the Connecticut sales tax has now been extended to digital goods and downloads, motor vehicle parking, dry cleaning and laundry services, interior design services, as well as an additional 1% tax on meals and beverages (restaurant tax).
It’s anticipated the General Assembly may be called into one or more special sessions to discuss various topics with the intention that one session will be focused on the proposal to add tolls.
Below are some of the more significant tax changes explained in greater detail.
Changes Affecting Individuals
Paid Family and Medical Leave
- The Governor signed into law on June 25, 2019, a family and medical leave program. Under the law, Connecticut workers at firms of one or more employees will be eligible for paid time off to care for a newborn, a newly adopted or foster child, a seriously ill relative by blood or marriage or a close associate who is the equivalent of a family member. Employees dealing with their own serious health conditions or who are serving as a marrow or organ donor will also be eligible.
- Workers will be entitled to up to 12 weeks of paid leave. Employees who experience a serious pregnancy-related health complication will be allowed up to two additional weeks of paid time off.
- The plan will be paid for by a 0.5 percent payroll tax levied on all employees.
- The payroll tax will begin to be deducted from employees’ paychecks on January 1, 2021 but employees may not begin collecting benefits until the following year on January 1, 2022.
Increase to Property Tax Abatement for Certain First Responders
- The Governor signed into law on June 28, 2019, a law increasing the maximum amount of property tax abatement that municipalities may grant for certain first responders. The law includes measures providing tax relief: 1) for the period commencing July 1, 2019 and ending June 30, 2021, of an abatement of up to $1,500 in property taxes due for any fiscal year; and 2) on and after July 1, 2021, an abatement of up to $2,000 in property taxes due for any fiscal year.
- The law is effective July 1, 2019.
Electronic Cigarette Tax
- Effective October 1, 2019, prefilled electronic cigarette products that are not intended to be refillable are taxed at 40 cents per milliliter. For all other electronic cigarette products, the tax is 10% of the wholesale sales price of the product. Other legislation was enacted with respect to tobacco products.
Alcoholic Beverage Tax
- Effective October 1, 2019, the alcoholic beverage tax is increased. The rates are dependent upon the type of alcoholic beverage being sold. The tax on the sale of beer has also been changed.
Plastic Bag Fee
- Effective August 1, 2019, there is a 10-cent fee on single-use plastic bags provided at the point of sale until June 30, 2021 when such bags are banned from being sold.
- For sales occurring on or after July 1, 2019 but prior to July 1, 2020, the admissions tax is 7.5% of the admission charge to any event at specified venues. For sales occurring on or after July 1, 2020, the admissions tax is 5% of the admission charge for the specified venue. For all other venues, the admissions tax is still 10% of the admission charge.
- For sales occurring on or after July 1, 2019 but prior to July 1, 2020, the admissions tax is 5% for any event at the Dunkin’ Donuts Park in Hartford.
Transportation Network Fee
- Effective July 1, 2019, the transportation network company (Uber and Lyft) fee for prearranged rides that originate in the state is increased from 25 cents to 30 cents.
STEM Graduate Tax Credit Repeal
- Effective for tax years beginning January 1, 2019, the refundable personal income tax credit for college graduates in science, technology, engineering, or math (STEM) fields is repealed. The annual credit was $500 and could be claimed for five years after graduation.
Property Tax Credit Limit
- The limitation for eligibility to claim the property tax credit is extended from 2018 to the 2020 tax year. The property tax credit is limited to taxpayers with dependents and individuals that are 65 years old or older.
Real Estate Conveyance Tax
- Effective July 1, 2020, there is a new marginal real estate conveyance tax rate of 2.25% on the portion of the sales price of a residential property that exceeds $2.5 million. Prior to the legislative change, real property in excess of $800,000 was assessed 0.75% up to $800,000 and 1.25% in excess of $800,000. Those rates are still applicable but now the 1.25% rate will only apply between $800,001 and $2.5 million and then the 2.25% rate will apply.
- For taxable years commencing on or after January 1, 2021, for any state resident taxpayer that paid the real estate conveyance tax rate of 2.25%, there is a personal income tax property tax credit (now limited to $200) that can be taken but can’t exceed 33.33% of the tax paid at that rate. The credit may not be taken until the second tax year after the taxable year in which the conveyance tax was paid. For example, if a $100,000 conveyance tax was paid at the 2.25% rate in 2020, the credit may not be taken until the 2022 tax year and must not exceed $33,333 in that year. If not fully utilized after three years, the credit may be carried forward for an additional three years.
- The apparent intended purpose of the tax is to impose an “exit tax” on residents selling their “mansions” (in excess of $2.5 million) and changing their Connecticut residency to another state.
Angel Investor Credit
- Extends the angel investor tax program for five years and now applies to investments made prior to July 1, 2024 instead of prior to July 1, 2019.
- Effective July 1, 2019 and applicable to income years commencing on or after January 1, 2019, the angel investor credit maximum is increased from $250,000 to $500,000.
Teachers’ Retirement Payment Deduction:
- The 25% retirement/pension pay deduction that was to increase to 50% is delayed two years until 2021. The 25% deduction stays for 2019 and 2020.
Changes Affecting Pass-through Entities and Corporations
Business Entity Tax Eliminated
- For tax years commencing on or after January 1, 2020, the business entity tax is repealed. The business entity tax was applicable to limited liability companies, limited liability partnerships, limited partnerships, and S corporations. It was a $250 fee due every other taxable year.
Pass-through Entity Tax (PET) Calculation and PET Credit Reduction
- Under the DRS’ bill, the pass-through entity tax base is expanded to include guaranteed payments (§707(c)) to partners of a partnership (but not wages to S corporation shareholders). This legislation is effective for tax years beginning on or after January 1, 2019. Although the partnership may be able to obtain a deduction for the PET, partners who solely receive guaranteed payments will generally not be able to receive any federal income tax benefit from the deduction (i.e., equity partners may obtain the deduction for the tax paid/accrued through a reduction of their distributive share of ordinary income).
- No legislation was introduced or enacted allowing nonresident partners or S corporation shareholders to file on a composite/group basis. In the majority of cases, a nonresident pass-through entity owner will be required to file a Connecticut nonresident income tax return to either pay additional taxes or receive a tax refund with respect to tax on Connecticut source income attributable to a pass-through entity.
- The DRS bill now exempts entities with less than $1,000 in annual PET from the requirement to make estimated tax payments.
- For income years commencing on or after January 1, 2019, the credit associated with the pass-through entity tax is reduced from 93.01% to 87.5%. The reduction in the credit is effectively a tax increase on pass-through entity owners. In effect, a $100,000 of Connecticut pass-through income may increase an owner’s Connecticut income tax liability by $385 (a 0.385% tax increase).
- Taxpayers will not be subject to underpayment of estimated tax payments for any additional tax due as a result of the credit reduction prior to taking effect (e.g., first two payments for calendar year entities).
- Effective July 1, 2020, the annual report filing fee for specified pass-through entities is increased from $20 to $80.
- As a side note, Connecticut is no longer the only state to impose a pass-through entity income tax to work around the $10,000 federal state tax deduction limitation. Four other states have enacted similar legislation: Louisiana, Oklahoma, Rhode Island, and Wisconsin with other states considering it.
- The latest IRS-Treasury priority guidance plan now includes providing “guidance” on applying the state and local deduction cap to passthrough entities. It is expected that this guidance will be issued later this summer or early fall. The broad question that the IRS and Treasury could address in this guidance is whether the PETs are standalone deductible taxes or “substitute state individual taxes.” Although there is support for the deductibility of entity level taxes on passthroughs, does the Connecticut credit mechanism jeopardize that support? Furthermore, although neither the IRS nor Treasury have indicated so, there is a possibility that the IRS and Treasury could require “listed transaction” disclosure.
Capital Base Phase Out
- Phases out the capital base component of the corporation business tax over four years.
- For income years commencing prior to January 1, 2021 the rate is .0031 (the current rate).
- For income years commencing on or after January 1, 2021, and prior to January 1, 2022 the rate is .0026.
- For income years commencing on or after January 1, 2022, and prior to January 1, 2023 the rate is .0021.
- For income years commencing on or after January 1, 2023, and prior to January 1, 2024 the rate is .0011.
- For income years commencing on or after January 1, 2024 the capital tax is completely phased out.
Federally Designated Opportunity Zones
- The Governor signed into law on June 21, 2019, a law concerning federal opportunity zones.
- Effective July 1, 2019, the state will extend the historic structure rehabilitation tax credit’s 30%credit to projects located in federally designated opportunity zones.
- The Commissioner of the Department of Economic and Community Development is now required to prioritize applications for projects located in federally designated opportunity zones while approving projects for urban and industrial site reinvestment tax credits.
- In approving state financial assistance for certain brownfield remediation projects, the Commissioner is required to give preference to projects located in federally designated opportunity zones.
- The Deputy Commissioner of Economic and Community Development is designated as the state’s primary point of contact for all state programs relating to opportunity zones.
- For income years commencing on or after January 1, 2019, the amount by which a company may reduce its tax liability using certain credits (e.g., Research and Development and Urban Reinvestment Act credit) is reduced from 70% to 50.01%
- The corporate surcharge of 10% of the corporation business tax calculated is extended to income years commencing prior to January 1, 2021. The surcharge was initially set to sunset for income years commencing prior to January 1, 2019.
Brownfield Revitalization 7/7 Program Repealed
- Applicable to tax years beginning on or after January 1, 2019, the 7/7 Brownfield Revitalization program is repealed. The program was established to provide state and local tax incentives to eligible owners for up to 14 years after remediating, redeveloping, and using formerly contaminated, abandoned, or underutilized property. Available incentives included corporation business tax and personal income tax credits and deductions, sales and use tax exemptions, and a property tax assessment freeze.
Credit for Employers Making Education Loan Payments for Employees
- The Governor signed into law on June 28, 2019, a law providing a tax credit to employers that make certain education loan payments for employees (generally, with respect to loans issued by the Connecticut Higher Education Supplemental Loan Authority – CHESLA Loans). The law includes measures: 1) establishing a state business tax credit of up to $2,625 per employee for an employer that makes eligible education loan payments on a qualified employee’s behalf; 2) providing that the credit equals 50 percent of payments an employer makes that is applied to a qualified employee’s outstanding principal balance; 3) explaining that the credit may be applied against the corporate business income or insurance premium excise tax; and 4) allowing an employer to claim the credit for any payment made during the income year the employee worked, and deems that an employee who works and lives in Connecticut for any part of the month did so for the entire month.
- The law is effective January 1, 2022 and applicable to income years commencing on or after January 1, 2022.
Economic Nexus and Click-Through Nexus Thresholds
- Effective July 1, 2019, the sales tax threshold for economic nexus is lowered from $250,000 to $100,000 in gross receipts in a 12-month period. The economic nexus threshold still requires a remote seller to have made 200 or more retail sales in addition to surpassing the gross receipts threshold. In addition, the nexus provision now also extends to sales of services as well as tangible personal property. The threshold for “click-through” nexus was also lowered to $100,000.
Certified Service Providers – Sales Tax Compliance
- The Commissioner of Revenue Services is instructed 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. The Commissioner must develop a plan to implement the use of such providers for the collection, reporting, and remittance of sales and use taxes. Such plan may include a requirement that retailers use such providers and identify the costs that may be incurred by retailers for those services.
The following changes are effective October 1, 2019:
- The sales tax rate on “digital goods” (i.e. audio works, visual works, audio-visual works, reading material or ring tones) and electronically delivered software is increased from 1% to 6.35% (other than when purchased by a business for its own use).
- The sales tax rate is increased on meals (food products ready for immediate consumption) sold by an eating establishment, caterer or grocery store and beverages that are ordinarily dispensed at bars and soda fountains to 7.35% (a 1% increase).
- The sales tax rate of dyed diesel fuel exclusively for marine purposes is lowered to 2.99%.
- Short-term rental facilitators (e.g. Airbnb, Vrbo, etc.) that facilitate retail sales of at least $250,000 during the prior 12-month period must obtain a permit to collect the occupancy tax. A rate of 15% will apply unless the rental qualifies as a bed and breakfast (taxed at 11%).
The following changes are effective January 1, 2020:
- The taxable motor vehicle parking services are expanded to all parking except for a parking lot operated by an employer for the exclusive use of its employees.
- Dry cleaning and laundry services (excluding coin operated services) and interior design services (other than when purchased by a business for its own use) are taxable.
- The sales and use tax exemption for safety apparel and protective equipment is eliminated.
What to Watch?
Payroll Tax Evaluation:
- Effective from passage of the bill, the Department of Revenue Services is tasked with gathering data it needs to evaluate the implementation of a payroll tax on employers in the state commencing January 1, 2021. An information return form will be mailed to businesses no later than August 15, 2019 and will be due back to the Department no later than October 1, 2019. A Payroll Commission will also be established to evaluate the feasibility of the employer payroll tax. A report with the Commission’s recommendations will be submitted no later than January 15, 2020.
Penalty Waiver Committee:
- The DRS bill increases from $1,000 to $5,000 the threshold over which a penalty waiver requires Penalty Review Committee review and approval.
Order of Applying Partial Assessment Payments:
- The DRS bill provides that for periods ending on or after December 31, 2019, partial payments are to be applied in the following order: 1) Penalties; 2) Interest; 3) Taxes.
Nonresident Estate Taxation:
- The DRS bill provides that if certain criteria are met, real and tangible personal property owned by a pass-through entity is treated as personally owned by a nonresident decedent for estate tax purposes. In general, a nonresident estate is an estate of a decedent who was not domiciled in Connecticut at the time of death.
End of the 2019 Fiscal Year
Just recently, Comptroller Kevin Lembo announced the state is on track to end the 2019 fiscal year with a $700.9 million surplus, though he noted that amount will be reduced by $540.9 million for appropriations to cover funding for a new special capital reserve fund for the Teachers’ Retirement System and a settlement with hospitals. Whether the net surplus will result in a reduction of enacted tax increases is unsure at this time. To note, 2019 legislation that was introduced to impose a 2% surcharge on capital gain income was squashed.
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 statutes, 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.