Connecticut's new budget bill makes many changes to Connecticut's tax rules for businesses and individual taxpayers. The new legislation will head to Governor Ned Lamont's desk for his signature.
Corporations and Pass-Through Entities
The bill makes significant changes to how corporations and pass-through entities are taxed.
Business entity tax repealed for LLC's, S-Corporations and Partnerships: The $250 business entity tax is eliminated beginning January 1, 2020. The $250 business entity tax is currently due every other taxable year and is paid by S corporations, limited partnerships, limited liability partnerships (LLPs), and limited liability companies (LLCs).
Pass-through entity tax credit reduced: The bill effectively increases income tax on the owners of pass-through entities. Effective for tax years beginning on or after January 1, 2019, the bill reduces the pass-through entity tax credit for a member's share of the tax to 87.5% (currently 93.01%). Note: Taxpayers are not subject to estimated tax payment requirements and interest on underpayments for the 2019 tax year for any additional tax due as a result of the credit reduction prior to it taking effect.
Filing fees for pass-through entities: Beginning July 1, 2020, the bill increases, from $20 to $80, the fee that foreign and domestic limited partnerships, LLCs, and LLPs pay for filing an annual report with the Secretary of State.
Phase out of capital base tax: Currently, the corporation business tax consists of two components. Corporations separately compute their liability under the regular corporation business tax rate of 7.5% and the corporate excess (capital base) tax equal to 3.1 mils per dollar of capital base with the tax not to exceed $1 million or be less than $250 and pay the larger of the two amounts (but not less than $250). The budget bill phases out the capital base component of the tax over a 4-year period. Under the bill, the capital base rate decreases to 2.6 mills in 2021; 2.1 mills in 2022; 1.1 mills in 2023; and zero mills beginning in 2024.
Corporate surcharge: The bill extends the 10% corporate surcharge to income years commencing on or after January 1, 2018, and prior to January 1, 2021.
Credit cap: For taxable years beginning on or after January 1, 2019, the bill reduces from 70% to 50.01%, the amount by which a company may reduce its tax liability using research and development and Urban Reinvestment Act credits.
Brownfield revitalization 7/7 program repealed: Applicable to tax years beginning on or after January 1, 2019, the legislation repeals the 7/7 Brownfield Revitalization program, which was established to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 and personal income tax credits and deductions, sales and use tax exemptions, and a property tax assessment freeze.
Payroll tax study: Under the legislation, a payroll commission is established and is directed to evaluate the implementation of a 5% employer payroll tax beginning January 1, 2021. In order to collect the necessary data for this study, DRS must mail, electronically or by first class mail, an information return form by August 15, 2019, to employers, excluding the federal government, state government, municipalities, local or regional boards of education, tribal nations, and self-employed individuals. Employers must return it by October 1, 2019. The commission must provide estimates of the total revenue an employer payroll tax would generate, based on the assumption that either a 5% payroll tax is imposed beginning January 1, 2021 or a payroll tax is phased in over three years at the rate of 1.5% in year one, 3% in year two, and 5% in year three. For the phase-in estimate, the commission must assume that income tax rates on wage income would be reduced to 0% for taxpayers in the current 3% and 5% brackets; 0.5% for the 5.5% bracket; 1% for the 6% bracket; 2.5% for the 6.5% bracket; 2.9% for the 6.9% bracket; and 2.99% for the 6.99% bracket. The current personal income tax rates are assumed to continue to apply to non-wage income.
Teacher pension exemption: The bill delays an increase in the teacher pension exemption to 50% until January 1, 2021, and maintains the current 25% exemption for 2019 and 2020.
Property tax credit limit: The budget bill continues to limit eligibility for the property tax credit to taxpayers with dependents and those who are 65 years old or older through 2020.
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.
Angel investor credit: Effective July 1, 2019, the bill extends the angel investor credit program for five years to July 1, 2024. The total tax credits allowed to any angel investor is increased to $500,000 (previously $250,000). Connecticut Innovations, which administers the program, may reserve up to $5 million (previously $3 million) in aggregate credits in each fiscal year. The bill also provides that Connecticut Innovations may prioritize unreserved credits for veteran-owned, women-owned or minority-owned businesses and businesses owned by individuals with disabilities.
Sales and Use Tax
Digital goods and software: Effective October 1, 2019, the sales and use tax rate on digital goods and canned or prewritten software that is electronically accessed or transferred, other than when purchased by a business for use by such business, will be subject to the full 6.35% sales tax rate and will no longer be considered computer and data processing services, which are subject to a reduced rate of 1%. ”Digital goods“ means audio works, visual works, audio-visual works, reading materials or ring tones that are electronically accessed or transferred.
Dyed diesel fuel sold by a marine fuel dock: The sales and use tax rate on dyed diesel fuel sold by a marine fuel dock exclusively for marine purposes is reduced to 2.99%.
Prepared meals: The bill increases the sales and use tax rate on the sale of meals sold by eating establishments, caterers or grocery stores; and alcoholic beverages, soft drinks, sodas or beverages ordinarily dispensed at bars and soda fountains to 7.35% from 6.35%.
Elimination of exemptions: Effective January 1, 2020, the bill eliminates the sales and use tax exemptions for safety apparel; specified parking services; dry cleaning services; laundry services and interior design services unless purchased by a business for use by such business. Coin operated laundry services remain exempt.
Economic and click-through nexus: Effective July 1, 2019, every person making retail sales of tangible personal property and services from outside Connecticut to a destination in the state is liable for sales tax if they make 200 transactions and have gross receipts of $100,000 (currently $250,000) during a 12-month period. In addition to lowering the threshold for economic nexus and extending it to sales of services, the bill eliminates the condition that such retailers be regularly or systematically soliciting sales in Connecticut. The sales threshold for click-through nexus is also lowered to sales of $100,000 (previously $250,000) made through referral agreements.
Certified service providers: The bill directs the DRS Commissioner to consult with the Streamlined Sales Tax Governing Board to develop a list of certified service providers to facilitate Connecticut sales tax collection and remittance and develop a plan to implement the use of such certified service providers. The plan may require retailers to use certified service providers and must identify the costs to retailers if required. The Commissioner must submit the plan to the Finance, Revenue and Bonding Committee by February 5, 2020, along with a draft of proposed legislation to implement it.
Room occupancy tax collection: The legislation requires "short-term rental facilitators" who facilitate retail sales of at least $250,000 during the prior 12-month period by short-term rental operators by providing a short-term rental platform, to obtain a sales tax permit to collect the room occupancy tax (15% sales and use tax for hotels and lodging houses and 11% for bed and breakfast establishments) and collect and remit tax for the sales that they facilitate for short-term rental operators on their platforms. Short-term rental operators are not liable for collecting room occupancy tax to the extent that the short-term rental facilitator collected the tax due. A “short-term rental platform” is a physical or electronic place that allows such operators to display available accommodations to prospective guests, including a store, booth, website, catalog, or dedicated software application.
Admissions tax: The admissions tax rate is reduced for certain venues from 10% to 7.5% for sales occurring on or after July 1, 2019, and from 7.5% to 5% for sales occurring on or after July 1, 2020. The venues subject to reduced rates are: the XL Center in Hartford; Dillon Stadium in Hartford; athletic events presented by a member team of the Atlantic League of Professional Baseball at the New Britain Stadium; Webster Bank Arena in Bridgeport; Harbor Yard Amphitheater in Bridgeport; Dodd Stadium in Norwich; Oakdale Theatre in Wallingford; and events, other than already exempt interscholastic athletic events, at Rentschler Field in East Hartford. For sales occurring on or after July 1, 2019, but prior to July 1, 2020, for any event at the Dunkin' Donuts Park in Hartford, the tax is 5% of the admission charge.
Real estate conveyance tax. Effective July 1, 2020, a new marginal real estate conveyance tax rate of 2.25% is placed on the portion of the sales price of a residential property that exceeds $2.5 million. For tax years beginning on or after January 1, 2021, taxpayers who paid conveyance tax at the new 2.25% rate may calculate their property tax credit against the income tax based on the amount paid in conveyance tax over a 3-year period, beginning in the third year after the conveyance tax was paid. Effective July 1, 2019, deeds that transfer the transferor's principal residence, which has a concrete foundation that has deteriorated due to the presence of pyrrhotite are exempt from real estate conveyance tax, provided the transferor obtains a written evaluation from a professional engineer indicating that the foundation of the residence was made with defective concrete.
Electronic cigarette tax. Effective October 1, 2019, the bill imposes a tax on electronic cigarette products at a rate of 40¢ per milliliter for pre-filled e-cigarette products and 10% of the wholesale price for all other electronic cigarette products. "Electronic cigarette products" means electronic nicotine delivery systems, liquid nicotine containers, vapor products, and electronic cigarette liquids. Each electronic cigarette wholesaler must file a return and pay the tax for the immediately preceding calendar month with the DRS Commissioner, on or before the last day of each month. Each electronic cigarette wholesaler must file the return electronically and make payment by electronic funds transfer.
Transportation network company fee. Effective July 1, 2019, the bill increases, from 25¢ to 30¢, the fee that Uber, Lyft and other transportation network companies must pay on each ride that originates in the state.
Alcoholic beverage tax rates. Effective October 1, 2019, the budget bill increases the tax rate on alcoholic beverages other than beer.
Hospital provider tax. The legislation also restructures and revises the hospital provider tax.
Plastic bag fee. Effective August 1, 2019, to June 30, 2021, single-use plastic bags are subject to a 10¢ fee. On and after July 1, 2021, single-use plastic checkout bags are banned.