July 30, 2019 Connecticut budget bill includes various tax changes On June 26, 2019, Connecticut Governor Ned Lamont signed into law the state's fiscal 2020–2021 budget bill (HB 7424) (the bill). Notable changes in the bill include: (1) expanded sales and use tax nexus provisions; (2) an increase to the sales and use tax rate on digital goods and certain computer software; (3) expansion of the state's sale tax base to include certain services; (4) an extension of the corporate surcharge; (5) the phase-out of the capital base tax; (6) a modification to the corporation business credit cap; and (7) a modification to the pass-through entity (PTE) tax. Another bill, HB 7373, signed by the governor on July 8, 2019, also makes changes to the state's tax laws, including additional changes to the PTE tax. In addition, a paid family and medical leave insurance program to be funded 100% by employees through payroll deduction is established by SB 1, signed by the governor on June 25, 2019. For more on this new law, see Tax Alert 2019-1194. These changes, except the paid family and medical leave insurance program, are discussed below. Sales and use tax Nexus — Bill Sections 327 and 328 The bill modifies the definitions of "retailer" and "engaged in business in the state," replacing the portion of the state's anti-Bellas Hess law that requires some level of solicitation activity directed at the state with a bright-line standard based on sales and transactions volume and reducing the gross receipts threshold from $250,000 to $100,000. Applicable to sales occurring on or after July 1, 2019, a remote retailer is required to collect and remit sales tax on sales of tangible personal property or services to destinations in Connecticut if, during the preceding 12-month period (ending September 30), its gross receipts from such sales are at least $100,000 and it made at least 200 Connecticut retail sales. The bill also reduces the threshold for click-through nexus from $250,000 to $100,000, applicable to sales occurring on or after July 1, 2019. HB 7373 delays notice and reporting requirements for referrers. As revised, referrers must provide a quarterly notice to sellers starting on January 1, 2020 (formerly July 1, 2019) and must submit an annual report to the tax commissioner by January 31, 2021 (formerly January 31, 2020). Digital goods and canned or prewritten computer software — Bill Sections 319-322 The bill increases the sales and use tax imposed on "digital goods" and certain electronically delivered canned or prewritten computer software from 1% to 6.35%. The bill amends the definition of taxable tangible personal property to include digital goods and makes clear that taxable "canned or prewritten computer software" includes such software that is electronically accessed (e.g., remotely accessed software) or transferred. A notable carve-out is provided for digital goods or canned or prewritten computer software purchased by a business for business use (i.e., a B2B exemption). The term "digital goods" is defined as "audio works, visual works, audio-visual works, reading materials or ring tones, that are electronically accessed or transferred." The bill also establishes conditions that must be met in order for sales of (1) canned or prewritten computer software, (2) digital goods, and (3) computer and data processing services that are an integral inseparable component part of the digital good, to be considered tax-exempt sales for resale, and specifies the records purchasers are required to maintain to substantiate this exemption. These changes are effective, and apply to sales occurring on or after, October 1, 2019. Services — Bill Sections 325 and 326 The bill expands the sales and use tax base by taxing certain motor vehicle parking services (e.g., space in a seasonal parking lot owned by the state or a municipality, metered parking, motor vehicle parking in lots with fewer than 30 spaces, except for employer-operated lots owned or leased for a minimum of 10 years and operated for the exclusive use of employees). It also taxes dry cleaning and laundry services (excluding coin operated services) and interior design services described in industry group 54141 of the North American Industry Classification System, excluding interior design services purchased by a business for use by such business (to qualify for the exemption, a purchaser will have to present the retailer with a certificate prescribed by the commissioner). Tax applies to sales of these services occurring on or after January 1, 2020. Short-term room rentals — Bill Section 329 and 330 Effective October 1, 2019, the bill expands the definition of "retailer" to include "short-term rental facilitators" and requires such facilitators to collect and remit Connecticut's room occupancy tax on short-term room rentals. In addition, a short-term rental facilitator is required to obtain a sales tax permit to collect the room occupancy tax and is considered the retailer for each sale of a short-term rental it facilitates on its platform for short-term rental operators. Short-term rental operators are not liable for collecting the room occupancy tax to the extent the tax due was collected by the facilitator. Certified service providers — Bill Section 331 The bill requires the Revenue Commissioner to consult with the Streamlined Sales Tax Governing Board to develop a list of certified service providers (CSPs). CSPs will help facilitate the collection and remittance of the state's sales and use tax. By February 5, 2020, the Commissioner must submit to the joint standing committee of the General Assembly a plan to implement the use of CSPs, along with a draft of proposed legislation that would implement the plan. The plan may include a requirement that retailers use CSPs and identify the costs that may be incurred by retailers for such services. Food and beverages — Bill Sections 323 and 324 Applicable to sales occurring on or after October 1, 2019, in addition to the 6.35% sales and use tax, the bill imposes an additional 1% sales and use tax on (1) meals sold by eating establishments, caterers, or grocery stores, and (2) liquors, soft drinks, sodas, or other beverages ordinarily dispensed at bars and soda fountains. Thus, the total rate of tax imposed on these sales in 7.35%. Income tax changes Corporate surcharge — Bill Sections 341-343 The bill extends the 10% corporate surcharge on Connecticut corporate income tax for two years, to tax years commencing before January 1, 2021. The surcharge applies to corporations with at least $100 million of annual gross income that have a Connecticut tax liability of more than $250, or file unitary returns regardless of the amount of gross income. Capital base tax phase-out — Bill Section 340 Under current law, a taxpayer's corporation business tax (CBT) liability is the greater of the net income base tax or the capital base tax. The current tax under the capital base is 3.1 mills per dollar of a corporation's capital base (i.e., the corporation's apportioned net worth). Starting in 2021, the capital base tax will be phased-out as follows:
Corporation business credit cap — Bill Section 349 Applicable to tax years beginning on or after January 1, 2019, the bill modifies the corporation business credit cap, by reducing to 50.01% (from 70%) the amount by which a corporation may reduce its tax liability using research and development and Urban Reinvestment Act credits. The amount of usable credit was set to increase to 70% (from 65%) in 2019. PTEs — Bill Sections 333 and 334 Legislation enacted in 20181 imposed a new entity-level tax on PTEs, including S-corporations, partnerships, and LLCs treated as partnerships for federal income tax purposes, at a rate of 6.99%. The new PTE tax is offset by a Connecticut income tax credit distributed to PTE partners, owners and shareholders (collectively PTE owners). The credit equals the PTE owner's distributive share of the PTE tax paid by the PTE multiplied by 93.01%. Applicable to tax years commencing on or after January 1, 2019, the bill reduces the value of the amount of the tax credit for PTE tax paid by lowering the multiplier to 87.5%. For the 2019 tax year, taxpayers are not subject to estimated tax payment requirements and will not be liable for interest on the underpayment of tax for additional tax due as a result of this law change. Provisions of HB 7373 make additional changes to the PTE law. Notably, it expands the PTE tax base (both the standard and alternative base method) to include guaranteed payments with respect to a partnership, and exclude any item treated as an itemized deduction for federal income tax purposes.2 HB 7373 also exempts PTE taxpayers with an annual tax liability of less than $1,000 from having to make required quarterly estimated tax payments. These changes take effect July 1, 2019, and apply to tax years beginning on or after January 1, 2019. Lastly, HB 7373, for estate tax purposes, sets forth conditions under which real and tangible personal property owned by a PTE will be treated as personally owned by a nonresident decedent. This change took immediate effect. Other tax related changes In addition to the above-mentioned changes, the bill does the following:
Implications Remote sellers and retailers should review Connecticut's changes to its sales tax laws and rate changes and adjust their sales and use tax compliance systems accordingly. While Connecticut has historically imposed sales tax on electronically delivered software and digital goods at the 1% computer and data processing rate, the bill subjects both to tax at the full rate, effective October 1, 2019. However, businesses will benefit from the bill's carve-out for purchases made for business use, which in effect keeps purchases of electronically delivered software and digital goods taxable at the lower 1% rate for businesses. The phase-out of the capital base tax will affect taxpayers that typically paid CBT based on the capital base tax. Starting in 2024, if not sooner, these taxpayers will have to compute their CBT liability based on the net income base tax. ———————————————
——————————————— 1 Pub. Act 18-49. See Tax Alert 2018-1032. 2 The exclusion of items treated as an itemized deduction conforms to the Connecticut Department of Revenue Service's current guidance. 3 Under Connecticut law, the real estate conveyance tax rate is: (1) 0.75% on the first $800,000 of the sales price; and (2) 1.25% on the portion of the sales price in excess of $800,000. Starting July 1, 2020, the new 2.25% rate will apply to the portion of the sales price in excess of $2.5 million. | |||||||||
| |||||||||
