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:

• 2021 — tax is 2.6 mills per dollar
• 2022 — tax is 2.1 mills per dollar
• 2023 — tax is 1.1 mills per dollar
• 2024 and thereafter — tax is zero mills per dollar

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:

• Sunsets as of January 1, 2020, the $250 business entity tax, which is due every other tax year and is imposed on certain entities (e.g., S corporations, limited partnerships (LPs), limited liability partnerships (LLPs), limited liability companies (LLCs)) (Bill Sections 338-339)
• Increases the annual business filing fees to $80 (from $20), applicable to foreign and domestic LPs, LLPs, and LLCs, starting July 1, 2020 (Bill Section 344-346)
• Extends the angel investor tax credit for five years, through July 1, 2024 (from July 1, 2019), and increases to $500,000 (from $250,000) the total amount of credit allowed to an angel investor, applicable starting in 2019 (Bill Section 347)
• Reduces the sales and use tax rate on dyed diesel fuel sold by a marine fuel dock exclusively for marine purposes to 2.99% (from 6.35%), applicable to sales occurring on or after October 1, 2019 (Bill Section 323 and 324)
• Establishes a new, higher 2.25% real estate conveyance tax imposed on the portion of the sales price that exceeds $2.5 million (effective July 1, 2020),³ and modifies the property tax credit against the income tax for those subject to the new, 2.25% rate (effective January 1, 2020) (Bill Sections 335 and 337)
• Imposes a 10-cent fee on single-use plastic bags at the point of sale, effective August 1, 2019 through June 30, 2021, and bans use of such bags starting July 1, 2021 (Bill Section 355)
• Imposes a tax on e-cigarettes, starting October 1, 2019 (Bill Section 351)
• Increases the rate of the excise tax imposed on alcoholic beverages, reduces the excise tax rate on certain sales of beer, imposes a floor tax on sellers of alcoholic beverages (except beer), effective October 1, 2019 (Bill Sections 352 and 353)
• Reduces the 10% admissions tax rate on certain venues to 7.5% on July 1, 2019, and to 5% on July 1, 2020 (Bill Section 354)
• Increases the fee transportation network companies pay on each prearranged ride originating in Connecticut to 30 cents (from 25 cents), effective July 1, 2019 (Bill Section 360)
• Eliminates the scheduled reduction to the hospital provider tax, leaving the existing rate on inpatient and outpatient services; this change took immediate effect (Bill Section 356)
• Repeals state and local tax incentives under the 7/7 program for eligible property owners that completed a brownfield remediation, applicable to tax years beginning on or after January 1, 2019 (Bill Sections 376 and 397)
• Repeals the sales and use tax exemption for safety apparel (i.e., clothing and protective equipment worn by employees during the course of their employment), effective January 1, 2020 (Bill Section 400)
• Requires the Connecticut Department of Revenue Services (Department) to evaluate the implementation of a payroll tax on in-state employers commencing January 1, 2021, with the Department developing and producing an information return form that it will mail to in-state employers by August 15, 2019, with a return due date of October 1, 2019 (Bill Section 385)
• Postpones until February 15, 2022 (from 2020), the due date of the first report of the Connecticut Commissioner of Revenue on the overall incidence of the CBT, income tax, sales and excise taxes, and property tax (Bill Section 92)

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.

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ENDNOTES

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.