Connecticut Passes House Bill Enacting Changes for Income, Business Entity and Sales Tax– July 12, 2019 by Hannah Prengler

H.B. 7424, signed by Governor Lamont on June 26, 2019, has made numerous tax law changes for those doing business in Connecticut. Key changes relate to the:

  • Reduction of the pass-through entity tax credit,
  • Extension of the 10% corporate surcharge and phase out of the capital stock tax,
  • Expansion of the sales tax and Wayfair nexus updates,
  • Phase out of the business entity tax on pass-through entities,
  • Enactment of “mansion tax,” and
  • Collection of rental facilitator tax. 

Pass-through Entity Tax Credit Change

In 2018, following the passage of the Tax Cuts and Jobs Act (TCJA), Connecticut passed a 6.99% entity-level tax on pass-through entities, which would allow for the deductibility of state tax from federal income. The Connecticut tax paid by the pass-through entity would then be offered as a refundable credit to the members at a rate of 93.01%. This served as a workaround to the $10,000 state and local income tax cap placed on individuals at the federal level.
 
H.B. 7424 reduces that credit to 87.5% for tax year 2019 and subsequent years. This should be taken into consideration when preparing the remaining tax estimates due and year-end tax planning. 

Corporate Tax Changes

C Corporations historically have paid a surtax on their Connecticut income tax. The surtax applies if the entity pays greater than the minimum tax or if the entity has greater than $100 million in total income. In 2018 the rate decreased from 20% to 10%.
 
H.B. 7424 has extended the 10% rate for tax years 2019 and 2020. Furthermore, the bill incrementally reduces capital stock tax rates until the tax is phased out entirely for income years commencing on or after January 1, 2024. 

Sales Tax Expansion and Nexus Updates

H.B. 7424 expands sales tax to parking, dry cleaning and laundry services, safety apparel and interior design services effective January 1, 2020. For taxpayers in the digital goods space, the sales tax rate has significantly increased for sales of digital goods after October 1, 2019. Digital goods includes items such as audio or visual works and/or software accessed, purchased or transferred electronically. Sales tax on these items will rise from 1% to 6.35%. A few of the newly taxable items may qualify as exempt when purchased by a business instead of an individual.
 
The bill also increases the rate of sales and use tax imposed on meals and drinks sold at eating establishments and bars by 1%, meaning these sales will be taxed at a 7.35% rate. 
 
Upon the Wayfair decision, many states have passed laws surrounding sales tax nexus and thresholds. Connecticut passed its own rule in 2018, which set the sales tax nexus threshold at $250,000 in gross receipts and 200 retail sales within a 12-month period. However, H.B. 7424 lowers the threshold to $100,000 in Connecticut gross receipts and 200 transactions. The reduced nexus threshold increases the need for companies to reanalyze their sales tax exposure.

>> Read “6 Things You Need to Know About Wayfair and Its Impact on Your Sales Tax Obligations”

Also effective July 1, 2019, is a similar reduced click-through nexus threshold for companies who have sales through agreements with Connecticut-based retailers. The threshold was also dropped from $250,000 to $100,000 in gross receipts. In addition to the threshold change, the receipts that qualify have expanded from strictly tangible personal property to both tangible personal property and sales of services.

>> Listen to our Chief Insights Podcast: “Wayfair Creates a New Normal for State Sales Tax”

Business Entity Tax Phase-Out

The business entity tax is a $250 capital base tax imposed on S Corporations, LLCs, limited liability partnerships and limited partnerships. The purpose of the tax is for the authority to do business within the state. The tax, filed on form OP-424, is due every other year.
 
With the passage of the H.B. 7424, this tax is set to be phased out and ultimately repealed by 2024. The current tax on businesses is 3.1 mills ($.0031) on each dollar of capital (minimum is $250). Beginning in the 2021 tax year the changes will be as follows:

Tax Year

Change

2021

$.0026/$1 of capital

2022

$.0021/$1 of capital

2023

$.0011/$1 of capital

2024

Not applicable, completely phased out

Mansion Tax

The current residential property conveyance rate is 0.75% on the first $800,000 of sales price and 1.25% on the sales price above $800,000. Effective July 1, 2020, Connecticut will impose an increased 2.25% transfer tax rate on the sale of residential property exceeding $2.5 million. The increased conveyance tax amount can be used as a property tax credit on the income tax return. 

Rental Facilitator

Beginning October 1, 2019 short-term rental facilitators are required to do the following:

  1. Obtain a sales tax permit
  2. Collect and remit sales tax to Connecticut (when acting as the operator and retailer for the sale)
  3. Maintain records 

Connecticut defines a short-term rental facilitator as the operator providing a platform, such as a website that lists short-term rentals (e.g., Air BNB), that generates a minimum of $250,000 in sales from short-term rentals.
 
 
If you are doing business in Connecticut, make sure to carefully review these changes with your tax advisor to identify opportunities and stay in compliance.
 
Please contact a member of your service team, Hannah Prengler at hprengler@cohencpa.com, Sara Britt at sbritt@cohencpa.com or Cynthia Pedersen at cynthia.pedersen@cohencpa.com for further discussion.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.