Although the 2018 legislative session of the Connecticut General Assembly ended with the adoption of bipartisan budget legislation, it was marked by a continued failure to conduct a more holistic review of the state’s sources of expense and revenue. Such a review was invited by the 2015 report of the State Tax Panel and the more recent report of the Commission on Fiscal Stability and Economic Growth, but there seemed to be little appetite for debate on the subject in this gubernatorial election year. Instead, the General Assembly appointed yet another tax panel, this time to study the Commission’s recommendations, and authorized the hiring of a national consultant to generate recommendations regarding efficiency improvements in revenue collection and agency expense management that will somehow result in savings of $500 million without adversely impacting program quality or social services program benefits.
Nevertheless, the 2018 session did generate significant Connecticut tax legislation, largely in reaction to the federal Tax Cuts and Jobs Act of 2017. Like many jurisdictions with a state income tax, Connecticut sought to counteract the new federal income tax limitation on the ability of individuals to take an itemized deduction for certain state and local taxes. The General Assembly enacted a new tax on pass-through businesses, such as Subchapter S corporations and limited liability companies, and other entities taxed as partnerships for federal income tax purposes. The Legislature also authorized each Connecticut municipality to establish a community support organization that can accept charitable contributions for the benefit of the municipality and be the basis for a credit against the municipality’s property tax. As discussed in this Alert, the efficacy of these attempts at federal tax relief may be limited based upon current and future federal and state guidance. In addition, Connecticut, together with other states, instituted a lawsuit challenging the new federal limitation on the deduction of state and local taxes.
Tax revenue collected by the state in late 2017 and early 2018, largely as the result of a federal law change related to the taxation of foreign source income, did allow Connecticut to address its current fiscal year budget issues and meaningfully replenish the state’s “rainy day” fund. However, the projection of significant future budget deficits caused the General Assembly to enact legislation de-coupling state tax law from a number of the most favorable provisions of the Tax Cuts and Jobs Act of 2017, including 100% bonus depreciation and the asset expensing rules under Internal Revenue Code §179. On a more positive note, for individuals, a new subtraction modification is established for the personal income tax for certain income earned by new venture capital funds that invest in Connecticut bioscience businesses, and the rules governing withholding on payments from pensions and annuities are clarified. Corporations are subject to a new rule that deems the amount of non-deductible expenses related to dividends to be equal to five percent of a corporation’s dividends. As part of the state’s ongoing attempt to impose nexus for Connecticut sales and use tax purposes on out-of-state retailers, the General Assembly has redefined what constitutes “engaged in business in the state” and imposed new state tax obligations on what are termed “market facilitators” (e.g., businesses that create a forum for sales, such as on the Internet) and “referrers” (e.g., businesses that create a forum for the listing or advertising of property or services for sale). The subsequent decision of the United States Supreme Court in South Dakota v. Wayfair, Inc., however, likely will permit Connecticut to more directly impose sales tax collection, remission and reporting obligations on remote sellers. The Office of Fiscal Analysis has estimated that Connecticut will realize an additional $40 million annually in sales and use tax receipts as a result of the Wayfair decision.
Governor-elect Ned Lamont has yet to announce his nominee for Commissioner of Revenue Services. Although revenues in the current fiscal year are projected to result in a $278.6 million surplus and a further transfer to the State’s rainy day fund of $648 million, the Office of Fiscal Analysis is still projecting a multi-billion dollar deficit for the next biennium, setting the stage for another difficult budget legislative session commencing in January 2019.
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This Alert summarizes Connecticut tax legislation enacted, court decisions rendered and administrative guidance published by the Connecticut Department of Revenue Services during the first ten months of 2018. Please contact a member of our State and Local Tax Practice Group if you have questions regarding the new tax law changes or how they may affect you and your business. On June 12, 2018, our tax attorneys hosted a CLE Webinar on the Connecticut response to the federal Tax Cuts and Jobs Act of 2017, including the new pass-through entity tax. Visit our CLE Knowledge Center or click here and register to view this presentation on demand.