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Connecticut Governor Malloy on May 4, 2011, signed the FY 2012 budget bill into law.
The budget bill (Senate Bill 1239) contains many revenue raising measures, of which significant tax changes are described below. The legislation also increases “sin taxes” on alcoholic beverages and tobacco products, eliminates admissions tax exemptions, and adopts a new cabaret tax.
Transaction Tax Rate Increases
Senate Bill 1239 adopts a number of transaction tax rate increases—all of which are effective July 1, 2011.
- The Connecticut general sales and use tax rate is increased from 6.0% to 6.35%.
- The hotel occupancy tax rate is raised from 12% to 15%.
- A new 9.35% rate applies to the lease or rental of motor vehicles for period of less than 30 consecutive days.
- A new 7% luxury tax rate applies to the entire sales price of: (1) motor vehicles exceeding $50,000; (2) vessels exceeding $100,000; (3) jewelry (real or imitation) exceeding $5,000, and (4) clothing, footwear, handbags, luggage, wallets, umbrellas, or watches with a sales price exceeding $1,000. [Note that the luxury tax is in lieu of the 6.35% general sales and use tax.]
Imposition of Tax on New Services
The legislation expands the sales tax base to include certain personal services.
Effective July 1, 2011, the following services are subject to sales and use tax:
- Motor vehicle storage services
- Packing and crating services (other than those provided in connection with the sale of tangible personal property)
- Motor vehicle towing/road services
- Certain intrastate transportation services provided by livery (not including taxicab travel)
- Pet grooming, boarding and obedience services
- Services in connection with cosmetic medical procedures;
- Manicure and pedicure services
- Spa services, regardless where performed
Elimination of Certain Sales and Use Tax Exemptions
Effective July 1, 2011, sales and use tax applies to certain previously exempt services: (1) hazardous waste removal; (2) valet parking provided at airports; and (3) yoga instruction provided at a yoga studio.
Additionally, certain statutory sales and use tax exemptions have been eliminated—notably the exemption for clothing and footwear under $50, and the exemption for nonprescription drugs.
Other eliminated exemptions include those applicable to cloth, fabric, and yarn purchased for noncommercial use, services and tangible personal property used or consumed in operating solid waste to energy facilities, and products to assist in quitting smoking.
Click-Through Nexus Provisions
The legislation also adopts “click-through” sales and use tax nexus provisions.
Effective July 1, 2011, the definition of retailer is amended to include:
…every person making sales of tangible personal property or services through an independent contractor or other representative who is a resident of Connecticut, if the retailer enters into an agreement with the resident, under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an Internet web site or otherwise, to the retailer.
To be considered a “retailer,” gross receipts from sales as a result of these arrangements with Connecticut residents must exceed $2,000 during the preceding four quarterly periods.
Retailers meeting these criteria will be presumed to be soliciting business through the in-state residents and will be required to collect Connecticut sales and use tax.
As in the other states (except Illinois) that have adopted similar provisions, this presumption can be rebutted by proof that the in-state resident did not engage in any solicitation in Connecticut on behalf of the retailer that would satisfy the nexus requirement of the U.S. Constitution during the four quarterly periods. The legislation does not provide any guidance on what proof will be sufficient to rebut the presumption.
The fiscal impact statement associated with the legislation estimates that this change will raise $9.4 million each fiscal year.
20% Corporate Surtax
Connecticut corporate taxpayers currently must calculate their liability under both the corporation business tax and an alternative capital stock-based tax, and pay under whichever methodology results in a higher tax liability.
The current capital stock base tax rate is three and one/tenth mills per dollar of taxable basis and the current corporation business tax rate is 7.5%.
- For tax years commencing on or after January 1, 2009, and prior to January 1, 2012, a 10% corporate business tax and capital base tax surtax is imposed.
- For tax years commencing on or after January 1, 2012, but before January 1, 2014, the surtax is increased to 20%.
Note that the surtax does not apply to taxpayers that pay the $250 minimum tax, or that have less than $100 million in gross income for the tax year. However, taxpayers filing unitary or combined returns are subject to the surtax, regardless of income.
Elimination of Cap on Credits for Certain Taxpayers
Under prior law, the amount of credits allowed against corporation business tax could not exceed 70% of the tax due for the tax year prior to the application of credits.
Effective for tax years commencing on or after January 1, 2011, but before January 1, 2013, the legislation (Senate Bill 1239) allows certain taxpayers to exceed the 70% threshold by an amount equal to the taxpayer’s “average monthly net employee gain” multiplied by $6,000. A taxpayer’s “average monthly net employee gain” is computed as follows:
- For each month during the tax year, the taxpayer calculates the number of its in-state employees on the last day of the month from which it then subtracts the number of in-state employees on the first day of its income tax year.
- The taxpayer next totals the differences for the 12 months in the income tax year, and such total, when divided by 12, is the taxpayer's average monthly net employee gain.
For purposes of this computation, only employees who are required to work at least 35 hours per week, and only employees who were not employed by a related person, as defined under Connecticut law, within the 12 months prior to the first day of the income year may be taken into account in computing the number of employees.
Individual Income Tax Rate Increases
A significant revenue raising provision is the increase to the individual income tax rate. For tax years beginning on or after January, 1, 2011, the state’s highest marginal tax rate is increased from 6.5% to 6.7% and the threshold at which the highest marginal rate kicks in has been reduced by half.
For example, for joint filers, the 6.7% rate applies to Connecticut taxable income over $500,000. Previously, the 6.5% rate applied to Connecticut taxable income over $1 million. In addition, a surcharge applies to certain higher income taxpayers.
New Tax on Electric Generation Services
For each calendar quarter beginning on or after July 1, 2011, and prior to July 1, 2013, a new tax is imposed on persons providing electric generation services and uploading electricity generated at an electric generation facility in Connecticut to the regional bulk power grid.
The tax is the product of one-quarter of one cent, multiplied by the net kilowatt hours of electricity generated at the taxpayer’s Connecticut electric generation facility and uploaded to the regional bulk power grid.
The tax does not apply to any net kilowatt hours of electricity generated at an electric generation facility exclusively through the use of fuel cells or an alternative energy system.
For more information, contact a KPMG State and Local Tax professional:
Rick Hill, (860) 297-5044, rahill@kpmg.com
Stephen Kralik, (860) 297-5431, skralik@kpmg.com
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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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