Connecticut adjusts nexus, business entity tax provisions


Matthew DiDonato
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Art Burkard
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Rob Michaelis
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Nick Caputi
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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On June 26, 2019, Connecticut enacted budget legislation which modifies several tax provisions, including generally reducing the economic nexus threshold for remote sellers and marketplace facilitators from $250,000 to $100,000 in a twelve-month period, effective July 1, 2019.1 The new law also adopts a “mansion tax” which imposes an additional conveyance tax of 2.5% on transfers of residential property exceeding $2.5 million. The multiplier used to calculate the individual income tax credit for the Connecticut pass-through entity (PTE) tax paid is adjusted downward. Further, the legislation repeals the $250 business entity tax, phases out the capital stock base of the corporation business tax (CBT) and extends the CBT surcharge and credit limitations in effect.

Sales tax provisions With varying effective dates, the legislation makes changes to several sales tax provisions.

Economic nexus Effective July 1, 2019, and applicable to sales made on or after that date, the definition of “retailer” for sales tax purposes is modified to include remote sellers with at least $100,000 of gross receipts during the specified 12-month period.2 The additional condition that the remote seller make at least 200 sales from outside the state to destinations in Connecticut remains in effect. Further, the requirement that the person engage in regular or systemic solicitation of sales of tangible personal property in Connecticut is removed.

The term “engaged in business” is likewise amended to include those selling tangible personal property or services from outside Connecticut with at least $100,000 of receipts and 200 or more retail sales during the specified 12-month period.3 Similarly, the economic nexus threshold for click-through nexus is also lowered to $100,000 during the preceding four quarterly periods ending on the last day of March, June, September and December.4

Other changes The legislation modifies several other sales tax provisions. As of Jan. 1, 2020, sales tax applies to specified services, including dry cleaning and laundry services, as well as interior design services.5 Further, effective Oct. 1, 2019, short-term rental facilitators are included in the definition of “retailer” and required to collect and remit Connecticut room occupancy tax on short-term rentals facilitated on behalf of third-party operators.6 Related definitions are provided.7

Effective Oct. 1, 2019, the definition of “tangible personal property” is expanded to include digital goods.8 Specifically included is canned or prewritten software electronically accessed or transferred, other than when purchased by a business for its own use, and any additional content related to such software. “Digital goods” include audio works, visual works, audio-visual works, reading materials or ring tones electronically accessed or transferred.9 Digital goods are specifically excluded from the definition of computer and data processing services.10 Related provisions regarding qualification for the sale for resale exemption when a sale is ultimately made to consumers, along with substantiation requirements, are also amended and applicable to sales occurring on or after Oct. 1, 2019.11

The Commissioner of Revenue Services is required to consult with the Streamlined Sales Tax Governing Board to develop a list of certified service providers that can facilitate sales tax collection and remittance with the state.12 The Commissioner is directed to develop and submit a plan by Feb. 5, 2020, to the General Assembly to implement the use of certified service providers for the collection, reporting and remittance of sales and use taxes.

Finally, the sales tax rate applicable to certain sales made on or after Oct. 1, 2019, will be changing. Specifically, the rate applied to sales of digital goods and some electronically delivered software is increased from 1% to 6.35%;13 the rate applied to meals and beverages increases from 6.35% to 7.35%;14 and the rate applied to certain dyed diesel fuel decreases from 6.35% to 2.99%.15

Business tax changes The legislation modifies several provisions which will have a significant impact on businesses. Specifically, the individual income tax credit for the PTE tax is lowered, the business entity tax is repealed and the capital stock tax is phased out.

Individual income tax credit for PTE tax Legislation enacted last year created a new business entity-level tax on “affected business entities,” defined as partnerships, S corporations and limited liability companies treated as partnerships for federal income tax purposes, at a rate of 6.99%.16 The PTE tax is generally calculated based on the affected business entity’s taxable income as determined for federal income tax purposes under Internal Revenue Code (IRC) Sec. 702(a) on both separately and non-separately stated items flowing to equity holders to the extent they are derived from or connected to sources within the state as adjusted for state modifications.17

Each affected business entity’s individual shareholder, partner or member is allowed a Connecticut credit equal to a person’s direct and indirect pro rata share of the tax paid multiplied by 93.01%.18 For taxable years beginning on or after Jan. 1, 2019, the multiplier is reduced to 87.5%.19 A waiver is available for underpayment penalties resulting from this retroactive change.20

Business entity tax For taxable years beginning on or after Jan. 1, 2020, the existing $250 annual business entity tax is repealed.21

Capital stock tax base phaseout The CBT is calculated on the higher of two bases: (i) a corporation income tax base; and (ii) a capital stock tax base.22 Pursuant to the legislation, the capital stock tax base of the CBT will be phased out over a five-year period. Specifically, the rate decreases from 3.1 mills per dollar for tax years beginning prior to 2021, to 2.6 mills per dollar for years beginning in 2021, 2.1 mills per dollar for years beginning in 2022, and to 1.1 mills per dollar for years beginning in 2023.23 For years beginning on or after Jan. 1, 2024, the rate on the capital stock tax base equals zero.

CBT surcharge and credit limitation extensions For the past several years, Connecticut has imposed a surcharge on top of the statutory CBT rate. The surcharge, which was 10% for tax years beginning in 2018, has been extended for tax years beginning in 2019 and 2020.24 In addition, Connecticut historically has limited the amount of tax credits that can be used in determining the CBT.25 Since 2015, the general credit limitation has been 50.01% of the CBT due, with the ability to use excess credits for certain research and reinvestment expenses more liberally over time. The limitation amount on excess credits is 65% of the CBT for tax years beginning in 2018. For taxable years beginning in 2019 and thereafter, the ability to increase the credit limitation for excess credits from 50.01% to a higher level has been eliminated.26

Mansion tax Effective July 1, 2020, the new law imposes a marginal conveyance tax rate of 2.25% on the value of residential real property sales exceeding $2.5 million.27 The marginal rate of 0.75% continues to apply to sales with values up to $800,000, with a 1.25% rate applicable to sales between $800,000 and $2.5 million. Connecticut resident individuals are allowed a new corresponding state income tax credit for the conveyance tax paid.28 Specifically for tax years beginning on or after Jan. 1, 2021, taxpayers who pay the conveyance tax at the 2.25% rate are allowed a credit equal to one-third of the tax paid in each of the three taxable years following the second taxable year after the taxable year in which the conveyance tax was paid. Unused credits may be carried forward for a maximum of six taxable years.29

Other taxes The legislation makes several other changes to various provisions, including imposition of a fee on single-use plastic bags, tax on vaping products and the hospital provider tax.30

Commentary Since federal enactment of the Tax Cuts and Jobs Act (TCJA)31 in late 2017, states have responded in various ways. With this budget bill, Connecticut lawmakers have modified a provision they adopted effective for the 2018 tax year. Specifically, they may have decreased the benefit to some Connecticut residents from the creation of the PTE tax which conceivably allowed them to prevent the application of the $10,000 state and local tax (SALT) deduction limitation on individuals in the TCJA. It is interesting that the corresponding credit allowed against individual income tax, which was designed to make the creation of the tax revenue neutral, was so quickly reduced. According to the fiscal analysis of the budget, the measure is expected to generate $100 million in tax revenue.

The reduction of the PTE tax credit may require certain nonresident individuals to file Connecticut income tax returns. By applying the 93.01% credit as originally enacted, a nonresident individual was not required to a file a Connecticut income tax return if the nonresident’s only source of Connecticut income was a distributive share of income from a PTE that paid the PTE tax.32 However, the reduced credit of 87.5% will no longer wholly offset the nonresident’s Connecticut income tax liability. There has not been any mention of allowing composite returns to allow these nonresidents to file as part of a group. Thus, the nonresident individual may be required to file a Connecticut income tax return due to the reduced credit amount. The legislation provides that taxpayers are not liable for underpayment penalties for tax years beginning on or after Jan. 1, 2019, but prior to the June 26, 2019, effective date of the legislation.33 Because penalties are only abated for prior periods, nonresidents presumably are required to make estimated tax payments. Finally, it is curious that the legislature did not amend the PTE tax provisions to address guaranteed payments. The Connecticut Department of Revenue Services originally issued guidance that guaranteed payments are not included in the tax base,34 but subsequently provided a filing option for PTEs with nonresident members who receive guaranteed payments.35

By adopting a so-called “mansion tax,” Connecticut lawmakers have forayed into an area ripe with potential for controversy. The conveyance tax may have an adverse impact on residential real estate transactions in the state, which already had been under some pressure based on TCJA changes that served to reduce the utility of itemized deductions, including the capped SALT deduction and the limited deduction for mortgage interest. More significantly, this tax could raise constitutional issues for Connecticut sellers leaving the state. By allowing in-state residents a corresponding credit against individual income tax for real estate conveyance tax paid, it creates a potential disparity between the treatment of sellers of residential real property based solely upon their future destination. Furthermore, the new credit only is available to people who sell homes valued at greater than $2.5 million. Thus, a disparity exists between individuals based on the value of the home sold.

Finally, with this legislation, Connecticut joins the ranks of many states which have responded to the South Dakota v. Wayfair, Inc.36 decision by adopting bright-line economic nexus thresholds for remote sellers similar to those implicitly approved by the U.S. Supreme Court, as well as new economic nexus standards for marketplace facilitators.

1 Act 19-117 (H.B. 7424), Laws 2019.
2 CONN. GEN. STAT. § 12-407(a)(12)(G). Previously, the threshold was $250,000. The specified twelve-month period includes the period ending on the Sept. 30 immediately preceding the monthly or quarterly period with respect to which liability for sales tax is determined.
3 CONN. GEN. STAT. § 12-407(a)(15)(A)(v). Similar to the definition of “retailer,” the prior threshold was $250,000. Further, the “regular and systematic solicitation” language contained in this provision is removed.
4 CONN. GEN. STAT. § 12-407(a)(15)(A)(x).
5 CONN. GEN. STAT. § 12-407(a)(37)(PP), (QQ).
6 CONN. GEN. STAT. § 12-407(a)(12)(N).
7 H.B. 7424, Laws 2019, § 329. Definitions are provided for short-term rental, short-term rental facilitator, short-term rental operator and short-term rental platform.
8 CONN. GEN. STAT. § 12-407(a)(13)(N).
9 CONN. GEN. STAT. § 12-407(a)(43).
10 CONN. GEN. STAT. § 12-407(a)(37)(A). Note that computer and data processing services are taxed at 1%. CONN. GEN. STAT. § 12-408(1)(D)(i).
11 CONN. GEN. STAT. § 12-410(5)(C)-(E).
12 H.B. 7424, Laws 2019, § 331.
13 CONN. GEN. STAT. § 12-408. This is the result of digital goods being reclassified as tangible personal property subject to sales tax.
14 CONN. GEN. STAT. § 12-408(1)(I).
15 CONN. GEN. STAT. §§ 12-408(1)(E)(iii); 12-411(1)(D)(ii).
16 Act 18-49 (S.B. 11), Laws 2018. For a discussion of this legislation, see GT SALT Alert: Connecticut Enacts Legislation Responding to Federal Tax Reform Affecting Pass-Through Entities, Corporations and Individuals.
17 S.B. 11, Laws 2018, § 1(c).
18 S.B. 11, Laws 2018, § 1(g)(1)(A).
19 CONN. GEN. STAT. § 12-699(g)(1)(A), (B).
20 H.B. 7424, Laws 2019, § 334.
21 CONN. GEN. STAT. § 12-284b(B).
22 CONN. GEN. STAT. §§ 12-214; 12-219.
23 CONN. GEN. STAT. § 12-219(a)(1).
24 CONN. GEN. STAT. §§ 12-214(b)(8); 12-219(b)(8).
25 CONN. GEN. STAT. § 12-217zz.
26 CONN. GEN. STAT. § 12-217zz(3).
27 CONN. GEN. STAT. § 12-494(b)(2).
28 CONN. GEN. STAT. § 12-704c(d)(1).
29 CONN. GEN. STAT. § 12-704c(d)(2).
30 CONN. GEN. STAT. § 12-263q; H.B. 7424, Laws 2019, §§ 351; 355.
31 P.L. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
32 Office of the Commissioner Guidance OCG-7, Connecticut Department of Revenue Services, revised Feb. 15, 2019.
33 H.B. 7424, Laws 2019, § 334.
34 Office of the Commissioner Guidance OCG-6, Connecticut Department of Revenue Services, revised Feb. 15, 2019.
35 For further information, see Pass-Through Entities (PEs) with nonresident members who receive guaranteed payments, Connecticut Department of Revenue Services, available at:
36 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.

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