Connecticut Gov. Dannel Malloy has signed a budget bill that makes numerous changes to the state’s corporation business tax and personal income tax laws. Among other things, the legislation modifies the state’s economic nexus standards, lifts certain restrictions on the transfer of film tax credits, limits certain tax incentives for businesses located in former aerospace or defense plants, provides additional options if corporate estimated taxes are overpaid, revises certain tax withholding provisions, and adjusts the penalties for the failure to pay taxes electronically.
The legislation (1) requires a company to meet both, rather than one, of the existing criteria to have economic nexus in Connecticut, and (2) exempts certain foreign corporations from economic nexus in conformity with the Department of Revenue Service’s (DRS) current policy. The changes are effective June 21, 2011, and apply to income years beginning after 2010.
Under current law, and to the extent allowed by the U.S. Constitution, a company is subject to the Connecticut corporation tax if, regardless of physical presence, it (1) has a “substantial economic presence” in the state, or (2) derives income from sources in the state. The legislation requires that, to be subject to the Connecticut tax, a company meet both, rather than only one, of these conditions.
The legislation also makes the law conform to DRS policy by exempting from the corporation business tax any company that (1) is treated as a foreign corporation under the federal tax code, and (2) has no income “effectively connected” with a U.S. trade or business, as determined under federal tax law. If, and to the extent that, a company treated as a foreign corporation has income effectively connected with a U.S. trade or business, that income is considered to be its gross income for Connecticut corporation tax purposes, regardless of other corporation tax statutes. In addition, when such a company calculates its net income apportionment fractions to determine its Connecticut corporation tax liability, the legislation requires it to do so using only its U.S.-connected property, payroll, and receipts.
Film Tax Credits
Under current law, the maximum transfer of film production tax credits allowed is limited (1) to 50% of the credit in any one income year for 2011, and (2) to 25% of the credit in any one income year in 2012 and beyond. However, entities subject to the corporation or insurance premium tax are exempt from these transfer restrictions. Effective July 1, 2011, the legislation extends this exemption to entities that are not subject to these taxes if they own at least 50% of another entity subject to the business entity tax.
Tax Incentives for Aerospace and Defense Plants
Connecticut law currently provides certain tax incentives (e.g., for improving property, acquiring machinery and equipment, and creating jobs) for a business facility located in a building that was vacant on July 1, 1998, and was formerly used for defense manufacturing or as a major aerospace or defense plant. The legislation modifies the incentive requirements with regard to a business facility located in a building that was vacant after June 21, 2011, and that was formerly a major aerospace or defense plant so that the former aerospace or defense plant had to have at least 800 employees for the incentives to apply.
Estimated Corporate Tax Overpayments
A corporation must make estimated corporation tax payments in four installments during its income year. If a corporation overpays one installment, the excess must be credited against the next installment. However, if the amount paid for the year exceeds the amount due for that year, current law dictates that the company receive a refund. Under the new legislation, a company that has overpaid its estimated corporation tax in one income year has the option to apply the excess to its estimated taxes in the following year instead of receiving a refund. This change is effective October 1, 2011, and applicable to estimated corporation business tax payments for income years beginning after 2011.
The legislation also makes changes to various withholding statutes. For example, under current law, the DRS can require employers with more than $2,000 in annual income tax withholding liability from wages to pay the taxes electronically. The legislation allows the commissioner to require electronic payments from any payers that had more than $2,000 in income tax withholding liability from nonpayroll amounts as well. The DRS must determine a payer’s annual withholding tax liability based on the amount the payer withheld from nonpayroll amounts in the calendar year two years before the one in which the DRS makes the determination. These changes are effective July 1, 2011, and applicable to tax periods ending on or after that date.
In addition, under the new legislation, when an employer that is required to pay withholding taxes sells or quits its business, or sells out its entire stock, the employer’s successors or assigns must hold back enough money from the purchase price to cover any unpaid withholding taxes, penalties, or interest due when the employer sells or quits. The buyer must hold back the money until the employer provides either a DRS receipt showing that the employer has paid all taxes, penalties, and interest or a DRS certificate stating that no taxes are due. If the buyer fails to hold back the money, the legislation makes the buyer personally liable for the amount that should have been withheld, up to the monetary value of the purchase price of the business or stock. The legislation also requires the DRS to issue the certificate or mail the buyer a tax deficiency assessment notice according to the regular procedure for such notices within 60 days after the latest of the following: (1) the date the DRS receives the buyer’s written request for a certificate that no taxes are due, (2) the date the employer sold or quit the business, or (3) the date the employer’s records become available for DRS audit. If the DRS fails to mail the deficiency assessment notice in time, the buyer need not hold back money from the purchase price. The statutory three-year time limit for enforcing the successor’s liability starts when (1) the employer sells or quits the business, or (2) the assessment against the employer becomes final, whichever is later. These provisions are effective July 1, 2011, and apply to sales of businesses and stock occurring on or after that date.
Furthermore, under current law, the DRS has six years, rather than the usual three, to send an income tax deficiency assessment notice to a taxpayer that omits more than 25% of its includible Connecticut adjusted gross income (AGI) from its income tax return without giving the DRS adequate notice of the amount and nature of the omission in either the return itself or an attached statement. The legislation extends the same six-year the time limit for the DRS to send a tax deficiency assessment notice to (1) an employer that omits more than 25% of Connecticut wages from its withholding tax return, or (2) a pass-through entity that omits more than 25% of includible Connecticut-sourced AGI from the withholding taxes required for its nonresident members. This change is effective June 21, 2011, and applies to tax years beginning after 2010.
The current penalty for failing to pay taxes electronically when required to do so is 10% of the required electronic payment, regardless of the amount of that payment. Starting with the first imposition of a penalty for a tax period starting after 2011, the legislation establishes maximum penalties of 10% or $2,500, whichever is less, for the first failure to pay electronically, and 10% or $10,000, whichever is less, for the second failure to pay electronically. The legislation maintains the existing 10% penalty with no maximum for a third or subsequent failure.
Provisions in the legislation concerning sales and use taxes are reported separately. (TAXDAY, 2011/06/22, S.8) Provisions in the legislation concerning insurance premiums taxes and other tax-related provisions will be covered in future stories.
Act 11-61 (H.B. 6652), Laws 2011, effective and applicable as noted