Connecticut Budget Bill Taps Digital Commerce and Out-of-State Vendors for Additional Revenue; Repeals Business Entity Tax

On June 26, 2019, the Connecticut Budget Bill (HB 7424) (the Bill) was signed into law by Governor Ned Lamont. Highlights of the recently enacted Bill include the following changes:

• Raising the sales and use tax rate imposed on electronically accessed or transmitted digital goods and canned or prewritten software from 1% to 6.35% (effective October 1, 2019);
• Reducing Connecticut’s economic nexus threshold for sales and use tax from $250,000 and 200 transactions to $100,000 and 200 transactions (in a 12-month period) (effective July 1, 2019);
• Repealing the Business Entity Tax and sunsetting the Capital Base Tax;
• Reducing the pass-through entity tax credit from 93.01% to 87.5%; and
• Extending the Angel Investor Credit for five more years.

Below are more details and highlights of key tax provisions in the Bill. Both businesses and individuals should closely analyze these changes and make note of the various effective dates.

Rate Changes

Under Connecticut law, computer and data processing services are subject to a reduced sales and use tax rate of 1%. However, effective October 1, 2019, electronically accessed or transmitted digital goods such as movies, and online books, and canned or prewritten software will be subject to Connecticut’s full sales and use tax rate of 6.35%. The Bill provides for a sale for resale exemption for these items if:

(1) the purchaser subsequently sells, licenses or leases the unaltered software to an ultimate consumer;

(2) the digital goods are an integral, inseparable component of another digital good or specified taxable service that the purchaser ultimately sells, licenses, leases in whole or in part to an ultimate consumer; or

(3) the taxable services sold are an integral and inseparable part or digital goods that the purchaser later resold to an ultimate consumer.

In addition to the sale for resale exemption, the 1% rate is maintained for the sale of electronically delivered canned or prewritten software when purchased by a business for use by such business.

The Bill also provides for the reduction of the admission tax rate on certain venues from 10% to 7.5% for sales on or after July 1, 2019, and from 7.5% to 5% for sales occurring on or after July 1, 2020.

Please consult the full text of the Bill for additional rate changes and details.

Economic Nexus Changes

Effective July 1, 2019, persons making retail sales of tangible personal property and services from outside Connecticut to within the state are subject to Connecticut sales tax if they have gross receipts of $100,000 and 200 transactions in the state in a 12-month period. Connecticut’s prior economic nexus provision only applied to tangible personal property and set the threshold for collection at $250,000 and 200 transactions in a 12-month period. Similarly, the Bill reduces Connecticut’s click-through nexus threshold to $100,000 instead of the previous $250,000.

The Bill also eliminates the requirement that retailers be regularly or systematically soliciting sales in Connecticut in order to establish economic nexus.

Business Entity Tax Repealed

Beginning January 1, 2020, the Bill sunsets Connecticut’s Business Entity Tax which requires certain business entities (e.g., limited partnerships, limited liability companies and S corporations) to pay a $250 tax every other taxable year.

Reduction of Pass-through Entity Tax Credit

Less than two years since its initial passage, the credit offered in conjunction with Connecticut’s pass-through entity tax is reduced by the Bill from 93.01% to 87.5%. These credits, offsetting at the personal or corporate income tax level (depending on the pass-through entity’s members), will be reduced effective January 1, 2019, though no estimated tax payments or interest on resulting underpayments will be assessed.

Capital Base Tax Phase Out

Under current Connecticut law, the corporation business tax rate for most corporations is (1) 7.5% of net income; (2) 3.1 mills per dollar (0.31%) of capital base (up to $1 million); or (3) $250, whichever is greater. However, from 2021 to 2024 the Bill phases out the Capital Base Tax from the current 3.1 mills to 2.6 mills in 2021, 2.1 mills in 2022, 1.1 mills in 2023 and zero in 2024.

Angel Investor Credit Extended

Effective July 1, 2019, the Angel Investor Credit program is extended by the Bill for five years to July 1, 2024. In addition, the total credits allowed to an angel investor is increased from $250,000 to $500,000 with an increased reservation in aggregate credits by the program administrator of $5 million. These changes are the latest in a chain of several developments that have made the angel investor program more attractive. Another recent change allows investors, including those who live outside of Connecticut, to sell or assign to in-state residents the credits they earn from investing in Connecticut-based startups.

The Takeaway

Connecticut-based business taxpayers will likely cheer the repeal of the business entity tax, capital base tax phase out and the extension of the Angel Investor Credit. But out-of-state vendors with Connecticut customers can expect greater sales tax collection compliance duties as a result of the lower economic nexus threshold. Because this Bill is an omnibus budget bill, additional guidance is expected from the Connecticut Department of Revenue Services regarding the finer points of many of the provisions. Please reach out to an Andersen SALT professional if you have questions on how these recent Connecticut tax law changes may impact you and your business.