Survey of 1995 Connecticut Tax Developments
| Pages | 11 |
| Publication year | 2021 |
70 CBJ 11. Survey of 1995 Connecticut Tax Developments
The year saw a number of significant developments in Connecticut taxation. Legislation had a decidedly pro-business focus, with the scheduled reduction in the corporate tax rate to 7.5%, the enactment of estimated tax safe harbors, and the expansion of Corporate tax credits and sales tax exemptions. However, fiscal constraints forced delays in the effective dates of some of these tax relief measures and, importantly, of the phase-out of the sales tax on computer and data processing services enacted in 1994.
Under the leadership of a new Commissioner, Gene Gavin, the Department of Revenue Services (hereinafter referred to as "DRS") continued to develop its "user friendly" theme, evidenced in part by the increase in the number of publications providing guidance to taxpayers and practitioners and by the formation of working groups to address issues of interest to the business community.
The volume of court decisions remains fairly high, although the Tax Session has reduced the backlog of pending cases. As the number of pending cases has declined, the Court has begun to hear property tax appeals, and, at the request of the judiciary, the General Assembly in 1995 expanded the jurisdiction of the Tax Court to include property tax cases statewide. At the close of the year, judge Aronson assumed senior status but will remain actively involved in the work of the Tax Session.
A. Corporation Business Tax
1. In General
As mentioned, the General Assembly extended the staged reduction of the corporation business tax rate on income, originally enacted in 1994, adopting the following rates of tax for the periods indicated:
Income Years Beginning Rate
1996 10.75%
1997 10.50%
1998 9.50%
1999 8.50%
2000 or thereafter 7.50% (fn1)
This legislation reflects a significant departure from the recent past when Connecticut's 13.75% corporate income tax rate was the highest in the country.
Also addressed were the issues raised by pending refund claims, asserting that the state has violated 31 U.S.C. § 3124(a) by providing exemption under the corporation business tax for interest on certain state level obligations while taxing in full interest on federal obligations. The legislation repealed retroactively to January 1, 1992 the exemption for interest on all state and local obligations, treating the repeal as an act of eminent domain and providing for payment of compensation for such taking. Any ultimately awarded refund of tax paid on federal interest will be net of related expenses. (fn2)
2. Tax Credits
The current year's legislation also affected several corporate tax credits. The preconditions for claiming the substantial credit adopted in 1994 to encourage large-scale investment in Connecticut by financial institutions were relaxed. The three-tiered credit structure now applies as follows:
At least 1200 30%
At least 1600 40%
2000 or more 50% (fn3)
Delayed from 1995 to income years commencing on or after January 1, 1997 was the section 12-217o credit for incremental increases in expenditures for machinery and equipment for facilities located in Connecticut, (fn4) and the section 12-217s credit for
expenditures related to transportation management programs. (fn5) Further, the availability of the credit for property taxes paid on electronic data processing equipment was delayed until 1997 in the case of the taxes on insurance premiums, air carriers, railroad companies, and utility companies. However, this credit remains currently available for the corporate and unrelated business income taxes. (fn6)
The legislature adopted a new credit for incremental increases in apprenticeships in plastics and plastics-related trades under a qualified apprenticeship training program certified under regulations of the Labor Commissioner, effective for income years commencing in or after 1995. (fn7) The credit is a function of hours of apprenticeship training conducted during prescribed periods, subject to the lesser of $4,800 or 50% of actual wages paid during an income year for each apprenticeship.
Legislation in 1995 also eliminated overlap among the tax credit provisions of sections 12-217i, 12-217q and 12-217r relating to alternative fuel and consolidates them in section 12-217i, effective for income years commencing in or after 1994. (fn8) These credits are at the 50% level with the exception of the credit for incremental increases in the cost of vehicles powered by clean alternative fuel, which is at 10%. Other legislation clarified that the credit for transportation management programs includes expenses incurred since January 1, 1995, although the effective date of the credit is for years beginning in 1997 and later. (fn9)
In other actions affecting credits, the Department of Economic Development is now authorized to include within an enterprise zone the entire area covered by a project conducted under the Economic Development and Manufacturing Assistance Act of 1990 or the Municipal Development Project Act of 1967 if more than 25% of the project's designated area is located within an enterprise zone. (fn10) Finally, a critical industries development account was established, within the General Fund to permit Connecticut Innovations, Inc. to provide financial assistance to customers of businesses in critical industries based in the state, ef
fective July 1, 1995. (fn11) Taxpayers investing in the critical industries development account are provided a credit in an amount determined by multiplying the amount of the investment by a percentage which is four points less than the average cost of capital for development projects financed by the Connecticut Development Authority.
3. Estimated Tax Reform
In addition to enacting legislation affecting credits, the General Assembly addressed a problem faced by payers of estimated corporate tax who found themselves liable for the interest penalty when unanticipated income was received after the second payment had been made. This resulted from the lack of provision for safe harbors based on prior year taxes other than that for the first installment payment. However, for 1996 and later estimated tax payments, "required annual payment" will be the lesser of 90% of the actual tax for the current income year or the following percentages of tax for the immediately preceding year:
1996 200%
1997 175%
1998 150%
1999 125%
2000 or thereafter 100% (fn12)
Installments will continue to be front-loaded, with the requirement that a corporation pay, in sequence, 30%, 40%, 10% and 20% of the "required annual payment" for the four annual installments. Interest applies at the rate of one percent per month for any underpayment. The Act includes authorization for the Commissioner to issue regulations addressing, among other things, short tax periods and crediting against estimated tax overpayments for a preceding taxable year. (fn13)
B. Sales and Use Tax
1. Measure of Tax
Among the more important sales and use tax changes was adoption of a one-year deferral of the phaseout of the tax on computer and data processing services, with the rate of tax declining from the current 6% to zero over the period July 1, 1997
through July 1, 2002. (fn14) Delay in the phaseout of this tax means that companies will continue to confront the difficult issues of interpretation that have confounded taxpayers and administrators since adoption of the tax in 1975. Also deferred for one year is the effective date of the repeal of the tax on tax preparation services for nonbusiness tax returns and of the exclusion of auctioneer services from taxable sales agent services. (fn15) Newly excluded from tax, effective July 1, 1997, are services of off-duty police officers at construction sites, motor vehicle parking space in municipally operated railroad parking facilities located in severe ozone nonattainment areas and the services of licensed hypertrichologists. (fn16)
2. Exemptions
The General Assembly made technical changes to a variety of sales and use tax exemptions, including extension of the section 12-412(8) exemption for charitable and religious organizations to any organization that is exempt from federal income tax under subsection 501(c)(3) of the Internal Revenue Code. (fn17) The legislation eliminates the difficulty previously experienced by self-sustaining organizations in establishing their exempt status. Further, the entity's determination letter issued by the Internal Revenue Service will now suffice to evidence its exempt status, eliminating the need for the DRS to review applications and issue exemption certificates. (fn18) Also modified were the section 12-412(70), (82) and (83) exemptions for commercial motor vehicles to limit to one year, commencing with the date of purchase, the requisite period of active and exclusive use in interstate commerce. (fn19)
Another significant change was the expansion of the preexisting section 12-412(44) exemption for motion picture, video or sound production activities to include production equipment and any materials which become an ingredient or component part of master tapes, records, video tapes or film produced for commercial purposes. (fn20) The expanded exemption reflects the growth of the film and sound production industry in Connecticut.
Other modifications of existing exemptions include extension of the section 12-412(19) exemption for certain medical materials and equipment to repair services rendered to such exempt property, effective July 1, 1995. (fn21) Also modified was the section...
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