Survey of 1996 Connecticut Tax Developments
| Pages | 13 |
| Publication year | 2021 |
71 CBJ 13. SURVEY OF 1996 CONNECTICUT TAX DEVELOPMENTS
For the second year in a row a positive fiscal climate permitted the General Assembly to continue its pro business approach to tax legislation. Further corporate tax credits and exemptions were enacted and the Assembly also focused on the effects of tax policy on economic development. The reduction in the corporate tax rate continues as scheduled and a number of task forces are studying additional ways to r-ationalize and simplify the tax laws and make Connecticut a more attractive state in which to conduct business.
The tax business of the courts was relatively brisk, with the work of the appellate courts fueled by the Tax Court's heavy docket of -recent years. With the reduction in the Tax Court's backlog, some changes have been made to insure that the judges have a full workload.
A. Corporation Business Tax
Perhaps the most innovative tax legislation adopted in 1996 was the establishment of a financial services export zone in the City of Hartford.(fn1) Qualifying insurance and financial entities formed solely to conduct business within the zone will be permitted to conduct business with non-United States persons without becoming subject to the insurance premiums tax and the corporation business tax. This legislation is effective for income years commencing on or after January 1, 1996, but will likely achieve its intended beneficial economic effects only upon the enactment of comparable federal tax relief for organizations operating in this and similar financial service export zones around the country. The Connecticut congressional delegation is actively pursuing such federal legislation.
Another legislative enactment aimed at the expansion of the financial services industry in Connecticut adopts the New York "Dreyfus Rule" for the apportionment of the income of regulated investment company ("RIC") managers.(fn2) Proposed by the Department of Revenue Services ("DRS"), the Act permits apportionment based on the percentage of RIC shareholders located in Connecticut relative to shareholders everywhere. The same Act provides a similar market-type apportionment rule for securities brokerage firms. In legislation focused on the motor carrier industry, new.legislation requires carriers to apportion their net income on the basis of miles traveled in ConneCtiCUL (fn3)
Another DRS proposal enacted during 1996 provides detailed rules for the taxation of corporations that participate as general or limited partners in partnerships or limited liability partnerships or as members of limited liability companies.(fn4) The Act proceeds from the premise that a partner in a parEnership doing business in Connecticut is itself doing business in Connecticut. Importantly, the Act provides a blanket rule that a corporation will not become subject to Connecticut income tax solely because of its participation as a limited partncr in an investment partnership doing business in Connecticut. With regard to corporations participating as limited partners in other kinds oflimited partnerships, the legislation opts for separate accounting rather than inclusion in the corporation's apportionment formula of its share of the partnership's property, payroll and receipts.(fn5) The treatment provided for participation in limited liability partnerships and limited liability companies par-allels that provided for partnerships. Additionally, definitions are provided distinguishing a corporation acting as a general partner from one acting as a limited partner in the context of a limited liability company. (fn6)
Other corporate tax nexus provisions include one stating that a foreign corporation that contracts with a Connecticut commercial printer will not be subject to corporation business tax by reason of its maintenance of inventory in Connecticut in connection with the contract or the presence of employees engaged in quality control services at the printer's facility.(fn7) An additional nexu&-related statute provides that corporations whose net income is immune from tax under federal law such as Public Law 86-272(fn8) are nevertheless subject to the capital base and minimum taxes. (fn9) Ibis provision is effective for income years commencing on or after January 1, 1996.
Additionally, the General Assembly adopted legislation to phase out the corporation business tax on subchapter S corporations by reducing iri annual increments the percentage of corporate net income subject to tax.(fn10) For an income year beginning during 1997, ninety percent. of net income would be subject to the corporate tax, for 1998 seventy-five percent, for 1999 fifty-five percent, for 2000 thirty percent, and for years beginning on or after January 1, 2001 subchapter S corporations would be exempt. The exempt amount is treated as a passthrough distribution to shareholders. The statute creates what could be for some entities a tax imbalance. by prohibiting subchapter S corporations from claiming any corporate tax credit during the phaseout rather than phasing credits out based on the percentage of corporate income subject to tax.
In addition to the credit provisions discussed below, two additional enactments are worthy of mention. One authorizes the commissioner to adopt regulations relating to the survival of net operating losses following the merger or consolidation of corporations.(fn11) The Act indicates that such regulations "may follow the provisions of the Internal Revenue Code of 1986." This is apparently a reference to the rationale employed in the case of Gmde A MaA4 Inc. v.Comm4sioner,(fn12) which is discussed in more detail in ILAL below. Additional legislation pr-ovides that expenses related to income that the State is prohibited from taxing are not deductible for purposes of the corporation businesstax. (fn13)
The 1996 session saw significant activity in the creation, modification and extension of corporation business tax credits. The legislature reinstated in part the corporation business tax credit for purchases of machinery and equipment by small and medium-size businesses. In the 1995 legislative session this credit was deferred until January 1, 1997. New legislation treats as eligible for the 1997 credit expenditures made in the period January I through May 31, 1995.(fn14) Also reinstated was the Insur-ance Premiums and Public Service Companies Taxes credit for property taxes paid on electronic and data processing equipment.(fn15) This Act also institutes a new five-year carryforward for any unused electronic data processing property tax credits under the corporation business tax.(fn16)
The General Assembly expanded the availability of enterprise zone creditS (fn17) and established a new business corporation tax credit applicable to corporations formed on or after January 1, 1997 that in enterprise zones employ individuals in excess of prescribed thresholds.(fn18) This credit is 100% of a corporation's tax liability for its initial three income years and 50% of its liability for the next seven years.
Other important credit legislation includes allowance of a 15-year carryforward for unused corporation business tax credits related to the incremental increases in research and development expenditures made by biotechnology companies.(fn19) Also, the credit for alternative vehicle power sources was expanded to include the purchase and installation of equipment incorporated into or used in a liquefied petroleum gas or liquefied natural gas filling station. (fn20) Other credits affected by 1996 legislation include the transportation management credit of Conn. Gen. Stat. § 12-217s, (fn21) the day care credit(fn22) and the critical industries credit.(fn23)
Public Act 96-260 would have consolidated more than three dozen corporate tax credits into two broad-based credits, one for fixed capital expenditures and the other for human capital expenditures, but was vetoed. However, elimination and consolidation of overlapping credits are likely to be matters of legislative interest in future sessions.
A Sales and Use Tax
The legislation treating activities in connection with a contract with a commercial printer as not creating nexus for corporate tax purposes applies to preclude nexus for purposes of the sales and use tax.(fn24) The legislature also eliminated the sales tax on transportation services, effective July 1,1996.(fn25) Also phased out is the sales and use tax on the repair and maintenance services to vessels.(fn26) The phaseout is accomplished by reducing the rate of tax to four percent for sales made on or after July 1, 1997 and to two percent after July 1, 1998. The tax is eliminated for sales made on or after July 1, 1999.
With respect to tax exemptions, the legislation establishing a financial services export zone in the City of Hartford exempts from sales and use taxes purchases by financial entities formed to conduct business in the zone.(fn27) Further, a new exemption is provided for the sale or use of machinery, equipment, tools, supplies, and fuel used directly in the biotechnology industry.(fn28) Legislation also provides a new exemption for sale or use of machinery, equipment, tools, and materials used in the commercial processing of photographic film and paper.(fn29)Finally, 1996 legislation provides to owners of motor buses a, trade-in allowance against their purchases of remanufactured parts coextensive with that granted to owners of trucks by 1995 Conn. Acts 95-327, § I (Reg. SM.).(fn30)
Amendments to the Connecticut income tax were largely technical in nature. The General Assembly adopted legislation providing that the income tax credit for property taxes paid on a primary residence or motor vehicle cannot exceed $100.00 on ajoint...
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