1998 Connecticut Tax Developments

Publication year2021
Connecticut Bar Journal
Volume 73.

73 CBJ 1. 1998 Connecticut Tax Developments

1998 Connecticut Tax Developments


With the State's fiscal situation again strong, the 1998 session of the General Assembly did not see enactment of any significant tax increases and, as in the 1997 session, several measures were adopted either to alleviate tax burdens for businesses or to attract business location or expansion in Connecticut. Probably the most significant tax incentive legislative measures adopted in recent sessions were those directed to the financial services industry that, in several respects, set Connecticut apart from other states in its favorable income taxation of this industry. (fn1)

This article will survey the significant state tax law changes adopted by the Connecticut General Assembly in 1998 and those judicial decisions involving Connecticut taxes and administrative pronouncements of the Department of Revenue Service ("DRS") that are of general interest. In addition to these changes affecting law and practice, practitioners should take note of the wealth of information, forms and publications that the Department of Revenue Services makes available to the general public on the World Wide Web. The address is www.state.ct.us/drs.


A. Corporation Business Tax

The financial services legislation (fn2) is effective for 1999 and later years. Most important, it provides for a market-based regime for apportionment of income within and without the state by applying to the income of financial service companies a single factor destination sales formula, that is, one based on the location of the customer rather than the place where the costs of performing the service are incurred. (fn3) Such companies are also exempted from the additional capital-based tax imposed under Conn. Gen. Stat. § 12-219. (fn4) Noteworthy is the breadth of the definition of financial service company, which includes not only the traditional banking and lending institutions described as financial institutions in the Multistate Tax Commission Regulations that adopt a special apportionment regime for financial institutions (fn5) but also investment banks, rating agencies, providers of corporate trust services and transfer agents, among others. Omitted from the definition of financial service companies are insurance companies because the legislation also exempts domestic insurance companies completely from tax, (fn6) consistent with the preexisting exemption for foreign insurance companies. (fn7)

This general treatment of financial service companies is harmonized with the preexisting elective apportionment regimes applicable to mutual fund managers and ciredit card issuers. by continuing the prior election provisions until 2001 and 2002, respectively, at which time the new rules will become mandatory. (fn8) Importantly, the legislation does not require that a domestic financial service company establish that it is taxable in another state in order to qualify for apportionment, nor does it impose any throwback rule applicable to income apportionable to states where the taxpayer is not subject to tax. The thrust of the legislation is to encourage financial institutions that have a market outside of Connecticut to locate or expand operations here. Out-of-state financial institutions that are taxable in Connecticut may find that a larger portion of their income is taxable in this state based upon on their in-state market share.

An integral part of this legislation is a provision permitting financial service companies to establish tax-exempt mortgage subsidiaries that have an office in Connecticut and employ five or more individuals in the state. (fn9) To achieve revenue neutrality, the legislation includes a provision that disallows deductions for royalties and related interest expense incurred in connection with affiliates holding patents, trademarks, copyrights or similar intangible assets that are not mortgages. (fn10) The disallowances do not apply if the taxpayer establishes by clear and convincing evidence that the adjustments are unreasonable or if the Commissioner agrees in writing to an alternative method of apportionment under Conn. Gen. Stat. § 12-221a. (fn11) There is as yet no published guidance regarding what may be reasonable or unreasonable or on how procedurally a taxpayer may assert that an adjustment would be unreasonable. (fn12)

Another major accomplishment was the enactment of legislation providing for the deregulation of the electric industry. This involves "unbundling," that is, the provision by separate persons of the generation, transmission and distribution functions that are now provided by each electric utility. In connection with this legislation, the definition of taxpayer and company under the corporation business tax is modified to include specific reference to entities providing these services. (fn13) In addition, Conn. Gen. Stat. § 12-213(20) defining the term "carrying on or doing business" was amended to include suppliers and generators engaged in activity in Connecticut with the purpose of supplying electricity to Connecticut consumers. (fn14) The apparent intent of this amendment is to maintain within the tax base income earned from this sale of electricity to Connecticut consumers, whether earned by outof-state or in-state generators or suppliers. However, as a result of a drafting or typographical error, the meaning of this provision is less than clear.

The General Assembly also enacted a number of changes to the corporation business tax credit regime. One such change expands from biotechnology companies to all companies the application of the 15-year carryforward for the research and development credit. (fn15) Further, the incremental research and development credit of Conn. Gen. Stat. § 12- 217n .was amended to provide a 6% tentative credit for companies with less than $100 million of gross income. (fn16) Both of these changes are effective for income years commencing on or afterianuary 1, 2000. (fn17) Also, the electric industry restructuring legislation adds a one-time credit with respect to each electric worker displaced as a result of industry restructuring and employed for more than six months by an electric supplier. (fn18)

Other legislation related to tax credits provides ordering rules for overlapping credits. These are: First, credit carrybacks are applied in order of expiration but, if two or more expire at the same time, in the order of maximum benefit to the company; second, credits that may not be carried forward or backward are applied in the order of greatest benefit to the company; and third, carryforwards are applied in the order of their expiration but, if two or more expire at the same time, in the order of maximum benefit. (fn19) Interest from the due date of the relevant return is added to the tax credit recapture provisions of the 1997 fixed capital credit and the Conn. Gen. Stat. § 12-217p low and moderate income housing credit. (fn20)

The General Assembly made several other changes to the corporation business tax. The combined return rules were amended to allow corporations that have filed combined returns for at least five successive years to elect separate return status. Corporations that file separately for five successive income years may thereafter re-elect combined return status. This amendment is effective for income years commencing on or afterjanuary 1, 1998. (fn21) Further, the statutes now permit annualization of estimated tax liability, effective for income years commencing on or afterjanuary 1, 1999. (fn22) And, mirroring federal repeal of the so-called "Ten Commandments," the statutes now exempt from Connecticut tax a foreign corporation whose sole activity in Connecticut consists of trading in stocks, securities or commodities for its own account in accordance with Internal Revenue Code of 1986, as amended (hereinafter referred to as the "Code") § 864(b) (2) (A) (ii). (fn23)

Statutory amendments applicable to S corporations include the extension of Connecticut S corporation treatment to qualified subchapter S subsidiaries. (fn24) Also, S corporations are exempted completely from tax, effective in 2001 (fn25) and the S corporation return filing date is changed to the 15th day of the fourth month following the end of the income year. (fn26)

B. Sales and Use Tax Legislation

Changes to the sales and use tax had the effect of reducing the tax base somewhat, but the more important result is that in many instances these changes will simplify compliance and ease the administrative burden of the tax. Excluded from tax are all credits provided by a retailer for the trade-in of like kind tangible personal property to be held by the retailer for resale. (fn27) Also excluded are all coupons whether or not they are subject to reimbursement by the manufacturer. (fn28) Both these changes are effective for sales occurring on or after July 1, 1998. (fn29)

An interesting amendment to the sales tax was enacted as part of the legislation regarding the expected advent of the National Football League New England Patriots to Hartford. Added to the definition of a sale in Conn. Gen. Stat. § 12-407 (2) is the sale of naming rights to any place of amusement, entertainment or recreation as that term is defined in section 12-540(3) relating to the admissions tax. (fn30) The definition of place of amusement, entertainment or recreation in that section is amended to include stadiums, amphitheaters and convention sites. (fn31) Because naming rights is not a defined term, the scope of this amendment is unclear.

Amendments provide a full exemption for manufacturing machinery repair and replacement parts, in place of the existing partial exclusion, and extend the exemption to include enhancement parts. (fn32) In that connection, the refund provision...

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