Improving the Connecticut Tax System: a Tax Practitioner's Wish List
| Publication year | 2021 |
| Pages | 213 |
79 CBJ 213. IMPROVING THE CONNECTICUT TAX SYSTEM: A TAX PRACTITIONER'S WISH LIST
Vol. 79, No. 4
December 2005
Your author commenced the practice of tax law with a Hartford law firm in 1970 and has since represented both individual and business taxpayers in matters involving Connecticut's array of income, sales and use, excise and other taxes. The practice has included extensive interaction with the tax professionals of the Connecticut Department of Revenue Services ("DRS"), prosecution of tax appeals at all levels of the Connecticut court system, and participation in the legislative process. Having attained the self-annointed status of a sage, your author endeavors in this paper to identify ten ways in which the Connecticut tax system and the manner in which it is administered might be improved. The focus is not on the technical, narrow concerns that bedevil the average tax lawyer, but on broader themes that have emerged over the course of years. 1.
Apply tax incentives in a manner consistent with theirgoals.
As in all of the states, Connecticut tax laws reflect not only the General Assembly's determination of the appropriate sources of tax revenue but, also, reasoned decisions to provide tax incentives for various types of activities that further the interests of the state. These manifestations of legislative tax policy take several forms, including exemptions from tax, deductions, tax credits and methodologies to attribute income or other aspects of the tax base within or without the state. In some instances, the favored tax treatment is accorded to entities that are traditionally free from tax around the country, such as governments, educational institutions and charities.1 In other cases, however, relief from taxation reflects a particular legislative determination that certain activities otherwise subject to tax should be afforded relief in order to stimulate desirable results, such as economic investment and job-creation. Thus, we have broad sales and use tax exemptions for taxpayers conducting biotechnology businesses,2 favorable income apportionment rules for financial service companies and manufacturers,3 and tax credits for the conduct of research and development within the state.4 In Connecticut, however, provisions of this type that are designed to stimulate targeted activity have often been administered by the DRS and construed by the courts in an hyper-technical manner that runs counter to the underlying legislative goals.
The seed of the problem is the rule of statutory construction for tax statutes that seems to have first been applied by the Connecticut Supreme Court in the 1960s and then religiously followed ever since. Drawn from English and American common law, the rule is articulated as follows:
First, statutes that provide exemptions from taxation must be strictly construed against the taxpayer. Second, any ambiguity in the statutory formulation of an exemption must be resolved against the taxpayer. Third, the taxpayer must bear the burden of proving the error of an adverse assessment concerning an exemption.5
The rule of construction applies similarly to deductions or other tax benefits and the corollary of the rule is that tax imposition statutes are strictly construed against the taxing authority.6
In application, the rule of construction regarding exemptions and other tax benefits generally means that taxpayers litigating to establish entitlement to an enacted tax incentive over objection of the DRS lose their cases most of the time. By your author's informal tally, in nearly 40 cases in which tax exemptions or similar benefits have been at issue before the Connecticut Supreme Court and in which the court has applied the rule of strict construction, the taxpayer has prevailed in only five cases. In cases involving tax imposition statutes, the tilt against the state is not nearly as extreme. This application of the rules of construction regarding tax benefits has encouraged DRS examiners to nitpick their way through the tax incentive provisions with the knowledge that they will likely be sustained in court. However, in your author's view, tax administrators should not guard tax incentives as they might the Holy Grail and judicial construction of statutes clearly intended to stimulate a targeted economic activity for the common good is in need of reexamination.
2. Respect separate corporate taxpayers.
The states are almost evenly divided between those that tax affiliated groups of corporations on a combined basis wherever located (so-called "unitary" states) and those, like Connecticut, that impose their corporate income tax separately upon each corporation that is taxable within the state ("separate return" states).7 Under a unitary-tax regime, the income of all members of a unitary group of corporations is combined and tax applies to the resultant net income apportioned to the state. Connecticut has never adopted a unitary corporation tax and proposals to do so over the years have never come close to enactment except for a short-lived measure that was enacted and immediately repealed in 2003.8
Notwithstanding the General Assembly's policy decision to remain a separate-return state, the DRS has for years focused on the potential for revenue drain inherent in such a system and sought to achieve de facto unitary treatment through the use of its statutory authority to adjust arrangements among affiliated companies in order fairly to reflect income.9 The aim of much of this effort is to deny tax effect to situations in which intercompany transactions among affiliates result in income for the affiliate located outside of Connecticut and, in some instances, deductions reducing the taxable income of...
To continue reading
Request your trial