2006 Connecticut Tax Law Developments
| Publication year | 2021 |
| Pages | 43 |
81 CBJ 43. 2006 CONNECTICUT TAX LAW DEVELOPMENTS
Volume 81, No. 1
March 2007
In contrast to 2005, the 2006 legislative agenda focused on business tax incentives in the form of several new or expanded corporation business tax credits. There was less legislative activity affecting the sales tax, but what there was involved the expansion of exemptions. On the judicial front, important decisions include Icon Holding1 and Blasko,2 which serve to mark the scope, however indistinctly, of the proper exercise of the Superior Court's equitable powers. Two contrasting cases are Message Center,3 which confirmed the courts' commitment to the true object test in the context of the sales tax, and Old Farms Associates4 in which the Supreme Court applied the principle that separate entities are presumed separate to hold that the form of real estate conveyances chosen by the taxpayers must be respected. Among the administrative developments discussed is the publication of Announcement AN 2006(7),5 in which the Department of Revenue Services,6 after consultation with tax practitioners and business representatives, withdrew a paragraph published in the Building Contractors' Guide7 suggesting that otherwise exempt purchases by turnkey contractors would be taxable, and reverted to its time-honored position that such purchases may be made free of tax when the facts and circumstances indicate that that is the correct result.
1. Corporation Business Tax
In 2006, the General Assembly enacted several key corporate business tax initiatives focused on fostering job creation and economic development, including the elimination of the corporate tax surcharge, a new job creation tax credit, a displaced worker tax credit, and a film industry tax credit.
Legislation eliminated the final year of the 15% corporate tax surcharge on net income and capital that was to apply for income years beginning on or after January 1, 2007 and ending before January 1, 2008.8
The General Assembly enacted two new credits aimed at increasing employment in Connecticut, both effective for income years beginning on or after January 1, 2006. First, companies that create at least 50 new, full-time jobs and retain them for at least 12 months may be entitled to a jobs creation credit.9 The credit is equal to 25% of the state income tax withheld from each new employee's wages for up to 5 years. The credit can be claimed only in the year in which it is earned. Second, for companies that hire workers who have been displaced or laid off by a Connecticut employer as a result of a business restructuring in which at least 10 people were terminated, a credit is available equal to $1,500 per qualifying employee, who must be paid at least 75% of his or her prior annual compensation.10 The credit can be claimed only in the year in which the displaced employee first completes 12 full months of full-time employment with the taxpayer.
Effective for applicable projects beginning on or after September 1, 2005, the corporate partners of a partnership or other pass-through entity that engages in certain qualifying expansion projects will be entitled to a new employment expansion project tax credit.11 In order for the partners to be eligible for the credit, the partnership or pass-through entity must conduct a qualifying expansion project that creates at least 400 permanent, full time jobs in Connecticut over 5 years. The credits can be transferred between corporate owners of the entity. Credits can be carried forward to income years following the income year in which the qualifying expansion project begins.
Under the film industry tax credit enacted in 2006, certain production companies incurring "qualified production expenses" in excess of $50,000 are eligible for a credit, equal to 30% of such expenses, against the corporation business tax.12 The credit is available to business entities qualified to do business in Connecticut that are engaged in the business of producing "qualified productions." Qualified productions generally include a variety of media productions, except news, weather, financial market reports, and pornographic or obscene material. The credits may be transferred, in whole or in part, to another taxpayer, provided that they are used in a year in which the production company would have been eligible to use the credit. This tax credit is administered by the Connecticut Commission on Culture and Tourism.
A new historic properties tax credit, equal to 25% of the construction costs not exceeding $2.7 million, is available to property owners who rehabilitate certified historic structures for residential use.13 The credit can be passed through to partners of the property owner, and a five-year carry-forward is permitted. Like the film production credit, the historic properties tax credit is administered by the Connecticut Commission on Culture and Tourism.
The General Assembly also amended or repealed several other tax credit provisions in 2006. For income years beginning on or after January 1, 2006, taxpayers are now entitled to the computer donation tax credit if they donate new or used computers to nonpublic schools.14 The credit equals 50% of the computer's fair market value. Effective July 1, 2006, the apprenticeship training credit in manufacturing, plastics, plastics-related, or construction trades is now equal to the lesser of $4,000 or 50% of actual wages paid over the first four income years.15 Effective July 1, 2006, the housing program contribution tax credit that may be earned by an organization conducting a housing program eligible for funding equals $500,000 per year, an increase from $400,000.16 Effective May 26, 2006, the urban and industrial sites reinvestment program credit is now available to any municipality that the Commissioner determines is connected with the relocation of an out-of-state operation or the expansion of an existing facility that will result in a capital investment of at least $50 million.17 The employer-assisted housing tax credit, which provided a tax credit to taxpayers that funded housing for their low-to-moderate income employees, was repealed effective June 7, 2006.18
2. Personal Income Tax
The General Assembly enacted several noteworthy legislative changes to the personal income tax in 2006, including the repeal of the requirement that pass-through entities make quarterly estimated tax payments on behalf of their nonresident owners. Also, the General Assembly increased the maximum income tax credit for qualifying property tax payments to $500, and provided taxpayers with a deduction for contributions to Connecticut Higher Education Trust ("CHET") accounts.
Since 2004, pass-through entities doing business in Connecticut or having income from Connecticut sources have been required to pay tax on the Connecticut source income attributable to their nonresident owners. For owners meeting certain requirements and electing to be included, the pass-through entity was permitted to file a group return and pay the applicable tax. If the nonresident owner was not permitted to be included in the group return, or did not elect to be included, the pass-through entity was required to include the owner in a composite return, and pay tax at the highest rate applicable on the nonresident owner's share of the entity's Connecticut-source income.
Under the 2006 legislation, pass-through entities are no longer allowed to file group returns on behalf of their non-resident members.19 Rather, such entities are required to include all nonresident members in the composite return and pay tax at the highest marginal rate. The pass-through entity is no longer required to make quarterly withholdings of tax. The entity also has until the 15th day of the fourth month (previously the third month) following the close of the tax year to inform each nonresident owner of the amount of taxes paid on their behalf. The Commissioner may assert a deficiency against either the entity or the owner, and is required to refund or credit overpayments to the entity or owner.
For tax years beginning on or after January 1, 2006, taxpayers are entitled to a maximum property tax credit of $500 (under prior law, the maximum credit was $400).20 Also, effective January 1, 2006, taxpayers are permitted to deduct from their adjusted gross income any contributions to CHET accounts. The deduction is limited to $5,000 for individual taxpayers ($10,000 for joint filers) and a 5 year carryover is allowed for unused deductions.21
B. Sales and Use Tax
In addressing the sales tax, the General Assembly focused on exemptions. First, it broadened the sales tax exemptions for aircraft repair under General Statutes sections 12-412(76) and (77) to...
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