Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York tax law.

Report on Connecticut Biennial Budget FY 2020-2021

Many news outlets from Gov. Lamont’s own press department to local newspapers have covered the Budget Plan such as Tax Notes did here. However, more detailed tax and revenue highlights of the Budget Plan, along with some of the omissions or differences from the Governor’s original proposals, are summarized below by each category.  But we’ll skip over other aspects of the Budget Plan, like property tax, criminal justice reform, state employee benefits, education and medical reforms, college and school grants, pension debt, and changes to digitalize the state operations.

                                                       Sales & Use Taxes

Reduction in the Scheduled Diversion of Motor Vehicle Sales and Use Tax--Sections 317 & 318

Current law phases in a diversion of motor vehicle sales and use tax revenue to the Special Transportation Fund (STF) from FYs 2019 to 2023, according to a specified schedule. As the table below shows, the Budget Plan bill modifies this schedule by reducing the required diversion in FY 2020 and FY 2021, effective July 1, 2019.

                    Schedule of Motor Vehicle Sales and Use Tax Diversion to STF


% of Revenue Diverted to STF

Current Law











23 and thereafter



Increased Sales and Use Tax on Digital Goods and Certain Electronically Delivered Software - Sections 319-322

Connecticut’s somewhat unusual 1% sales tax rate on certain products is going away. This change increases, from 1% to 6.35%, the sales and use tax rate on digital goods and certain electronically delivered software and establishes conditions under which sales of canned or prewritten software and digital goods or taxable services are considered “sales for resale” and thus exempt from sales tax. The increase applies to:

--digital goods (i.e., electronically accessed or transferred audio, visual, or audio-visual works; reading materials; or ring tones), and

--canned or prewritten software that is electronically accessed or transferred, other than when purchased by a business for use by such business and any additional content related to such software.

Under current law, both are considered computer and data processing services and are thus subject to the 1% rate for such services. By law, unchanged by the Budget Plan, canned or prewritten computer software delivered by other means is considered tangible personal property and thus subject to the 6.35% rate effective October 1, 2019.

Sales for Resale

The Budget Plan also establishes conditions under which sales of (1) canned or pre-written computer software and (2) digital goods or taxable services are considered “sales for resale” and are thus exempt from sales tax. Under this section of the budget Plan which is effective October 1, 2019:

  1. sales of canned or prewritten computer software are considered "sales for resale" if the purchaser subsequently sells, licenses, or leases the software unaltered to an ultimate consumer;
  2. sales of digital goods are considered "sales for resale" if they are an integral, inseparable component of another digital good or specified taxable service (i.e., telecommunications service, community antenna television service, certified competitive video service, or other taxable service) that the purchaser subsequently sold, licensed, leased, broadcast, transmitted, or distributed, in whole or part, to an ultimate consumer; and
  3. sales of taxable services (e.g., computer and data processing services) are considered "sales for resale" if they are an integral, inseparable component of digital goods that the purchaser subsequently resold to an ultimate consumer.

Sales & Use Tax on Meals and Beverages - Sections 323 & 324

Effective October 1, 2019, the Budget Plan increases, from 6.35% to 7.35%, the sales and use tax rate on sales of (1) meals sold by eating establishments, caterers, or grocery stores and (2) liquors, soft drinks, sodas, and beverages ordinarily dispensed at, or in connection with, bars and soda fountains. It does so by imposing a 1% sales and use tax rate on such sales that applies in addition to the 6.35% sales and use tax.

By law, a “meal” is food sold in ready-to-eat form or wrapped as “take-out” or “to-go” to be eaten elsewhere. An “eating establishment” includes a restaurant, cafeteria, grinder shop, pizzeria, drive-in, fast food outlet, ice cream truck, hot dog cart, refreshment stand, sandwich shop, private and social club, cocktail lounge, tavern, diner, snack bar, and hotel or boarding house that furnishes both lodging and meals to its guests (CGS § 12-412 (13).

Sales & Use Tax on Dyed Diesel Fuel - Sections 323 & 324

The Budget Plan reduces, from 6.35% to 2.99%, the sales and use tax rate applicable to dyed diesel fuel. (Federal law exempts diesel fuel used for certain non-highway purposes, including marine purposes, from federal fuel taxes and requires exempt diesel fuel to be dyed red so it can be identified). These changes are effective October 1, 2019.

The reduced rate applies to dyed diesel fuel that is sold by a marine fuel dock exclusively for marine purposes or stored, accepted, or otherwise used for those purposes. By law, dyed diesel fuel is exempt from the motor fuels tax and the petroleum products gross earnings tax (CGS §§ 12-458 & 12-587).

Sales & Use Tax Extended to Additional Services - Sections 325 & 326

The Budget Plan extends the sales and use tax to (1) specified motor vehicle parking services; (2) dry cleaning and laundry services, excluding coin-operated services; and (3) interior design services, except for business-to-business and is effective January 1, 2020 and applicable to sales occurring on or after that date. The Budget Plan defines the type of parking this applies to and provides detail regarding the dry cleaning and laundry services covered.

To qualify for the exemption for interior design services purchased by a business for business use, the purchaser must present a certificate, prescribed by the Department of Revenue Services (DRS) commissioner, to the seller. The certificate must certify that the purchaser is a business and is purchasing such services for its business. Under the bill, the purchaser is liable for the tax otherwise imposed if it provides the certificate to the seller improperly. Anyone who willfully delivers to a seller a certificate that is known to be materially fraudulent or false is guilty of a class D felony (up to five years in prison, a fine of up to $5,000, or both), in addition to any other penalty the law provides.

                                              Wayfair Stuff and Sales Tax Nexus

Economic Nexus - Sections 327 & 328

Unlike New York, which is limiting its economic nexus reach in the wake of Wayfair, Connecticut is going in the opposite direction. The Budget Plan lowers the threshold for the sales tax economic nexus law and broadens its application, thus expanding the number of out-of- state retailers making retail sales in the state that must collect and remit Connecticut sales tax. Under current law, out-of-state retailers that regularly and systematically solicit sales of tangible personal property in Connecticut must collect and remit sales tax if :

(1) they made at least 200 Connecticut sales during the preceding 12-month period (ending September 30), and

(2) their gross receipts are $250,000 or more during that period.

However, the Budget Plan:

(1) lowers the threshold to 200 transactions and $100,000 in gross receipts during the 12-month period;

(2) expands it to apply to out-of-state retailers making retail sales of services, rather than just tangible personal property; and

(3) eliminates the condition that such retailers be regularly or systematically soliciting sales in Connecticut.

The new thresholds are effective July 1, 2019 and applicable to sales occurring on or after that effective date.

“Click-Through” Nexus

The Budget Plan similarly lowers the sales threshold over which retailers selling tangible personal property or services through certain agreements with people located in Connecticut must collect and remit sales tax on their in-state taxable sales. The agreements must provide that, in return for the person in Connecticut referring potential customers to the retailer (directly or indirectly by any means, including a website link), the person will receive a commission or other compensation from that retailer. Under current law, this requirement applies to any retailer that annually earned more than $250,000 in gross receipts from sales in the state under such referral agreements in the preceding four quarters. The act lowers this sales threshold to $100,000. Again, the effective date is July 1, 2019, and applicable to sales occurring on or after that date.

Room Occupancy Tax for Short-Term Rental Facilitator - Sections 329 & 330

The Budget Plan requires “short-term rental facilitators” to (1) obtain a sales tax permit to collect the room occupancy tax (i.e., 15% sales and use tax for hotels and lodging houses and 11% for bed and breakfast establishments) and (2) be considered retailers for the sales they facilitate for short-term rental operators on their platforms. Under the Budget Plan, a short-term rental facilitator must:

1. collect and remit sales tax on each such sale;

2. be responsible for all of the obligations the state sales and use tax law imposes as if it were the lodging house operator and retailer of the sale; and

3. keep the records and information the DRS commissioner requires to ensure proper sales tax collection and remittance, in accordance with existing sales tax record-keeping requirements.

The Budget Plan provides a new definition for a short-term facilitator and additionally provides that short-term rental operators are not liable for collecting room occupancy tax to the extent that the short-term rental facilitator collected the tax due. The occupancy tax is effective October 1, 2019 and the conforming change to the definition of retailer is applicable to sales occurring on or after that date.

                                                   Business Taxes

A Reduced Income Tax Credit for Passthrough Entities - Sections 333 & 334

In 2018, Connecticut enacted Public Act 18-49, which imposed an entity-level tax on the net income of passthrough businesses and created an offsetting individual income tax credit for the entity’s members. The Budget Plan would lower the value of the offsetting income tax credit by reducing the multiplier used to calculate the credit from 93.01% to 87.5 %. This is somewhat of an odd move, at least if we understand the math. The whole point to this “PET” tax was to help taxpayers who were losing out on the SALT deduction as a result of federal tax reform by shifting the burden on state income tax to their partnership or other pass-through entity. But now, by reducing the credit available to the individual taxpayer for the tax paid by the entity, Connecticut appears to be using this PET tax as a way to also increase revenue. Sad!

The Budget provides that taxpayers are not subject to estimated tax payment requirements and interest on underpayments for the 2019 tax year for any additional tax due as a result of this reduction before the provision takes effect.

Business Entity Tax - Sections 338 & 339

The Budget Plan sunsets the business entity tax. Under current law, the business entity tax is a $250 tax, due every other taxable year, imposed on certain business entities (e.g., S corps, limited partnerships, limited liability partnerships, and limited liability companies). It is effective upon passage, except a conforming change is effective January 1, 2020.

Capital Base Tax Phase Out - Section 340

The Budget Plan phases out the capital base tax on corporations over four years, from 2021 to 2024. Currently, the tax rate is 3.1 mills per dollar of a corporation’s capital base (i.e., its net worth apportioned to Connecticut). Under the Budget Plan, the rate decreases to 2.6 mills in 2021, 2.1 mills in 2022, 1.1 mills in 2023, and zero mills beginning in 2024.

The capital base tax is a component of the state’s corporation business tax. Under current law, for most corporations, the corporation business tax rate is (1) 7.5% of net income, (2) 3.1 mills per dollar of capital base (up to $1 million), or (3) $250, whichever produces the larger tax. This section is effective upon passage.

Corporation Business Tax Surcharge - Sections 341 & 343

Effective January 1, 2019, the Budget Plan extends the 10% corporation business tax surcharge for two additional years, to the 2019 and 2020 income years.

By law, companies must calculate their surcharges based on their tax liability, excluding any credits. As under existing law, the surcharge for 2019 and 2020 applies to companies that have more than $250 in corporation tax liability and either (1) have at least $100 million in annual gross income in those years or (2) are taxable members of a combined group that files a combined unitary return, regardless of the amount of annual gross income.

The Budget Plan provides that taxpayers are not subject to estimated tax payment requirements and interest on underpayments for the 2019 income year for any additional tax due as a result of the surcharge extension before the provision takes effect.

Business Filing Fees - Sections 334 & 336

Beginning July 1, 2020, the Budget Plan increases, from $20 to $80, the fee that foreign and domestic limited partnerships, limited liability companies, and limited liability partnerships pay for filing an annual report with the secretary of the state.

Angel Investor Tax Credit - Section 347

The Budget Plan extends the angel investor tax credit program by five years, from July 1, 2019, to July 1, 2024. It increases (1) from $3 million to $5 million, the aggregate amount of angel investor credits Connecticut Innovations (CI) may reserve each fiscal year and (2) from $250,000 to $500,000, the total amount of tax credits allowed to any angel investor.

By law, the amount of credits that CI may reserve each year for investments in emerging technology businesses is capped at 75% of the total amount of credit available that year, but CI may exceed the cap if any unreserved credits remain after April 1 in each year. The Budget Plan authorizes CI to prioritize the unreserved credits for veteran-owned, women-owned, or minority-owned businesses and businesses owned by individuals with disabilities.

Under this program, angel investors (i.e., investors who are considered “accredited investors” by the Securities and Exchange Commission) who invest at least $25,000 in approved businesses are eligible for a personal income tax credit equal to 25% of their investment up to a capped amount. A business must apply to CI for approval to receive credit-eligible investments. CI then certifies that the business meets the applicable criteria (e.g., is principally located in the state, has been in operation less than seven years, and has less than $1 million in annual revenue). The Angel Investor Tax Credit changes are effective July 1, 2019, and applicable to income and tax years on or after January 1, 2019.

Corporation Business Tax Credits Cap - Section 349

The Budget Plan reduces, from 70% to 50.01%, the amount by which a company may reduce its tax liability using research and development and Urban Reinvestment Act (URA) credits. Under existing law, the 50.01% credit cap applies to all other corporation business tax credits. The Corporation Business Tax Credits Cap is effective upon passage and applicable to income years beginning on or after January 1, 2019.

Imposition of Tax on E-Cigarettes -Section 351

The Budget Plan imposes a tax on sales of electronic cigarette (e-cigarette) products by e-cigarette wholesalers. “E-cigarette products” are defined as electronic nicotine delivery systems; liquid nicotine containers; vapor products; and liquids that, when used in an electronic nicotine delivery system, produce a vapor that includes nicotine and is inhaled by the system’s user (i.e., e-cigarette liquids). The tax is imposed each calendar month, beginning October 1, 2019, at a rate of:

  1. 40 cents per milliliter of e-cigarette liquid, for any e-cigarette product that is pre-filled, manufacturer-sealed, and not intended to be refillable and
  2. 10% of the wholesale price for all other e-cigarette products whether or not sold at wholesale, or if not sold, at the same rate upon use by the wholesaler.

“Wholesale sales price” means the price of e-cigarette products or, if no price has been set, their wholesale value. Under the bill, only the first sale or use of the same product by the wholesaler is used to compute the tax.

Under the Budget Plan, an e-cigarette wholesaler is (1) a person engaged in the business of selling e-cigarette products at wholesale in the state, (2) a person in the state who purchases e-cigarette products at wholesale from a manufacturer, or (3) a dealer, retailer, or other person that otherwise imports, or causes another to import, untaxed e-cigarette products into the state.

Alcoholic Beverages Tax - Sections 352 & 353

The Budget Plan generally increases the excise tax on alcoholic beverages, except for beer, by 10%. It reduces, by 50%, the tax rate on beer for off-premises consumption that is sold on the premises covered by a manufacturer’s permit. It requires sellers to pay an additional tax on the alcoholic beverages (except for beer) in their inventories as of the opening of business on October 1, 2019.

Plastic Single-Use Bags - Section 355

From August 1, 2019, to June 30, 2021, the Budget Plan requires each store to charge a 10-cent fee for each single-use checkout bag provided to a customer at the point of sale. The store must indicate the number of single-use checkout bags provided and the total fee charged on the customer’s transaction receipt. The fee is not subject to sales tax. Beginning July 1, 2021, the Budget Plan prohibits store owners and operators from providing or selling single-use checkout bags to customers.

The fee and ban apply to “single-use checkout bags,” which are plastic bags with a thickness of less than four mils that are provided to a customer at the point of sale. The bill exempts (1) bags provided to contain meat, seafood, loose produce, or unwrapped food items; (2) newspaper bags; and (3) laundry or dry cleaning bags. “Store” means any entity considered a retailer for sales tax purposes that maintains a retail store in the state and sells tangible personal property directly to the public.

Municipal Ordinances

The bill specifies that it does not prohibit a municipality from enacting or enforcing an ordinance on (1) plastic single-use checkout bags that is at least as restrictive as the bill’s provisions or (2) paper single-use checkout bags, including enabling stores to charge a fee for paper bags distributed to customers.

                                                   Admissions Tax

Admissions Tax - Section 354

The Budget Plan reduces the admissions tax rate on certain venues in two steps: from 10% to 7.5% for sales occurring on or after July 1, 2019, and from 7.5% to 5% for sales occurring on or after July 1, 2020. The lower rate applies to the following venues:

1. the XL Center in Hartford;

2. Dillon Stadium in Hartford;

3. athletic events presented by a member team of the Atlantic League of Professional Baseball at the New Britain Stadium;

4. Webster Bank Arena in Bridgeport;

5. Harbor Yard Amphitheater in Bridgeport;

6. Dodd Stadium in Norwich;

7. Oakdale Theatre in Wallingford; and

8. events, other than interscholastic athletic events, at Rentschler Field in East Hartford (interscholastic athletic events at Rentschler Field are exempt under existing law).

The Budget Plan also (1) reduces the admissions tax rate on events at Dunkin’ Donuts Park in Hartford, from 10% to 5%, beginning July 1, 2019, and (2) fully exempts such events from the tax beginning July 1, 2020.


Hospital Provider Tax –Section 356

The Budget Plan would also make changes to the hospital provider tax, which comes on the heels of a May 28 announcement that Lamont's administration had reached a tentative agreement to settle the Connecticut Hospital Association's lawsuit over the tax. It eliminates a scheduled reduction in the hospital tax rates on inpatient and outpatient services by maintaining the rates at FY 2019 levels but requiring the base year for calculating the tax to be adjusted each biennium. Among other things, the Budget Plan requires the DSS commissioner to issue refunds if he determines for any fiscal year that the effective hospital tax rate exceeds the rate permitted under federal law.

Existing law sets the FY 2019 hospital provider tax rate for (1) inpatient hospital services at 6% of each hospital's FY 2016 audited net revenue attributable to such services and (2) outpatient hospital services at $900 million, minus the total tax imposed on all hospitals for providing inpatient services, divided by the total FY 2016 audited net revenue attributable to outpatient services for all hospitals subject to the tax. Under current law, these rates are scheduled to decrease for FY 2020 and thereafter for both inpatient and outpatient hospital services to $384 million, divided by the total FY 2016 audited net revenue for all hospitals subject to the tax.

The Budget Plan eliminates the scheduled rate decrease by maintaining the rates for inpatient and outpatient hospital services at FY 2019 levels but requiring a base adjustment each biennium. Under the bill, beginning with the FY 2020-2021 biennium, the fiscal year upon which the inpatient and outpatient hospital services tax is based must be the fiscal year three years prior to the first year of the biennium, rather than FY 2016 (i.e., FY 2017 for the FY 2020-2021 biennium).

Within 90 days after receiving completed reports from all such hospitals, the DSS commissioner must notify the DRS commissioner of the amount of any refund due to each hospital in order to comply with federal law. Within 30 days after receiving this notice, the DRS commissioner must notify the comptroller of the refund amounts; the comptroller must draw an order on the treasurer to pay each such refund. No interest may be added to the refunds.

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