May 17, 2011
Tax Changes in Connecticut and Rhode Island
Tax changes are coming to Connecticut and possibly Rhode Island. On May 4, 2011, CT Governor Malloy signed into law a bill creating a number of new taxes while disallowing certain exemptions. In addition, the State of Rhode Island has issued proposed changes to its taxing structure. The RI bill is only proposed at this time. The pertinent changes in each of the states are as follows:
Extension of the corporate surcharge
This surcharge, currently 10%, was set to expire in 2011; it has been extended to 2012 and 2013 and increased to 20%. The surcharge is generally applicable only to companies with gross receipts in excess of $100M. Companies presently paying the surcharge, need to be aware that the surcharge will not be expiring in 2011 and will be doubled for 2012 and 2013.
Personal Income Tax
Personal income tax brackets are expanding from 3 brackets to 6. The present brackets are for 3%, 5% and 6.5% tax rates. The 5% bracket is being broken into four brackets with rates of 5%, 5.5%, 6% and 6.5%. The tax rate for trusts and estates has been increased from 6.5% to 6.7%.
These tax rate changes are retroactive to January 1, 2011. The state will be issuing new withholding tables. Estimated tax payers must adjust their September payment to address the changes in tax rates.
Sales and Use Tax
The sales and use tax rate is increased from 6% to 6.35% effective July 1, 2011. The bill eliminates certain exemptions and makes additional services subject to the tax. The changes are:
Elimination of exemptions
- Hazardous waste containment and removal
- Valet Parking at the airport
- Yoga instruction
- Clothing and footwear under $50
- Non-prescription drugs
- Cloth or fabric for non-commercial sewing
- Property or services used in the operation of a solid waste to energy facility
- Smoking cessation products
New Taxable Services
- Motor vehicle storage
- Packing and crating
- Intrastate limousine and van service
- Pet grooming
- Boarding and obedience classes
- Cosmetic surgery
- Manicures and pedicures
- Spa services
Connecticut has also implemented a so-called “Amazon” provision which requires out of state on-line retailers to collect sales and use taxes on sales to CT purchasers made from in-state referrals. Under the bill, the definition of retailer is expanded to include persons making sales through an independent contractor that is a CT resident, if the retailer enters into an agreement with the resident, under which the resident for a commission or other consideration, directly or indirectly refers potential customers, whether by an Internet website link or otherwise to the retailer. This rule applies to retailers with more than $2000 in gross receipts for the previous year. If the $2000 threshold is met, the retailer is then presumed to be soliciting in CT through the independent contractor.
Other sales tax increases
- Raise hotel occupancy tax from 12% to 15%
- Tax on short term car rentals (30 days or less) is 9.35%
- 7% tax rate applies to luxury goods, defined as:
- Non-commercial motor vehicles over $50,000
- Boats over $100,000
- Jewelry over $5,000
- Clothing, footwear, handbags, luggage, wallets, umbrellas and watches over $1,000
Other various tax increases
- Cigarette tax increased from $3 to $3.40 per pack
- Increases in the alcoholic beverage tax rate on various products
- Estate and Gift threshold decreased from $3.5M to $2M effective for deaths or gifts made on or after January 1, 2011
- Tax on diesel fuel increases from 26 cents to 29cents per gallon
- Real estate conveyance tax increases from .5% to .75%
- Temporary electric generation tax of .25 cents per kilowatt hour generated and uploaded to the grid
- A new tax on hospital net revenue tax of 4.6% payable quarterly
- For 2011 and 2012 the insurance premium tax can only be offset by credits for 30% of the tax, previously 70% applied
- A new cabaret tax is imposed at 3% on admissions, food, drink, service and merchandise at a place that provides live music, dancing and alcoholic drinks.
Under discussion in Rhode Island is a proposed statutory adjustment to RI corporation tax law to accomplish two main objectives:
- Increase the minimum tax and apply it to additional entities
- Change RI to a unitary taxation state
The law if enacted would begin with the 2012 calendar year. It would require tax returns and minimum payments for all partnerships and LLC’s with new minimum taxes as follows:
|RI Gross receipts < $1M||$250|
|$1M - $2.5M||$1000|
|$2.5M - $5M||$1500|
|Greater than $5M||$2000|
The present minimum tax is $500, but it is not applicable to all partnerships and single member LLC’s.
The most significant change would be a move to unitary taxation for the state of Rhode Island.
Under unitary application, the statute applies a common ownership test and the constructive ownership rules of IRC 318(a) to treat more than 50% ownership as “common ownership”, thus expanding the unitary group. This change, if enacted, could result in members being included in the RI unitary group that are outside of the federal consolidated group.
The corporate tax rate in RI is presently 9% it will decrease as follows:
The tax will be applied on the unitary income of the combined group determined by eliminating all income, deductions and losses from all transactions between group members. The RI apportionment factor will be calculated by including in the numerator all property, payroll and sales in RI of all members of the combined group while including in the denominator all property, payroll and sales. Members may elect to determine the combined group’s apportionable income pursuant to a water’s edge election. Regulations will need to be issued to address the application of the unitary tax concept to multistate entities falling under combined reporting.