Connecticut Senate Bill No. 1239 was adopted and signed into law by Governor Dannel Malloy on May 4, 2011. This new budget includes tax increases and changes that will affect virtually everyone who lives or works within the State of Connecticut. Not all items are covered here, but we have summarized below many of the points in the bill that we believe may impact our clients. If you would like to discuss how any of these items affect your 2011 business or individual tax planning, please contact us so that we may begin to address your concerns.

Changes to the Individual Income Tax effective January 1, 2011:

• New tax tables increase the number of marginal tax brackets from three to six, and raise the top marginal rate from 6.5% to 6.7%. Please see the last page for the full tax table comparison.
• The 3% tax rate is gradually phased out (excess income will instead be taxed at the 5% rate) for taxpayers with Connecticut gross income in excess of amounts below:
  • $56,500 filing single
  • $100,500 filing jointly
  • $50,250 married filing separate
  • $78,500 filing as head of household
• Additionally, higher income taxpayers will face “recapture” of the benefit of lower marginal rates when certain income thresholds are exceeded.
• Revised withholding tables effective August 1, 2011 are available on the Connecticut Department of Revenue Services website. Employers are required to use the new tables to catch-up payroll withholding under the new provisions.
• The property tax credit also takes a hit:
  • The maximum amount of credit is reduced to $300 from $500
  • The credit phases-out at a steeper rate
• Individuals will be required to adjust estimated tax payments with the 3rd quarterly payment (due September 15, 2011) to take into account the new tax rates in effect for 2011.
• Trusts and estates with Connecticut taxable income also see a rate increase from 6.5% to 6.7%.

Changes to Job Creation Tax Credit programs for businesses effective July 1, 2011:

• The State has increased the available pool of funds for businesses eligible for the jobs creation tax credit program, the qualified small business job creation tax credit program, and the vocational rehabilitation job creation tax credit program. If you think you may be hiring at your business, please contact us for additional information on possible hiring incentive tax credits.
• Corporations may be able to surpass the 70% limitation on credits allowable against 2011 and 2012 state tax returns if there has been an “average monthly net employee gain.”

Changes to Sales and Use Tax effective July 1, 2011:

• Rate increases:
  • The general sales and use tax rate for sales occurring on or after July 1, 2011 will increase from 6.0% to 6.35%.
  • The sales and use tax rate for short-term (30 days or less) rental or lease of a passenger vehicle will increase from 6.0% to 9.35%.
  • Certain defined “luxury goods” will be subject to a 7.0% sales and use tax rate. Luxury items include motor vehicles with a sales price in excess of $50,000, boats sold for $100,000 or more, as well as jewelry over $5,000 and items such as clothing, handbags, and watches over $1,000.
  • The room occupancy rate will increase to 15% from 12%.
• Certain sales tax exemptions repealed – these items and services will now be subject to tax as of July 1, 2011:
  • Items of clothing or footwear costing under $50
  • Cloth, fabric, or yarn purchased for non-commercial use
  • Non-prescription drugs and medicines
  • Smoking cessation products
  • Valet parking at airports
  • Yoga instruction at a yoga studio
  • Voluntary hazardous waste or contaminant clean up provided to industrial, commercial or income-producing property
• Certain new services will be subject to tax as of July 1, 2011:
  • Pet grooming, boarding, and obedience services
  • Cosmetic medical services
  • Manicure, pedicure and other nail services
  • Spa services (includes waxing, wraps, peels, scrubs)
  • Motor vehicle towing and road services
  • Intrastate transportation services provided by livery services
  • Motor vehicle storage services
  • Packing and crating services
• Remote sellers subject to sales tax collection (the “Amazon” rule which is effective May 4, 2011):
  • Out-of-state businesses with commissioned affiliates (for example, independent contractors, or website-owners providing referrals for a fee) located in Connecticut will be compelled to charge, collect, and remit Connecticut sales tax
  • Physical presence in the state is no longer a requirement for these remote sellers
  • Low threshold of $2,000 or more in sales through Connecticut affiliates
  • Similar to New York legislation which is currently under challenge in their courts

Changes to Estate and Gift Taxes effective January 1, 2011:

• The taxable estate threshold is lowered from $3.5 million to $2.0 million.
• The taxable gift threshold is likewise lowered from $3.5 million to $2.0 million. Donors must aggregate all gifts made on or after January 1, 2005, apply the new threshold, then subtract the Connecticut gift taxes paid since 2005 to determine balance due in the current year.

Changes to Real Estate Conveyance Tax effective July 1, 2011:

• Connecticut conveyance tax rate will increase 0.25%
  • Tax on the first $800,000 of the sale price of residential property increases from 0.5% to 0.75%
  • Tax on the sale price of residential properties in excess of $800,000 increases from 1.0% to 1.25%
  • Tax on the full sale price of unimproved land and certain bank foreclosures for mortgage delinquencies increases from 0.5% to 0.75%
  • Tax on sales of non-residential property other than unimproved land increases from 1.0% to 1.25%
• The municipal portion of the tax is made permanent at 0.25%

Changes to miscellaneous taxes effective July 1, 2011:

• The tax on cigarette and other tobacco products increases; dealers and distributors will be required to pay a floor tax on inventory held at close of business June 30, 2011.
• The tax on alcoholic beverages increases; dealers and distributors will be required to pay a floor tax on inventory held at close of business June 30, 2011.
• The base tax on diesel fuel increases three cents per gallon; dealers and distributors will be required to pay a floor tax on inventory held at close of business June 30, 2011.
• A tax of 1⁄4 of one percent per kilowatt hour of electricity generated will be imposed from July 1, 2011 through June 30, 2013.

If you would like to discuss the impact of these rules, please feel free to call us at 203-787-6527 or contact us through our website at www.bhco.com.