For the first time, Connecticut is establishing an “economic nexus” standard for determining whether corporations must pay state income taxes, regardless of whether they maintain a physical presence in the state.
In an attempt to limit deficits over the next few years, Connecticut is slapping a 10 percent surcharge on its regular 7.5 percent corporate income tax for the next three fiscal years, as well as raising personal income taxes for individuals making at least $500,000, which experts say will also affect a number of small-business owners who report income tax using individual forms.
Jack Condlin, president of the Stamford Chamber of Commerce, said from his vantage point it appears the legislature is deaf to the issues facing Fairfield County businesses and residents, who already provide more than 40 percent of the revenue drawn from the state”™s eight counties.
“They are trying to figure out now how to get more revenue out of this section of this state, rather than thinking of investing in this section of the state and helping it grow (more),” Condlin said. “What they don”™t realize is that hedge-fund types of companies can be located here, they can be located in the Carolinas, they can be located in Texas. Other states are trying very hard to get these kinds of companies to relocate to their state.”
Jay Sattler, an accountant with BlumShapiro, said that many small businesses might be able to avoid the $500,000 shelf by claiming tax credits, or even creating multiple vehicles under which to report taxable income.
“But of course, all that planning too takes money,” chuckled Peter Gioia, vice president and economist for the Connecticut Business and Industry Association.
Still, Gioia said he has yet to hear any carping about the new corporate tax surcharge from Main Street businesses that are not involved in legislative lobbying.
Â
The newest addition to Connecticut”™s tax mix is the concept of economic nexus, with the state now rewriting its corporate tax forms to force businesses with no physical presence in the state to report income earned here.
Â
New York is engaged in litigation with Amazon.com Inc. concerning the state”™s decision to tax online sales of merchandise, even though Seattle-based Amazon has no physical presence in New York.
Other states that considered adopting the principle of nexus this year included California, Illinois and North Carolina. Foes say such laws further complicate an already knotty tax code and impose a serious burden on small businesses
“We believe that retaining a physical presence nexus standard for state taxation of business activity is an essential part of a neutral, simple, transparent, and stable tax system,” said Joseph Henchman, counsel with the Washington, D.C.-based Tax Foundation, who testified on the topic earlier this year before Congress. “State efforts to move away from a physical presence standard undermine these principles and threaten to do long-term harm to economic growth.”
Henchman cites the example of a New York company that sells a product on its website to a California buyer, via servers in Ohio and Colorado.
“Is the transaction everywhere, nowhere, or always somewhere at a given point in time?” he said. “A physical presence rule provides an easy and logical answer to where the transaction is located, identical to the answer given for brick-and-mortar businesses: New York, where the company”™s property and payroll are located.”
Â
Connecticut and other states have historically attempted to draw additional revenue from residents in other states ”“ for instance, through higher taxes on hotel rooms and rental cars.
Â
“States are trying to tax whatever they can reach,” Henchman said.
Dennis Heffley, an economist with the University of Connecticut, said that states are unlikely to draw much more revenue from tinkering with the mix of taxes levied on businesses and residents.
“To a large extent, states over time ”¦ have probably pretty much optimized as much as they can in terms of squeezing out revenues,” Heffley said, speaking at a CBIA forum in Stamford while presenting results from a study he co-authored on the topic in the journal The Connecticut Economy. “There may not be a lot of wiggle room to change the tax (mix) to adjust the yield.”
