As part of an overarching examination of Connecticut”™s business tax structure, sales taxes may be the initial priority in a report due this September, according to Chris Bruhl, a task force member who is CEO of the Business Council of Fairfield County.
Gov. Dannel P. Malloy commissioned the task force to analyze business taxes and tax credits. At an initial public hearing in April, Department of Revenue Services Commissioner Kevin Sullivan said businesses should not expect any reduction in their taxes in cash-strapped Connecticut, but that they might benefit from a simplification of the tax code.
At a May 3 meeting, the task force examined corporation taxes versus the taxation of entities that pass profits on to partners, which Bruhl said could likewise see some form of legislative attention in next year”™s session. According to the Connecticut Department of Revenue Services, between 2004 and 2007 nearly 97,000 limited liability companies were formed in Connecticut, compared to about 8,900 corporations.
The task force holds its next meeting June 14 in Hartford.
Connecticut”™s base 6.35 percent sales tax was the 31st lowest in the country as of this year, according to the Washington, D.C.-based Tax Foundation, which ranked New York 7th highest with an 8.48 percent combined rate of state and local sales taxes.
If Connecticut has a lower combined sales tax than its biggest rival, it is nevertheless daunting for businesses assessing how much to levy in the form of taxes ”“ or even deducing whether they have to charge tax at all, with breaks abounding in Connecticut”™s tax code for certain types of sales.
“The process is so uneven, so confusing,” Bruhl said. “It”™s really an irritant (and) it affects all companies.”
If an irritant, it is a major source of state revenue ”“ from the start of the fiscal year in June 2011 through April, Connecticut sales and tax collections totaled $2.4 billion, up more than $500 million from the previous fiscal year. The state itemizes those collections quarterly ”“ in the most recent report for the third quarter of 2011, companies reported billions of dollars in deductions thanks to loopholes to promote various industries in Connecticut.
At the April public hearing, an accountant with J.H. Cohn L.L.P. noted the state has more than 40 statutory provisions regarding the taxation of services.
“Our rules are often very difficult to understand,” testified Patrick Duffany, a J.H. Cohn partner. “Because of the ad-hoc basis on which the sales tax changes were made and laws were adopted, what we are left with is a confusing maze of complex and often hard-to-understand rules regarding what services are taxable and what services are exempt.”
Duffany called attention to rules governing the taxation of business analysis, business management, and business management consulting services under Connecticut”™s sales tax rules, saying they create traps for the unwary.
“Connecticut is the only state that I am aware of that imposes this tax, and I feel that this provision significantly increases costs on businesses who would like to enter some type of joint venture with Connecticut-based businesses,” Duffany said. “This ”¦ creates a disincentive to invest in Connecticut jobs.”
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