PA 10-188—sHB 5494

Finance, Revenue and Bonding Committee

AN ACT CONCERNING VARIOUS CHANGES TO TITLE 12 AND TO THE TAX CREDIT PROGRAM FOR REHABILITATION OF CERTIFIED HISTORIC STRUCTURES

SUMMARY: This act:

1. eliminates a state corporation tax deduction for federally deductible dividends companies receive from “captive” real estate investment trusts (REITs) unless the captive REIT is also subject to the Connecticut corporation tax;

2. modifies and expands requirements for filing amended corporation and income tax returns when a taxpayer files an amended federal corporation tax return or an amended income tax return with another state or the District of Columbia;

3. requires inactive sellers to surrender their state sales tax permits and changes the notice and hearing requirements before the Department of Revenue Services (DRS) may cancel an inactive seller's permit;

4. standardizes motor carrier tax report filing deadlines and eliminates all reporting for carriers that operate only within Connecticut and buy all their fuel here;

5. eliminates municipalities' role in approving individual Neighborhood Assistance Act tax credit applications (municipalities must still approve the credit-eligible programs); and

6. allows the DRS commissioner to require more taxpayers and employers to electronically file tax returns and transfer tax payments and withholding taxes.

The act also allows property owners eligible for business tax credits for projects that rehabilitate historic structures for mixed commercial and residential use to receive tax credit vouchers for completing and placing in service a portion of the project that does not include residential uses. Under prior law, owners completing a project in phases could obtain credit vouchers only for individual residential units that are an identifiable portion of the building.

Finally, the act eliminates two obsolete tax commissions and an annual report to the legislature on DRS' annual cigarette tax enforcement activities. It also makes technical and conforming changes ( 4, 8, 14, and 16).

EFFECTIVE DATE: Various, see below.

1-3 — DISALLOWANCE OF CORPORATION TAX DEDUCTION FOR CAPTIVE REAL ESTATE INVESTMENT TRUST (REIT) DIVIDENDS

In calculating net income for Connecticut corporation tax purposes, the law requires companies to count dividends they receive from certain real estate investment trusts (REITs). This act expands this provision to require companies to include dividends paid from “captive” REITs in their taxable net income unless the captive REIT is also subject to the Connecticut corporation tax.

The act defines a “captive REIT” as one that (1) for any taxable year, qualifies for special federal tax treatment (see BACKGROUND); (2) is not regularly traded on an established securities market; (3) has more than 50% of its shares directly or constructively owned or controlled by a single-entity corporation; and (4) is not a “qualified” REIT. State law defines a “qualified REIT” as one that (1) was formed and had at least $500 million in real estate assets contributed to it before April 1, 1997 and (2) elected before April 1, 1998 to be treated as a REIT for federal tax purposes. Deductions for intercompany dividends from nonqualified REITs are already disallowed for Connecticut corporation tax purposes under CGS 12-217(a) (3).

Under the act, a REIT is not considered a “captive REIT” if more than 50% of its beneficial or voting shares are owned by a single-entity corporation controlled by an entity that:

1. for any taxable year, qualifies for special federal tax treatment as a REIT;

2. is exempt from federal taxes;

3. is a foreign REIT organized in a country that has a tax treaty with the U. S. that addresses the tax treatment of REITs; or

4. is a REIT that (a) will become regularly traded in an established securities market, (b) has at least 100 shareholders, and (c) is not closely held.

Under the act, REIT shares are considered to be “constructively owned” by someone if they are owned by (1) the person's spouse or his natural or adopted children, parents, or grandparents; (2) a partnership, S corporation, or trust in proportion to the person's ownership share in the entity; or (3) a corporation in proportion to the person's ownership share, provided the person owns at least 10% of the corporate shares (IRC 318 (a) as modified by IRC 856 (d)(5)).

EFFECTIVE DATE: Upon passage and applicable to income years starting on or after January 1, 2010.

5, 12 & 13 — AMENDED TAX RETURNS

A corporation that files an amended federal corporate tax return has 90 days to file an amended state corporation tax return. The act delays the start of this 90-day filing period from the date the taxpayer files its amended federal return to the date of the final federal determination on the amended return. It also makes the requirement to file an amended state return apply when the taxpayer files an amended return with any federal official or agency, not just the IRS.

The act makes similar changes in the statutes concerning (1) amended income tax returns filed with other states, other states' political subdivisions, or the District of Columbia that change the amount of taxes the person must pay to the other jurisdiction from that for which he or she received a credit on his or her Connecticut income tax return and (2) amended Connecticut informational income tax returns required from partnerships, limited liability companies, and S corporations that file amended federal returns.

The act requires DRS to treat any such amended state return requiring a tax refund as having been filed in “processible form” (for a corporation tax return) or as having “sufficient required information” (for an income tax return) once the taxpayer submits proof of the final determination from the federal government or other jurisdiction, as applicable. By law, the state must pay interest of 0. 66% per month if it fails to pay a tax refund within 90 days after a final tax filing deadline or the date the return was filed, whichever is later. The 90-day period starts when the return is filed in a processible form or is determined to contain sufficient required information.

EFFECTIVE DATE: Upon passage and applicable to income years or tax years, as appropriate, starting on or after January 1, 2010.

6 — SALES TAX PERMITS HELD BY INACTIVE SELLERS

By law, those engaged in the business of selling in Connecticut must hold a DRS-issued sales tax permit for each place of business. This act allows only those who are actively conducting business as sellers to hold such permits and requires inactive sellers to surrender their permits for cancellation.

Prior law already allowed the DRS commissioner, after notice and hearing, to revoke a permit when a seller has filed four successive monthly or quarterly sales tax returns showing no sales. The act:

1. changes the commissioner's action from a permit revocation to a cancellation;

2. allows the commissioner to also cancel a permit if a seller's returns show no sales for two successive annual periods;

3. extends the commissioner's required written notice of a permit cancellation hearing from 10 to 30 days before the hearing; and

4. eliminates a requirement that, if the commissioner gives notice of the hearing by mail, it be by registered or certified mail.

The act bars the commissioner from issuing a new permit to replace a canceled one unless the commissioner is satisfied that the seller will make taxable sales.

EFFECTIVE DATE: July 1, 2010

7 — MOTOR CARRIER ROAD TAX REPORTS

The act eliminates the DRS commissioner's authority to adopt alternate motor carrier road tax report filing schedules and deadlines by regulation. It thus requires all carriers required to file reports to file them quarterly on the last days of January, April, July, and October.

Under prior law, the commissioner could exempt carriers that either (1) operate only in Connecticut or (2) buy all their fuel in the state, from quarterly reporting and instead require them to file annual reports. The act requires the commissioner to exempt motor carriers that both operate and buy all their fuel only in Connecticut from all reporting. It requires all other carriers to file quarterly reports and eliminates the annual reports.

EFFECTIVE DATE: July 1, 2010 and applicable to quarters beginning on or after January 1, 2011.

8-10 — NEIGHBORHOOD ASSISTANCE ACT TAX CREDITS

The Neighborhood Assistance Act (NAA) provides business tax credits to companies that invest in certain municipally approved community activities and programs.

The act eliminates municipalities' role in approving tax credit proposals from individual businesses. Under prior law, the DRS commissioner had to refer each such proposal to the municipal agency in charge of overseeing the credit-eligible program. The agency had 30 days to approve or disapprove the application. Failure to act constituted disapproval. The act also eliminates municipal approval or disapproval as a factor in the DRS commissioner's decision to approve a tax credit application. Instead, it requires the commissioner to decide based on whether the application was (1) submitted on time (i. e. , between September 15th and October 1) and (2) complies with the NAA's requirements.

Finally, the act increases the NAA credit for business investments in community-based alcoholism prevention or treatment programs from 40% to 60% of the investment, thus making it match the 60% credits generally applicable to most other NAA activities.

The act also makes a technical change.

EFFECTIVE DATES: July 1, 2010 for the provision eliminating the municipal approval requirement and upon passage for the other provisions. The technical change applies to income years starting on or after January 1, 2010.

11 — ELECTRONIC FUNDS TRANSFER AND ELECTRONIC FILING REQUIREMENTS

The act expands the DRS commissioner's authority to require taxpayers and employers to pay taxes or transfer withholding taxes electronically.

Under prior law, the commissioner could require electronic payment from those whose annual tax liability or employer withholding tax payment requirements are more than $10,000. The act reduces the thresholds to (1) $4,000 or more in annual tax liability and (2) more than $2,000 in annual withholding tax payments.

It also requires any taxpayer that, by DRS regulation, is required to file tax returns, statements, and other documents electronically to also pay the applicable taxes electronically. The payment requirement does not apply to tax return preparers.

EFFECTIVE DATE: July 1, 2010

15 & 16 – HISTORIC STRUCTURES TAX CREDIT

Projects Completed in Phases

Property owners who rehabilitate historic structures for mixed commercial and residential use are eligible for business tax credits. Those completing projects in phases can receive tax credit vouchers for completing work on, and placing in service, an identifiable part of the building. Under prior law, the only project phases eligible for credit vouchers were individual residential units. This act allows an owner to receive a voucher for a substantial rehabilitation of an identifiable part of a building even if the completed portion includes no residential units.

By law, before beginning any work, an owner must apply for a credit to the Commission on Culture and Tourism (CCCT). He or she must submit a rehabilitation plan, expenditure estimates, and other information to CCCT for its review and approval. This act requires any owner who plans to complete the rehabilitation in phases to also provide a full description of each phase, with anticipated completion schedules. The plan must include a description of the residential uses and schedule for completing them.

The owner must notify CCCT when he or she has completed and placed in service an identifiable portion of the building, document the work performed on that portion, and submit a cost certification. After reviewing the rehabilitation phase and verifying that it complies with the plan, CCCT must issue a tax credit voucher.

Credit Voucher Recapture

If the property owner fails to complete the residential portion of the project within the schedule specified in the plan, the owner must repay (“recapture”) 100% of the credit voucher amount on his or her tax return for the income year following the year of the failure. The act allows CCCT to extend the completion deadline for the residential portion for a maximum of three years.

EFFECTIVE DATE: July 1, 2010. The voucher provision applies to income years starting on or after January 1, 2010.

14 & 17 — REPEALED PROVISIONS

Commissions Eliminated

The act eliminates the Small- and Medium-Sized Business Users' Committee and the State Tax Review Commission.

The former was established to advise and make recommendations to the DRS commissioner on how to improve the department's “user friendliness. ” It was composed of the DRS commissioner and the chairs and ranking members of the Commerce and Finance Committees or their designees, two members appointed by the governor, and 10 members with specific qualifications appointed by the legislative leaders. The State Tax Review Commission, established in 1991, was originally charged with evaluating the state's tax system and making a single report by December 15, 1992. In 1993, the legislature expanded its charge and required it to make reports every year by December 15. The commission filed reports in December 1992 and January 1994, but then fell into inactivity.

Report on Cigarette Tax Enforcement

The act eliminates a requirement that the DRS commissioner report annually on the department's cigarette sales enforcement activities to the Public Health and Children's committees and the state agency the governor designates as responsible for reducing smoking by minors. The first report was due January 1, 1998. The Legislative Library has no record of any reports being submitted.

EFFECTIVE DATE: Upon passage

BACKGROUND

Real Estate Investment Trust (REIT)

A REIT pools resources from investors to own either real properties, such as apartments, shopping malls, or office buildings, or mortgages. Under federal law, certain REITs receive special tax treatment. To qualify, a REIT must:

1. be managed by one or more trustees or directors;

2. signify ownership in the form of either transferable shares or transferable certificates of beneficial interest;

3. be an entity that would otherwise be subject to federal corporation tax;

4. not be either a financial institution or an insurance company;

5. have at least 100 shareholders;

6. not be closely held;

7. derive at least 95% of its gross income from dividends, interest, rents, and other transactions involving real property, with at least 75% from real property transactions; and

8. hold at least 75% of the total value of its assets in the form of real property and no more than 25% in securities (IRC 856).

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