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2017 Legislative Session: Refusing to Budge(t)

July 13, 2017

The 2017 regular legislative session ended at midnight on June 7, 2017, with Governor Malloy and the Connecticut General Assembly unable to agree on a biennial budget for the period from July 1, 2017 through June 30, 2019, or on a strategy for how the state will address the estimated $5 billion deficit projected for that period.

According to a recent report issued by the Office of Fiscal Analysis, a deficit mitigation plan, expenditure reductions and an increased net revenue projection have combined to reduce the projected deficit to $64.7 million for the fiscal year ended June 30, 2017.  Income tax and sales tax revenues were meaningfully below budget and, should the projected deficit be realized, the state will be compelled to transfer the amount of the deficit from the Budget Reserve Fund to the General Fund (leaving approximately $171 million in the “rainy day fund”).  The General Assembly refused to pass either the Governor’s proposed biennial budget or an interim budget for the first quarter of the 2017-2018 fiscal year.  As a result, on June 30, 2017, Governor Malloy signed Executive Order No. 58, declaring that an “emergency exists due to the lack of an approved appropriations act” and providing that all expenditures from July 1, 2017 through the approval of an appropriations act be authorized only upon the Governor’s approval of a request by the Office of Policy and Management for periodic spending authorizations.  To address the projected deficit, it is anticipated that there will be a sharp reduction in state funding for a number of programs.  Shortly before this Alert went to print, Governor Malloy announced that it is unlikely that any budget agreement can be reached before July 18th.

Despite the much-publicized budget dysfunction, the General Assembly did enact significant tax-related legislation, and the Connecticut Department of Revenue Services (“DRS”) published important regulatory guidance for Connecticut taxpayers.  The angel investor tax credit has been expanded and new rules have been adopted for withholding on pension and annuity payments.  The new receipts sourcing rules, effective for corporations in 2016 and for pass-through entities in 2017, were the subject of an extensive Special Notice drafted by the DRS with input from tax practitioners and helpful examples for most taxpayers.  The General Assembly approved a DRS legislative proposal that imposes new permitting and other requirements on tax preparers and facilitators (generally applicable to individuals other than attorneys, certified public accountants and enrolled agents), changes the ordering rule for the application of partial payments, imposes a limitations period on penalty waiver requests and extends the effective period of tax warrants.  The sales tax laws have been amended to reduce the effective period of new tax permits, establish a significant civil penalty for the failure to produce timely books and records, and impose more onerous filing and security obligations on delinquent taxpayers.  The DRS orally has represented that it will seek to impose economic nexus in the application of the Connecticut sales and use tax.

This Alert summarizes Connecticut tax legislation enacted, court decisions rendered and administrative guidance published by the DRS during the first six months of 2017.  Please contact a member of our State and Local Tax Practice Group if you have questions regarding the new tax law changes or how they may affect you and your business.

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