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DRS Updates: New Withholding on Pensions and Annuities, Economic Nexus for Sales Tax and "Fresh Start" Program

December 18, 2017

Withholding on Pensions and Annuities

Effective January 1, 2018, each payer of pension and annuity distributions, including distributions from an employer pension, an annuity, or similar instrument or plan, will be required to deduct and withhold Connecticut income tax from the taxable portion of such distributions if the payer (i) maintains an office or transacts business in Connecticut, and (ii) makes payment of any amount taxable in Connecticut to a resident individual.

On December 7, 2017, the Commissioner of Revenue Services released a memorandum (the "Memorandum") clarifying the new withholding requirements and offering something of a safe harbor for payers making good faith efforts to comply during 2018. Specifically, the Memorandum provides that “[p]ayers that make good faith effort to implement the withholding requirements during calendar year 2018 will not incur any taxes, interest or penalties attributable to any non-compliance with these requirements during calendar year 2018.”

In order to comply with withholding, payers need to distribute Form CT-W4P to Connecticut residents who are receiving periodic payments. Although a payer need not solicit a Form CT-W4P from a recipient of a non-periodic distribution, the recipient may submit a Form CT-W4P to claim an exemption from withholding or to request a specific additional amount of withholding. If a recipient does not properly complete the Form CT-W4P, then the payer must withhold at the highest marginal rate. Payments exempt from tax, such as distributions from a Roth IRA, are not subject to withholding.

When determining whether a recipient is a Connecticut resident, the Memorandum provides that a payer may rely on the address of record for such recipient. A payer may also rely upon a written statement (including the Form CT-W4P) from the recipient regarding the recipient's residency if the statement is signed under penalties of perjury.

The DRS plans to ask the legislature to amend the withholding statute to provide additional clarity and to provide for withholding at the maximum marginal rate for the taxable portion of non-periodic distributions. The DRS also intends to revise the Form CT-W4P and its instructions in an effort to make the withholding process more easily understood.

Upcoming Guidance Regarding Economic Nexus and Sales Tax

Earlier in 2017, a DRS press release stated that “current state law requires out of state sellers of goods that have an economic presence in the state to collect and remit sales tax.” The press release indicated that the state is stepping up its efforts to collect sales taxes not paid by on-line and other out-of-state retailers with a significant volume of sales in Connecticut.

In a speech on November 15, 2017, the Commissioner announced that the DRS intends to issue, in early 2018, new guidance and regulations on the “taxability of Connecticut destined e-commerce sales” targeted at e-retailers that have annual sales in Connecticut of $300,000 or more. The Commissioner indicated that the guidance is likely to incorporate the approach for the taxation of an “Internet vendor” adopted by Massachusetts in Regulation 830 CMR 64H.1.7.

"Fresh Start" 

The Connecticut budget bill included the implementation of the Fresh Start Program (the “Program”). The Program runs from October 31, 2017 through November 30, 2018, and allows the Commissioner of Revenue Services to grant certain relief to any “qualified taxpayer” who failed to file a tax return, or failed to report the full amount of tax properly due on a previously filed tax return, that was due on or before December 31, 2016.

If a taxpayer applies for, and is accepted into the Program, then the taxpayer can enter into a fresh start agreement which shall provide for a waiver of all penalties and 50% of the interest attributable to such failure, and may also provide for a limited look-back period. Lookback periods will generally be limited to three or four years. The program is similar to the still open and available Voluntary Disclosure Agreement program (“VDA”) with the most notable difference between the two programs being the fact that a VDA can be entered into anonymously, and typically includes payment of all interest due.

The Program covers all Connecticut taxes administered by the Department of Revenue Services, except the motor carrier road tax. Only certain taxpayers qualify as “eligible taxpayers” and more information can be found in the Shipman & Goodwin LLP November 2017 tax alert on or on the Department’s website.

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