Transcript Slide 1

State Income and Employment-Related
Tax Issues for Businesses in Connecticut
Moderated by Alan E. Lieberman, Shipman & Goodwin LLP
CBIA 2012 Connecticut Tax Conference
June 1, 2012
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HARTFORD | STAMFORD | WASHINGTON, DC | GREENWICH | LAKEVILLE
Connecticut Personal Income Tax Sourcing
Rules & Pitfalls to Avoid for Executives
Presented by:
Ryan V. Leichsenring, Esq.
Shipman & Goodwin LLP
860-251-5101
[email protected]
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The Sourcing Rules – Who Cares?
The sourcing rules are the mechanism that states, such as
Connecticut, use to ascertain what portion of income will be
taxed in situations where the taxpayer has connections to two
or more states. An understanding of these rules not only is
key to properly reporting compensation income, but can be
very useful in retirement planning.
The rules may be particularly relevant in any of the following
situations:
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The Sourcing Rules – Who Cares?
1.
Nonresident taxpayers who work in Connecticut;
2.
Connecticut resident taxpayers who retire and move out of
Connecticut;
3.
Connecticut resident taxpayers who relocate out of Connecticut
and continue to work; and
4.
Connecticut resident taxpayers who work outside of Connecticut (and
pay taxes to the state in which they work).
The important phrase: “derived from or connected with sources within this
state.”
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General Rules for Sourcing Income
Nonresidents
Nonresidents compute their Connecticut tax by first determining their
Connecticut adjusted gross income from all sources and determining
the amount owed. That amount is then multiplied by a fraction that
is equal to the amount of the taxpayer’s Connecticut adjusted gross
income from Connecticut sources divided by the total Connecticut
adjusted gross income from all sources [CT Agencies Regs. § 12700(b)-1].
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General Rules for Sourcing Income
Residents
The Connecticut adjusted gross income of residents is federal adjusted
gross income with certain modifications (i.e. all of your income regardless of
source) [CT Agencies Regs. § 12-701(a)(20)-1].
Connecticut adjusts for services provided out of the state by residents by
providing a credit for taxes paid to another qualifying jurisdiction [CT
Agencies Regs. § 12-704(a)-1].
Although not explicitly stated, the regulations use the rules for sourcing of
nonresident income to perform the same analysis for the non-Connecticut
income of residents subject to the credit.
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Sourcing of Compensation
1. Regular Wages [CT Agencies Regs. § 12-711(c)-5]
• Allocation vs. Apportionment
• Multiple Employers
• What is a “Working Day?”
• Casual, Isolated and Inconsequential Presence
• Form CT-W4NA and the 15-Day Rule
2. Commissions Earned by Salespersons [CT Agencies Regs. § 12-711(b)-9]
3. Compensation on the Basis of Mileage [CT Agencies Regs. § 12-711(b)-10]
4. Restricted Stock [CT Agencies Regs. § 12-711(b)-17]
• IRC § 83(b) Elections
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Sourcing of Compensation
5. Nonqualified Stock Options [CT Agencies Regs. § 12-711(c)-18]
6. Incentive Stock Options [CT Agencies Regs. § 12-711(c)-16]
7. Deferred Compensation [CT Agencies Regs. § 12-711(c)-19]
8. Covenants Not to Compete [CT Agencies Regs. § 12-711(c)-20]
9. Pensions [CT Agencies Regs. § 12-711(c)-12]
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Special Issues with NY-Based Employees
1. “Convenience of the Employer” Sourcing Rule
• 20 NYCRR 132.18
• Zelinsky v. New York Tax Appeals Tribunal, 769 NYS.2d 464
(NY Court of Appeals 2003)
• Risk of Double Taxation on Work from Home
2. Unintended Statutory Residents
• Matter of Barker (NY Division of Tax Appeals, ALJ
Determination) (April 7, 2011)
• Risk of Double Taxation on Intangible Income
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Beware the “Special Accrual”
1.
Special Accrual Regulations [CT Agencies Regs. §§ 12-717(c)(1)-1
and 12-717(c)(2)-1]
• Lack of guidance
2.
New York’s Analysis: the federal “All the Events” test
• The right to income is fixed
• The amount of income can be determined with reasonable accuracy
3.
Common Areas of Dispute
• Severance Payments
• Pensions (Qualified and Non-Qualified Plans; See PITLA, 4 U.S.C.
§114)
• Deferred Compensation (Query: Conflict with regulation?)
• Non-wage items (e.g., installment sales)
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Issues with Connecticut’s
Composite Income Tax Rules
Presented by:
Todd D. Doyle, Esq.
Shipman & Goodwin LLP
860-251-5807
[email protected]
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The Composite Income Tax:
What Is It?
•
Entity-level tax imposed upon pass-through entities (“P/Es”) having
nonresident partners/members/shareholders
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Statutory Scheme
► Partnerships (and limited liability companies taxed as
partnerships) C.G.S. § 12-719(c)(1)
► S corporations
C.G.S. § 12-719(c)(1)
► Requirement to file composite return
C.G.S. § 12-726
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The Composite Income Tax:
Relevant Statutes
•
C.G.S. § 12-719(b)(1) “With respect to each of its nonresident
partners, each partnership doing business in this state or having
income derived from or connected with sources within this state
shall, for each taxable year, make payment to the commissioner as
provided [in the statute].”
•
C.G.S. § 12-719(c)(1) “With respect to each of its nonresident
shareholders, each S corporation doing business in this state or
having income derived from or connected with sources within this
state shall, for each taxable year, make payment to the
commissioner as provided [in the statute].”
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The Composite Income Tax:
Relevant Statutes (Continued)
•
C.G.S. § 12-726 Partnerships or S corporations doing business in
Connecticut or deriving income from Connecticut sources need to
file a composite return setting forth this information.
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The Composite Income Tax:
Application/Enforcement
•
P/Es not required to make estimated payments.
•
After January 1, 2008, P/Es may NOT rely upon a statement by a
member that a Connecticut income tax payment has or will be
made by the member for the taxable year. IP 2006(22).
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P/E liable for interest (1% monthly) and penalties (10%) for making
late composite income tax payments.
•
Collection first sought from P/E, but DRS will pursue individual
members if unable to collect from P/E.
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The Composite Income Tax:
Determination of Connecticut Source Income
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Determined differently for P/Es than for corporate taxpayers.
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C.G.S. §§ 12-218 et seq. generally requires corporate taxpayers to
apportion their income using a three-factor or one-factor formula with
sales allocated to a jurisdiction based upon location of the customer.
►
Connecticut currently directs P/Es to apportion sales based upon the
percentage of sales or services performed through a Connecticut office.
Apparent audit focus in recent years, notwithstanding prior acquiescence
with P/Es use of the corporate method.
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Conn. Agencies Regs. § 12-711(c)-4(a)
•
Income of a nonresident P/E attributable to a business with in-state
and out-of-state receipts shall be allocated (as provided in
subsection (b) of this section) or apportioned (as provided in
subsection (c) of this section) to Connecticut on a fair and equitable
basis in accordance with generally accepted accounting principles.
•
Once an individual uses either method (allocation or
apportionment), he or she shall continue to use that method unless,
after application in writing to the Commissioner, the Commissioner
determines that the method used no longer reflects income which is
fairly attributable to Connecticut.
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Conn. Agencies Regs. § 12-711(c)-4(b)
Books and Records Rule
•
If the books of the business are kept so as regularly to disclose, to
the satisfaction of the Commissioner, the proportion of the net
amount of the items of income, gain, loss and deduction derived
from or connected with Connecticut sources, the Connecticut
nonresident income tax return of the nonresident individual shall
disclose the total amount of such items, the net amount of such
items allocated to Connecticut, and the basis upon which such
allocation is made.
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Conn. Agencies Regs. § 12-711(c)-4(c)
Three-Factor Apportionment
• If the books and records of the business do not disclose, to the
satisfaction of the Commissioner, the proportion of the net amount of the
items of income, gain, loss and deduction attributable to the activities
carried on in Connecticut, such proportion shall [except income and
gains from real property] be determined by multiplying the net amount of
the items of income, gain, loss and deduction of the business by the
average of the percentages described in subsections (d) to (f), inclusive,
of this section.
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Three Factors
•
Property factor -- divide the average values of Connecticut real and
tangible property at the beginning and the end of the year by the
average beginning and end-of-year values of all property. Conn.
Agencies Regs. § 12-711(c)-4(d).
•
Payroll factor -- divide total wages and compensation paid in
respect to services carried on in Connecticut by all wages and
compensation. Conn. Agencies Regs. § 12-711(c)-4(e).
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Three Factors (continued)
•
Gross income factor -- divide the gross sales or charges for
services performed by or through an office, branch, agency or other
location of the business within Connecticut, by the total of all gross
sales or charges for services performed within and without
Connecticut.
•
The sales or charges to be allocated to Connecticut include all
sales negotiated or consummated, and charges for services
performed, by an employee, agent, agency or independent
contractor chiefly situated at, connected by contract or otherwise
with, or sent out from, offices or branches of the business, or other
agencies or locations, situated within Connecticut.
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Contrast With NY Law (Continued)
• NY CLS Tax § 631 and 20 NYCRR § 132.15 use language identical
to C.G.S. § 711 and Conn. Agencies Regs. § 12-711(c)-4, but NY
case law interprets the rules differently:
• Statute and regulation disclose “a clear intent that the ‘direct
accounting’ method is to be utilized unless the taxpayer’s books do
not adequate separate out” the taxpayer’s in-state income.
See In the Matter of Piper, Jaffray & Hopwood v. State Tax
Commission, 42 A.D. 2d 381 (NY App. Div. 1973).
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Contrast With NY Law (Continued)
•
Allocation and apportionment rules applicable to P/Es were intended to
follow the rules applicable to corporations under NY’s corporation franchise
tax.
“[t]he legislative history, purpose and the express provisions of [current 20 NYCRR §
132.15] indicate that the exaction of the unincorporated business tax is to be imposed
only upon net income from business done within this State. The intent of the
legislature was to bring unincorporated business enterprises doing business within the
State into a tax scheme by which taxes were imposed upon similar businesses
conducted within the State by corporations (Legislative Document No. 56, 1935, pp 24,
25) and to make unincorporated businesses share their just proportionate burden of
taxation. The Attorney-General admits that the intent was to parallel the corporation
franchise tax.”
In the Matter of Thompson v. Mealey, 290 N.Y 230 at 234.
(Emphasis added.)
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Negative Policy Implications
• Taxes in-state P/Es on worldwide sales consummated within the
state while allowing non-resident P/Es to make sales to Connecticut
purchasers without apportioning ANY income to Connecticut.
• Treats Connecticut P/Es inconsistently with Connecticut
corporations.
• Requires Connecticut P/Es to request specific permission of the
Commissioner to change from allocation method to apportionment
method. Conn. Agencies Regs. § 12-711(c)-4(a).
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Some Good News
• Voluntary Disclosure for P/Es wishing to “come clean.”
• Income Tax audit group -- willing to “make a deal.”
• Possible legislative fix?
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Worker Misclassification
Employee or Independent Contractor
Presented by:
Raymond J. Casella, Esq.
Shipman & Goodwin LLP
860-251-5808
[email protected]
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Worker Misclassification
Why is the Government Concerned?
• Information reporting (W-2 v. 1099)
• Tax burden (employer’s share of FICA)
• Payroll tax returns (federal and state)
• Tax payment timing (weekly v. quarterly)
• Non-tax issues: tort laws, labor laws, employment laws, employee
benefits, etc.
• Noncompliance by independent contractors
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Worker Misclassification
Why is this a Somewhat Complicated Issue in Connecticut?
• CT Department of Revenue Services (DRS):
Follows the IRS regulations and tests for determining a workers
status as an employee or independent contractor.
• CT Department of Labor (DOL):
Follows its own test referred to as the ABC Test.
• The Complication:
The tests used by the DRS and the test used by the DOL can yield
different results.
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Worker Misclassification
Connecticut Department of Revenue Services Test:
• A worker is an employee if the service recipient has the right to
control the service provider, not only as to the result to be
accomplished, but also as to the details and means by which that
result is accomplished.
• 20-factor test
• Three categories of evidence
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The 20 Factors
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Instruction
Training
Integration
Services rendered personally
Assistants
Continuity of relationship
Setting of hours
Full-time requirement
Work location
Sequence of work
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Required reports
Payment terms/frequency
Travel expenses
Furnishing tools
Significant investment
Profit or loss potential
Multiple service recipients
Service available to public
Worker’s right to terminate
Right to discharge
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Worker Misclassification
Connecticut Department of Labor ABC Test
A. The worker is free from control and direction in connection with the
performance of such service (the IRS/DRS 20-factor test).
B. The service is performed outside the usual course of the business for which
the service is performed or is performed outside of all the places of
business of the enterprise for which such service is performed.
C. The worker is customarily engaged in an independently established
business of the same nature as that involved in the service performed.
The ABC test is stated in the conjunctive, all parts must be established in
order to prove worker is an independent contractor.
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Worker Misclassification
When it Rains it Pours (a/k/a information sharing)!
• Federal/State
The IRS and CT DRS share information about employment tax audits and
worker misclassification.
• State/State
The CT DRS and the CT DOL share information about employer audits and
worker misclassification (there is also a CT Joint Enforcement Commission
on Worker Misclassification).
• Federal/Federal
September 2011 - US Dept. of Labor and IRS sign agreement to work
together to end misclassification.
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Worker Misclassification
What Can You Do?
• Perform a self-audit
• Substantiation
• Consider CT DOL unemployment insurance audit consequences
• Consider current CT DRS voluntary disclosure program
• Consider IRS Voluntary Classification Settlement Program (VCSP)
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Worker Misclassification – IRS VCSP
• An extremely generous program from the IRS
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Significantly reduces tax liability (10% - 1 year)
No interest or penalties
No audit of prior years
• VCSP Requirements
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Agree to reclassify workers moving forward
Have consistently treated workers as contractors
Be presently treating the workers as contractors
Have filed all required Forms 1099 for last 3 years
Have no classification dispute with IRS over the workers
Not be under audit by IRS, the US DOL or a state agency
Have complied with the classification result of prior IRS audits
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Successor Liability:
Connecticut Income Tax Withholding
Prior to July 1, 2011
• Successor Liability for Sales and Use Tax
• Successor Liability for Admissions and Dues Tax
Effective on or After July 1, 2011
• Successor Liability Also Applies to Connecticut Income
Tax Withholding
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Successor Liability:
Connecticut Income Tax Withholding
What is Successor Liability?
Successor liability is the obligation of the purchaser of a
business or stock of goods to withhold a sufficient amount of
the purchase price to cover any sales and use tax liability,
admissions and dues tax liability, or income tax withholding
liability, plus interest and penalties on such liability, owed and
unpaid by the seller as of the time of the sale.
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Successor Liability:
Connecticut Income Tax Withholding
How Do You Avoid Successor liability?
• Request a Tax Clearance Certificate from the DRS.
• You will receive back a tax clearance certificate or an escrow letter
(or a acknowledgement that your request was not accepted because
it didn’t contain all the required information).
• If you receive a tax clearance certificate, you are relieved from
liability for your business predecessor's tax.
• If you receive an escrow letter, you must withhold from the purchase
price the amount stated in the escrow letter and pay that amount to
the DRS.
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Successor Liability:
Connecticut Income Tax Withholding
When Should You Request a Tax Clearance Certificate?
•
As soon as you can (preferable more than 60 days before the closing).
•
If you do not know the exact closing date, include in the request the
expected closing date.
•
Once a complete request is received by the DRS, the DRS has 60 days to
send a tax clearance certificate or escrow letter.
•
If the DRS does not send the clearance certificate or escrow letter within 60
days of receipt of all required information, the purchaser is released from
successor liability.
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Responsible Person Liability:
Connecticut Income Tax Withholding
• What is responsible person liability?
• Who is a responsible person?
• When is responsible person liability imposed?
•
IRS also has responsible person liability provisions.
2137059_1
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