Connecticut proposes digital advertising services tax and employee-elective wage compensation tax on employers

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLPOn April 14, 2021, the Connecticut General Assembly’s Joint Committee on Finance Revenue and Bonding introduced SB1106. The bill would establish the “Connecticut Equitable Investment Fund,” which would be funded by, among other things: (1) a new digital advertising services tax; and (2) a new wage compensation tax, whereby, at an employee’s or independent contractor’s election, an employer would be required to pay a tax equal to 5% of the electing employee’s wages or electing independent contractor’s payments.

Digital advertising services tax proposal

SB1106 would create a new tax on a person’s annual gross revenues derived from digital advertising services in Connecticut. The definition of “digital advertising services” broadly includes “advertisement services on a digital interface, including banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The tax rate varies from 2.5% to 10% of the annual gross revenues derived from digital advertising services in Connecticut, depending on the taxpayer’s global annual gross revenues. To be required to pay the tax, the taxpayer must have at least $100,000,000 of global annual gross revenues.

SB1106 does not address how to source digital advertising services receipts, instead requiring the Department of Revenue Services to adopt regulations. If enacted, the digital advertising services tax would be effective on January 1, 2022.

Eversheds Sutherland Observation: This digital advertising services tax proposal is largely based upon the Digital Advertising Gross Revenues Tax recently enacted (and amended) in Maryland. See our prior Legal Alert.

Wage compensation tax proposal

SB1106 would also create a new “wage compensation” tax, whereby each employee earning more than $40,000 in annual gross income may elect to have their employer pay a tax equal to 5% of the electing employee’s wages. The wage compensation tax would be paid by an employer for any employees who make the necessary election, and each electing employee would be allowed a refundable credit against their own Connecticut personal income tax liability equal to 95% of the wage compensation tax paid by the employer related to such employee’s wages. If enacted, the wage compensation tax would take effect on January 1, 2022.

Eversheds Sutherland Observation: This wage compensation tax proposal has similarities to New York’s Employer Compensation Expense Tax (discussed in a prior Legal Alert)—but in New York, it is the employers who may elect into the tax regime. While not explicit in the legislation, it would seem that—like in New York—an electing employee would be allowed to adjust their Connecticut personal income tax withholdings to reflect the anticipated tax credit related to the wage compensation tax paid by their employer.

SB1106 would require employers to: (1) inform their employees of the wage compensation tax, and provide information about how an employee may make an election; and (2) provide their employees with an estimated tax table that provides projections of what such employee’s wages and personal income tax liability “might be” if an employee makes (or does not make) such an election. Employers would be barred from prohibiting employees from electing their employers into the wage compensation tax, but would be allowed to establish “a reasonable minimum period of time that an electing employee is required” to maintain an election. And those individuals (presumably fellow employees) with the employer who are required to comply with the wage compensation tax on behalf of electing employees would be joint and severally liable with the employer for the failure to remit the tax.

SB1106 would also require a similar election to be made available to any individual issued an IRS Form 1099. If such an individual elects for the wage compensation tax to apply, any amounts reportable on Form 1099 would be treated as “wages paid” to such individual and the Form 1099 issuer would be subject to the wage compensation tax on such amounts.

Next steps

The Connecticut General Assembly’s joint Finance, Revenue and Bonding Committee has scheduled a public hearing on SB1106 on Tuesday April 20, 2021. Because SB1106 appears to have significant support within the General Assembly, the public hearing is expected to draw hundreds of persons, business, and organizations to testify both for and against the bill. The Connecticut General Assembly does not adjourn until June 9, 2021, leaving sufficient time for this proposal to move.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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