State and Local Tax Alert - July 2016

July 2016

Connecticut Adopts Market Sourcing For Corporation and Personal Income Tax, and Single Sales Factor for Personal Income Tax


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Summary 

On June 6, 2016, Connecticut Governor Dannel P. Malloy (D) signed into law S.B. 502, 2016 Gen. Assem., May Spec. Sess. (Conn. 2016), which adopts single sales factor apportionment for Personal Income Tax purposes, and market sourcing for Corporation and Personal Income Tax purposes.  These provisions in S.B. 502 apply to taxable years beginning on or after January 1, 2016, for Corporation Income Tax purposes and taxable years beginning on or after January 1, 2017, for Personal Income Tax purposes.
 

Details

Single Sales Factor Apportionment

For taxable years beginning on or after January 1, 2017, under the Personal Income Tax, Connecticut apportions items of income, gain, loss, and deduction attributable to a business, trade, profession, or occupation carried on in the state via a single sales factor.  This provision applies to the income of a nonresident individual, including a nonresident partner’s, shareholder’s, and beneficiary’s share of income.
 
Market Sourcing for Apportionment

For taxable years beginning on or after January 1, 2016, for Corporation Income Tax purposes and for taxable years beginning on or after January 1, 2017, for Personal Income Tax purposes, Connecticut adopts the following framework for assigning receipts from sales of other than tangible personal property held primarily for sale.  For Personal Income Tax purposes, these provisions also apply to the income of a nonresident individual, including a nonresident partner’s, shareholder’s, and beneficiary’s share of income.
 
Source to Connecticut
Receipt Form Personal Income Tax Corporation Income Tax
Service To the extent the service is used at a location in the state To the extent the service is used at a location in the state
Rental, lease, or license of tangible personal property To the extent the property is situated in the state To the extent the property is situated in the state
Rental, lease, or license of real property Excluded To the extent the property is situated in the state
Rental, lease, or license of intangible property (marketing) To the extent the good or service is purchased by a Connecticut customer To the extent the good or service is purchased by a Connecticut customer
Rental, lease, or license of intangible property (non-marketing) To the extent the property is used in the state To the extent the property is used in the state
Sale or other disposition of tangible personal property Excluded Excluded
Sale or other disposition of real property (not held primarily for sale) Excluded1 Excluded
Sale or other disposition of intangible property (not held primarily for sale) Excluded Excluded
Interest None Managed or controlled within the state
Other To the extent the taxpayer’s market for the sales is in the state To the extent the taxpayer’s market for the sales is in the state

A taxpayer that cannot reasonably determine the assignment of receipts under the foregoing rules may petition the Commissioner of Revenue for approval of a methodology that reasonably approximates the assignment of such receipts.  Connecticut requires the taxpayer to file the petition within 60 days prior to the original due date for the first return to which the petition applies.  The Commissioner is required to grant or deny the petition before the original due date for the return.
 

BDO Insights

  • Connecticut’s adoption of single sales factor apportionment for Personal Income Tax purposes aligns the apportionment of income under that tax with the apportionment of income under the Corporation Income Tax, at least with respect to taxable years beginning on or after January 1, 2017.  Connecticut adopted single sales factor apportionment for Corporation Income Tax purposes in December 2015, which applies to taxable years beginning on or after January 1, 2016.  See the BDO SALT alert that discusses Connecticut’s adoption of single sales factor apportionment for Corporation Income Tax purposes.
  • Connecticut’s adoption of market sourcing was expected given that most, if not all, states that have adopted single sales factor apportionment have also adopted market sourcing at the same time or shortly thereafter.
  • Since the new law was enacted on June 6, 2016, Connecticut taxpayers should assess what, if any, impact these law changes may have on their existing deferred tax balances, and adjust accordingly as of the enactment date.
  • We anticipate that the Department of Revenue Services, like other states that have adopted market sourcing, will need to issue further administrative guidance regarding its interpretation for determining “the extent the service is used at a location” in Connecticut.

 

West:   Atlantic:
Rocky Cummings
Tax Partner

 
  Jeremy Migliara
Tax Senior Director

 
Paul McGovern
Tax Senior Director
  Jonathan Liss
Tax Senior Director

 
Northeast:   Central:
Janet Bernier 
Tax Partner

 
  Angela Acosta
Tax Senior Director

 
Matthew Dyment
Tax Principal

 
  Nick Boegel
Tax Senior Director

 


Southeast:
  Joe Carr
Tax Principal

 
Ashley Morris
Tax Senior Director

 
  Mariano Sori
Tax Partner

 
Scott Smith
Tax Senior Director

 
  Richard Spengler
Tax Senior Director

 
Tony Manners
Tax Senior Director






 
 

Southwest:

Gene Heatly
Tax Senior Director

Tom Smith
Tax Partner