Connecticut enacts market-based sourcing bill
Also implements single sales factor apportionment for all
TAX ALERT |
UPDATE (6/8/16): On June 2, 2016, Connecticut Gov. Dannel Malloy signed SB 502 into law. Connecticut will adopt market-based sourcing provisions for service income, effective for corporate taxpayers beginning in tax year 2016. Personal income taxpayers and nonresident individuals share of income from a pass-through entity will also be subject to the new market-based sourcing provisions and the single sales factor, enacted last year for corporate taxpayers, effective beginning in 2017. Both corporate and pass-through entities should review their Connecticut activities and sourcing to determine the impact of the new provisions.
ORIGINAL (5/8/16): On May 13, 2016, the Connecticut legislature passed the state’s biennial budget, SB 501, and an implementer bill, SB 502, which, when signed, will implement market-based sourcing for income tax purposes and expand the state’s single sales factor apportionment method to pass-through entities.
Effective for tax years beginning on or after Jan. 1, 2016, SB 502 amends Connecticut General Statutes Sec. 12-217 to implement the following sourcing rules applicable to the state’s corporation business tax:
- Gross receipts from sales of tangible property are sourced based upon the location of delivery.
- Gross receipts from sales of services are sourced based upon the market for those services. Market is determined based upon the location of the use of the services.
- Gross receipts from the rental, lease or license of real or tangible property are sourced to the state where the property is situated.
- Gross receipts from the rental, lease or license of intangible property are sourced to the location where the property is used. Marketing intangibles are used at the location where the customer that purchased the marketed goods or services is located.
- Gross receipts from interest are sourced to the location where the interest-bearing instrument is managed or controlled.
- Gross receipts from the sale or other disposition of real, tangible or intangible property are excluded from the sales apportionment factor if the property is not held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business.
- Any other gross receipts are sourced based upon market.
- If a taxpayer cannot reasonably determine the source of gross receipts under these rules, the taxpayer may petition the state to use a reasonable approximation. This petition must be submitted in writing no later than 60 days prior to the due date of the return.
Further, effective for tax years beginning on or after Jan. 1, 2017, SB 502 amends Connecticut General Statutes Sec. 12-711 to implement equivalent market-based sourcing rules for personal income tax purposes. This change in sourcing methodology also applies to Connecticut General Statutes Sec. 12-712, which controls the sourcing of a nonresident individual’s income from a partnership, S corporation, trust and estate. Lastly, SB 502 extends the state’s single sales factor apportionment methodology to pass-through entities.
Connecticut Gov. Dannel P. Malloy has indicated that he supports the SB 502 and it is expected that he will sign the bill in the near future. Taxpayers should review their activities within Connecticut, as passage of the bill may have a significant impact on cash taxes and the value of deferreds, particularly when coupled with the state’s change from a three-factor to a single sales factor apportionment formula. For more information regarding Connecticut’s implementation of single sales factor apportionment, please read our prior article, Connecticut adopts significant tax changes in biennial budget.