United States

Connecticut releases notice on single-sales factor and market sourcing


On April 17, 2017, the Connecticut Department of Revenue Services (CT DRS) issued Special Notice 2017(1), titled Legislative Changes Regarding Single-Sales Factor Apportionment and Market-Based Sourcing. The notice discusses recent legislative changes to the Connecticut Corporation Business Tax (CBT) applicable to years beginning on or after Jan. 1, 2016, and changes to the income tax applicable to taxable years on or after Jan. 1, 2017. The notice addresses the state’s economic nexus provisions, industry and the single-sales factor apportionment and market-based sourcing provisions. A few of the notice’s more noteworthy provisions are highlighted below.

Apportionment legislation

Economic nexus

In 2010, Connecticut enacted a bright-line economic nexus standard, providing that a taxpayer will have substantial economic presence with the state if it has $500,000 of receipts attributable to Connecticut sources during the tax year. For most remote businesses, this provision had little impact on whether the business established nexus with Connecticut because receipts were apportioned based on a cost-of-performance methodology. However, beginning for tax years 2016, the state adopted market-based sourcing provisions, ultimately increasing the importance of an economic nexus analysis by remote service providers. A remote service provider that may not have had $500,000 of receipts apportioned to Connecticut under a cost-of-performance methodology may now have achieved and exceeded that threshold under the market-based approach. Remote service providers should carefully review their sales under the market-based sourcing provisions to determine whether nexus with Connecticut has been established.


The notice confirms that industry-specific apportionment remains the same, except for manufacturers who now apply the general single-sales factor apportionment methodology and receipt exclusion rules.

Financial service providers

Financial services companies are required to apportion income under Connecticut General Statutes section 12-218b, and are not otherwise impacted by the apportionment legislation. However, some financial service providers may not qualify as Connecticut ‘financial service companies.’ Those financial service providers must generally apportion under section 12-218(b), and not section 12-218b. However, financial services providers should apply the financial service apportionment sourcing rules under section 12-218b to the extent the provider is sourcing financial service receipts, and not for any other receipts. Similarly, taxpayers subject to the income tax for tax periods beginning on or after Jan. 1, 2017, that provide financial services, should utilize the rules under section 12-218b(j) to the extent that the rules identify the market for the relevant services, despite these rules being captured under the CBT and not the income tax chapter.

General sourcing rules

The notice provides a chart highlighting the general sourcing rules as applicable to the CBT and income tax. Note that for CBT purposes, receipts from the sale of real property, intangible personal property and tangible property are excluded from the sales factor if not in the ordinary course of business. The gain or loss from those excluded items are included in net income and not subject to apportionment.

For income tax purposes, receipts from the sale of tangible personal property or intangible property are excluded when not in the ordinary course of business. The income or loss from the sale, rental, lease or license of real property is allocated to the state where the property is located and excluded from the sales factor. If sales of tangible personal property are excluded from the sales factor, the sale should be allocated to where the property is located. However, gain or loss from excluded intangible property is subject to apportionment if employed in the taxpayer’s business and not allocated.

Market-based sourcing rules

Individual customers and business customers

The notice provides guidance on the sourcing of receipts from the sale of services, distinguishing between individual and business customers. This distinction is a recent trend in market-based sourcing rules, starting in California and now also included in the Multistate Tax Commission market-based sourcing regulations. Generally, the sale of a service to an individual customer is sourced to Connecticut when the customer uses the service in the state. Receipts from the sale of a service to a business customer are also sourced to Connecticut to the extent the business customer uses the service in the state, however, the service is deemed to be used in the state to the extent that the service relates to the business customer’s activities in the state. Intermediary transactions, applicable only to business customers, are sourced based on the location of the ultimate customer and not the taxpayer’s customer.

Another distinction between individual and business customers relates to the sourcing of receipts from the rental, lease or license of intangible property. Generally, that property is sourced to the extent the business customer uses it in the state. The sourcing of intangibles is dependent on whether the intangible is considered a marketing intangible, non-marketing and manufacturing intangible or mixed intangible.

Reasonable inquiry and reasonable approximation

The notice explains that a taxpayer must make reasonable inquiries to its business customers to determine where the use of the taxpayer’s services or intangible property will occur. Those inquiries are not required if the taxpayer has more than 250 business customers purchasing substantially similar services and no more than 5 percent of receipts from services or intangible property are from a single customer.

Reasonable approximation may also be used when the location where the service or intangible property is used cannot be determined or obtaining the location would require undue effort or expense and the taxpayer has sufficient information to estimate the location where the service or property is used.


The guidance provided in this special notice was long-anticipated since the enactment of the recent apportionment legislation. In addition to providing guidance on the single-sales factor and market-based sourcing rules, the notice provides 28 examples that help apply the issued guidance and enacted statutory language. Given the significant changes and refinements within Connecticut, taxpayers should be cognizant of varied tax implications for the 2016 and 2017 tax periods, for the CBT and income tax respectively. Other guidance issued from the CT DRS pertaining to the law changes for the CBT includes Special Notice 2016(1), Combined Unitary Legislation – Corporation Business Tax and OCG-3, Office of The Commissioner Guidance – Regarding the Calculation of the Corporation Business Tax on a Combined Unitary Basis.


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