United States: Connecticut Enacts Legislation Shifting State To Market-Based Sourcing

On June 2, 2016, Connecticut Governor Dannel Malloy signed legislation that will shift the state to market-based sourcing under both the corporate and personal income tax systems.1 While the corporate income tax sourcing provisions are applicable for tax years beginning on or after January 1, 2016, the personal income tax sourcing provisions will be delayed until the 2017 tax year. Additionally, the legislation moves the state to single sales factor apportionment under its personal income tax system. The legislation also creates two new sales and use tax exemptions and makes revisions to the state's angel investor credit.

Implementation of Market-Based Sourcing

Corporate Income Tax

Effective June 2, 2016, and applicable to income years beginning on or after January 1, 2016,2 gross receipts from services are assignable to Connecticut if the market for the services is in the state.3 A taxpayer's market for the service is in Connecticut to the extent the service is used at a location in the state.4

The legislation directs that gross receipts from the rental, lease or license of real or tangible personal property is assigned to Connecticut to the extent the property is located in the state.5 Gross receipts from the rental, lease or license of intangible property is assigned to Connecticut to the extent the property is used in the state.6 Intangible property used in marketing a good or service to a consumer is used in Connecticut if that good or service is purchased by a consumer in the state.7

Under the legislation, an occasional sale exclusion is created, under which gross receipts from the sale or other disposition of real property, tangible personal property or intangible property are excluded from the apportionment calculation 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.8

The legislation also includes a catchall provision under which gross receipts, other than those specifically set forth in the statute, are assigned to Connecticut to the extent the taxpayer's market for the sales is in the state.9

Personal Income Tax

Generally similar sourcing provisions are enacted for personal income tax purposes.10 In contrast to the sourcing provisions applicable to corporations, the sourcing provisions for individuals take effect January 1, 2017, and are applicable to income years commencing on or after such date.

Reasonable Approximation

Notably, the legislation contains provisions allowing a taxpayer to use reasonable approximation as an alternative sourcing methodology under both the corporation and personal income tax.11 Specifically, if a taxpayer concludes that it cannot reasonably determine the assignment of its receipts using the above sourcing rules, the taxpayer can petition the Commissioner to use a methodology that reasonably approximates the assignment of these receipts.12 The petition must be submitted no later than 60 days before the due date of the return for the first income year to which the petition applies (extended due date if an extension is requested), and the Commissioner is required to act on the petition before the due date of the return.13

Single Sales Factor Apportionment

Effective January 1, 2017, and applicable to income years beginning on or after such date, Connecticut will move to single sales factor apportionment under its personal income tax system.14 Under the legislation, the proportion of the net amount of items of income, gain, loss and deduction attributable to activities of a business, trade, profession or occupation carried on in Connecticut will be determined by multiplying such amount by the gross income percentage.15 The gross income percentage will be computed by dividing the gross receipts from sales earned in Connecticut by the total gross receipts from sales everywhere.16 Current law uses an equally-weighted three-factor formula consisting of property, payroll and gross income.17

With respect to the treatment of pass-through income, current law provides that the portion of a nonresident partner's distributive share of partnership income,18 a nonresident shareholder's pro rata share of S corporation income19 and a nonresident beneficiary's share of trust or estate income20 derived from or connected with sources in Connecticut must be determined under regulations issued by the Commissioner (which are required to be consistent with the personal income tax sourcing provisions). Effective January 1, 2017, and applicable to income years commencing on or after such date, these items must be determined in accordance with the new sourcing provisions applicable to the personal income tax.21

Miscellaneous Provisions

Sales and Use Tax Exemptions

Effective July 1, 2018, and applicable to sales occurring on and after such date, sales of feminine hygiene products and sales of disposable or reusable diapers will be exempt from sales and use tax.22

Credit for Angel Investors

Effective July 1, 2016, and applicable to taxable years beginning on or after January 1, 2016, Connecticut's credit for angel investors (accredited investors who review businesses for potential investment) may be sold, assigned or transferred.23 Additionally, the legislation extends the termination date of the credit from July 1, 2016 to July 1, 2019.24


Connecticut's move to market-based sourcing reflects the general trend among states to shift to this sourcing methodology. The popularity of market-based sourcing is based on the states' enhanced ability to tax multistate businesses that generate income from in-state sources. However, while there may be a steady uniform movement towards market-based sourcing, there is a lack of uniformity among the states on the type of market-based sourcing system being implemented.

One area where this variance is most evident is in the concept of what constitutes the market. For example, under the Connecticut legislation, gross receipts from services are sourced to Connecticut if the market for the services is in the state, which is defined as the location in which the service is used. Not all states follow Connecticut's view of the market. Sometimes, states look to the location in which the service benefits the customer, while other states look to the location in which the service is delivered, and still others look to the ordering or billing address of the customer receiving the service. Faced with such variances among states' market-based sourcing rules, taxpayers may be tempted to rely on a customer's billing address (arguably the easiest method) rather than following the myriad of sourcing rules. By doing so, taxpayers subject themselves to potential exposure.

Connecticut's new sourcing rules highlight another challenge confronting taxpayers – the lack of specificity in adopted statutes relating to the sourcing of sales. In many jurisdictions, sourcing statutes provide only a modicum of guidance, leaving the state tax authority with the task of filling in the gaps through regulations. The broad language in Connecticut's statute is going to make it difficult for taxpayers to determine if they are properly complying with the new statutory rules. Of further concern to corporations is the intent of the Connecticut legislation for the market-based sourcing provisions to apply to the 2016 tax year, without any idea of when regulations will be promulgated. The application of these rules in the 2016 tax year will require immediate consideration for purposes of income tax accounting under ASC 740.


1 Public Act No. 16-3 (S.B. 502), Laws 2016.

2 Public Act No. 16-3 (S.B. 502), Laws 2016, § 199.

3 CONN. GEN. STAT. § 12-218(b)(2).

4 Id.

5 CONN. GEN. STAT. § 12-218(b)(3).

6 CONN. GEN. STAT. § 12-218(b)(4).

7 Id.

8 CONN. GEN. STAT. § 12-218(b)(6).

9 CONN. GEN. STAT. § 12-218(b)(7).

10 CONN. GEN. STAT. § 12-711(c).

11 CONN. GEN. STAT. §§ 12-218(b)(8); 12-711(c)(2)(H).

12 Id.

13 Id.

14 CONN. GEN. STAT. § 12-711(c)(2). Corporations use single sales factor apportionment. CONN. GEN. STAT. § 12-218(b).

15 CONN. GEN. STAT. § 12-711(c)(2).

16 Id.

17 Id.

18 CONN. GEN. STAT. § 12-712(a)(1).

19 CONN. GEN. STAT. § 12-712(a)(2).

20 CONN. GEN. STAT. § 12-712(a)(3).

21 CONN. GEN. STAT. § 12-712(a)(1), (2), (3).

22 CONN. GEN. STAT. § 12-412(122), (123).

23 CONN. GEN. STAT. § 12-704d(b).

24 CONN. GEN. STAT. § 12-704d(e)(1).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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