The Connecticut Department of Revenue Services (DRS) has issued a special notice that addresses legislative changes to the apportionment of income by taxpayers computing:
- corporation business tax (CBT) liability, effective for income years beginning on or after January 1, 2016; and
- personal income tax liability, effective for tax years beginning on or after January 1, 2017.
The notice contains procedures intended to help taxpayers source their receipts under the market-based sourcing rules. In addition, examples illustrate the application of the sourcing rules.
The legislation replaced the three-factor apportionment formula consisting of property, payroll, and sales factors with a formula based solely on the sales factor. In addition, the legislation adopted market-based sourcing rules for receipts from transactions involving services and intangible property. Receipts from the sale of certain property must be excluded from both the numerator and denominator of the sales factor if the property is not held by taxpayers primarily for sale to customers in the ordinary course of the taxpayer’s trade or business.
Under market-based sourcing, receipts from the sale of services and the rental, lease or license of intangible property must be sourced to Connecticut if, and to the extent, a business or individual customer uses the services or intangible property in the state.
In general, use occurs at the location(s) where the taxpayer’s business or individual customer either directly or indirectly receives value from the service or intangible property. Taxpayers must follow procedures to identify where a customer receives value from a service or intangible property. The procedures, which depend on the facts and circumstances of the transaction, include:
- sourcing receipts based on the location of the customer’s billing address;
- the location indicated in the contract between the taxpayer and customer or the taxpayer’s books and records; or
- the location where the customer placed the order for a service.
The sourcing rules for determining the location where a business customer uses intangible property also distinguish between marketing intangibles, non-marketing and manufacturing intangibles, and mixed intangibles. If the location at which a customer uses a service or intangible property cannot be determined by the taxpayer after making reasonable inquiries, the taxpayer may reasonably approximate the location where the service or property is used. Finally, a taxpayer may petition the DRS for permission to source its receipts on an alternative basis, if, after a diligent effort to apply the procedures outlined in the notice, a taxpayer still cannot determine the proper sourcing of its receipts.
Taxpayers Required to Use Market-Based Sourcing
The apportionment and sourcing rule changes apply to taxpayers, including manufacturers, that are doing business in, or have economic nexus in and outside, Connecticut. CBT taxpayers engaged in certain activities, including air carriers, broadcasters, securities brokerages, and financial service companies, must continue to use industry specific apportionment and sourcing rules.
Need to learn more about market-based sourcing? Check out CCH CPELink