Tax Flash – State of Connecticut Passes New Budget

On June 2, 2016, Connecticut (“CT”) Governor Daniel Malloy signed the state’s budget for the 2016-17 fiscal year into law. The legislation contained several noteworthy changes for corporate income tax, personal income tax, and sales tax purposes.

Highlights of the legislation include:

1. Market-based sourcing of gross receipts for both corporate and personal income tax purposes.
2. Single receipt factor for personal income tax purposes (beginning with the 2017 tax year).
3. Additional sales and use tax compliance requirements.
4. A new estate tax deduction beginning in 2021.

1. Market-based sourcing of gross receipts for both corporate and personal income tax

• Market-based sourcing for corporations is effective for tax years beginning on or after January 1, 2016.
• Market-based sourcing for individuals, S-corporations, partnerships and trusts is effective for tax years beginning on or after January 1, 2017.
• Types of gross receipts and how sourced:
  • Sales of tangible personal property are CT receipts if delivered in the state.
  • Service revenues are CT receipts if the market for the service is in the state. Note that the market for the services is CT if and to the extent the service is used at a location in the state.
  • Receipts from rents, leases, or licenses of real or tangible personal property are CT receipts to the extent the property is situated in CT.
  • Receipts from rents, leases, or licenses of intangible property are CT receipts if and to the extent the property is used in the state. Intangible property utilized in marketing a good or service to a consumer would be deemed used in the state if that good or service is purchased by a consumer in the state.
  • (Corporate income tax) Receipts from interest are CT receipts if managed or controlled within the state.
  • (Corporate income tax) Receipts from the sale or other disposition of property (real, tangible personal, or intangible) are excluded from the 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.
  • (Personal income tax) Receipts from the sale, rental, lease or license of real property are excluded from the receipts factor. Note that individuals must directly allocate such receipts where applicable per CT’s regulations (e.g., income from CT real estate is allocated to CT).
  • All other gross receipts are assigned to CT based upon market-based sourcing rules.
• Note that for tax years beginning on or after January 1, 2017, nonresident individuals must source business income to CT (including distributive income from S corporations, partnerships, and LLCs treated as partnerships for income tax purposes) using the sourcing provisions discussed above.
• If the sourcing of receipts cannot be reasonably identified pursuant to these rules, taxpayers may submit a petition to request a methodology that reasonably approximates the assignment of such receipts. The petition must be filed no later than 60 days before the due date of the return.

2. Single receipt factor for personal income tax purposes

• For individuals, S-corporations, partnerships and trusts, a single receipt factor replaces the three factor apportionment formula, effective for tax years beginning on or after January 1, 2017.

3. Sales & Use Tax

• Regarding sales & use tax (and cigarette tax) licenses, effective January 1, 2017, seller’s permits will not be renewed if the applicant has failed to file any required returns. Previously, such licenses would not be renewed only if the applicant had outstanding taxes due.

4. Estate Tax

• For decedents passing away after January 1, 2021, an estate tax reduction is established for estates that made qualifying investments (e.g., investments made for a period of 10 years or longer) through Connecticut Innovation/CTNext’s investment program. The reduction is equal to 50% of the investment, up to $5 million per decedent and capped at $30 million in total tax reduction.

If you have any questions how the new budget changes may affect you personally or your business, please contact your Marcum tax advisor.