As reported upon by Martha Kessler in the Daily Tax Report, Governor Dannel P. Malloy (D) of Connecticut called for the Connecticut legislature to deal with the budget deficit in a special session in December. The state has included in the enacted budget Public Act No. 15-1 (Senate Bill 1601) changes to the state’s apportionment formula and adjustments to the mandatory combined reporting scheme instituted in June of 2015.
For tax years beginning before Jan. 1, 2016, Connecticut has a scheme in which the apportionment formula for a corporation varies depending on the nature of its business. Corporations that are not deriving income from manufacturing, selling, or using tangible personal or real property use a single-factor formula based on receipts to calculate their apportioned income for Connecticut. However, corporations that do derive their income from manufacture, sale or use of tangible personal or real property use a three factor formula with a double weighted sales factor.
Under the provisions of 2015 Conn. S.B. 1601, for tax years beginning on or after Jan. 1, 2016, most corporations will now be required to use a single-sales factor apportionment formula to determine their Connecticut income. The budget act provides for an election, available to manufacturers for whom 75 percent of their total gross receipts are from sales of tangible personal property directly to the U.S. government, to use the three factor double weighted sales formula.
As noted in the Bloomberg BNA Survey of State Tax Departments, there has been a growing trend toward single-sales factor apportionment among states, with New York, New Jersey, Rhode Island and Washington D.C. all recently moving to this method of apportionment. Connecticut joins this trend by making its single-sales factor apportionment a requirement for most corporations in the state.
The Budget Act also contained adjustments to Connecticut’s recently enacted mandatory combined reporting scheme. Notably, the Act includes a cap stating that the tax calculated for a combined group on a combined unitary basis may not exceed the nexus combined base tax by more than $2.5 million, prior to surtax and application of credits. The nexus combined base tax is the sum of amount of tax on each entity that is part of the combined group calculated as if it were not required to be part of a combined return. It should be noted that this is only to the extent of the income that each entity would have apportioned to Connecticut if their tax were calculated separately.
The new cap appears to be an effort to lessen the previously increased burden to be placed on corporations who are now required to file as part of combined returns by limiting the total increase in tax to a specific number.
The text of the Act can be read in full here:
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states continue the trend toward single-sales factor apportionment?
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