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Connecticut Changes to Market-Based Sourcing

On June 2, 2016, the Governor of Connecticut signed legislation adopting market-based sourcing for purposes of a corporation apportioning receipts from services. This is effective for years beginning on or after January 1, 2016. The effect of the change to market-based sourcing is that income from services will now be considered Connecticut source income if the customer receives the benefit of the service in Connecticut regardless of where the service was performed. However, this does not necessarily result in a nexus determination in Connecticut. If you have no physical presence in Connecticut, and no other nexus connection, you would need $500,000 (subject to annual adjustments) to be subject to Corporation Tax in Connecticut. Prior to this change, the method was called Cost of Performance Method, which means that income was sourced to the location that the service was performed. Market-based sourcing has been adopted by many states, and the list is growing. New York State adopted economic nexus and market based sourcing for all receipts beginning January 1, 2015.

What is the reason for the change? These and other recent changes, such as economic nexus rules and single sales factor apportionment, are a benefit to resident corporations, attracting new business to the state, while at the same time pulling in additional tax from foreign corporations.

The way it benefits resident corporations is:

If you are a corporation that is a service business and you perform that service in your New York office and that service is for the benefit of a customer located in Connecticut, that would not be New York source income. Now that Connecticut went to market-based sourcing, it becomes Connecticut source income, but still not taxed unless the sales to Connecticut are over $500,000.

As the above new regulations show, state taxes are undergoing constant change. If you have questions on these issues, callĀ 516-938-5219.

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