On April 17, 2017, the Connecticut Department of Revenue Services (“Department”) released eagerly awaited market-based sourcing guidance. The guidance will have an impact of virtually all companies (regardless of form) doing business within and without Connecticut. The guidance was issued in the form of Special Notice 2017(1) and provides a detailed explanation of the recent changes to Connecticut’s tax law concerning apportionment for taxpayers, including corporations, pass-through entities (such partnership and S corporations), and individuals.

For some time now there has been a trend amongst states to switch from three factor cost of performance based apportionment to single-sales factor market-based apportionment, and just such a change was implemented by statute in Connecticut during 2016. For tax years beginning on or after January 1, 2016 corporations will use a single-sales factor market-based apportionment formula. For all other taxpayers, single-sales factor market-based apportionment will come into effect for tax years beginning on or after January 1, 2017. Connecticut’s market based sourcing statute varies in several significant respects from all other states, thus, through SN 2017(1) the Department has provided relevant examples of how Connecticut’s market-based sourcing rules should be applied.

Sourcing guidance, and in some cases, specific examples, are provided for several types of receipts in SN 2017(1), including: Sales of tangible personal property (“TPP”), rental, lease, and licensure of TPP, sales of services, rental and sales of real property, and rental, lease, or licensure of intangible property. SN 2017(1) also specifies when corporations and pass-through entities source a type of receipt differently. Receipts from services are, by default, sourced based on customer’s billing address, however, special rules exist for sourcing receipts from services related to real property, TPP, and for services provided in the physical presence of a customer. For all other services, the Department will accept the sourcing of receipts based on customer billing address unless a taxpayer can demonstrate a more accurate method based on books and records of the taxpayer (including contracts with customers). The examples should be reviewed in the context of a taxpayer’s specific business, industry, and facts.

Importantly, corporations with industry-specific apportionment statutes should generally still apply those specific apportionment rules. Typically, in Connecticut, industry-specific apportionment rules do not apply to pass-through entities, however, pass-through entities that would be considered a financial service company (as defined by statute) if the entity was taxed as a corporation should look to the Financial Service Company sourcing rules when determining the market for financial service related receipts.

Taxpayers will want to carefully review SN 2017(1) before filing 2016 and 2017 income tax returns.