Knowledge Center

  • RSS Feed
  • Contact
  • Print


Connecticut Governor Signs Favorable Tax Legislation for Connecticut-Based Businesses

June 15, 2016

Tony Switajewski, State and Local Tax Partner

Connecticut Governor Dannel Malloy recently signed a budget implementation bill which includes favorable income tax legislation for Connecticut-based businesses. Following is a brief summary of two enacted tax legislation changes: (1) utilization of a single sales factor to determine Connecticut taxable income; and (2) market-state sales factor sourcing of service and intangible property revenue.

Single Sales Factor Apportionment

Corporations and pass-through entities (such as S corporations, partnerships, and limited liability companies) will now be able to determine the portion of their taxable income subject to Connecticut income tax based solely on a single sales factor.  Previously, many businesses had to consider their Connecticut-based property and payroll when determining the amount of taxable income subject to Connecticut income taxes.  By removing the property and payroll factor from the apportionment percentage determination, Connecticut-based businesses should see the amount of their Connecticut taxable income and associated tax liability reduced.  The following example illustrates the potential favorable impact this legislation may have for a Connecticut-based business:

Example:  Corporation ABC (a C corporation) is based in Connecticut and has 95% of its property and payroll in Connecticut and 5% of its sales are to Connecticut customers.  Under the previous law, 50% of the corporation’s taxable income was subject to tax.  Under the new law, only 5% of the corporation’s taxable income is now subject to taxation.   

For Connecticut-based businesses, the formula change to determine the apportionment percentage to be applied to the business’ taxable income can result in a substantial reduction in the business’ Connecticut income tax liability and should encourage businesses to invest their new-found money in employees and property within the state.

For C corporations, this legislation is effective for tax years beginning on or after January 1, 2016. For pass-through entities, the legislation is effective one year later; i.e., for tax years beginning on or after January 1, 2017.

Market-State Sales Factor Apportionment

In general, the determination of a business’ Connecticut sales for purposes of determining the Connecticut sales factor has been based on the destination of the property that is sold.  However, with respect to the sale of services, service revenue is not based on the destination of the service but has been based on where the work to render the service is performed. Services (and income derived from intangible assets) will now be sourced similarly to the sourcing of sales of goods; i.e., based on the destination of the service (generally, where the customer who receives the service is located).  This should have favorable income tax consequences for Connecticut-based service businesses, whereas additional tax revenue should be captured from non-Connecticut-based service businesses. The following example illustrates the impact this legislation will have on Connecticut and non-Connecticut based businesses:

Example:  Service Co. (a C corporation) is a Connecticut-based business that provides consulting services to customers throughout the world. Ninety percent (90%) of its consulting service revenue is derived from services that are provided at the company’s Connecticut location (100% of the company’s payroll and property are located in Connecticut); 10% of its revenue are from customers that are located in Connecticut.  Under the previous law, the company’s sales factor to be applied to the company’s taxable income was 90% (with an overall 95% apportionment factor).  Under the new law, only 10% of the company’s taxable income will be subject to Connecticut income taxation (considering the recently enacted single sales factor).   The change to market-state sourcing of service revenue should benefit Connecticut-based service businesses that have a vast majority of their clientele outside Connecticut.  

If Service Co. were based outside of Connecticut, and did not provide any of its services in Connecticut, under the old law, 0% of its taxable income would be subject to Connecticut income taxation. However, under the new law, 10% of its taxable income is now taxable in Connecticut (assuming it has economic nexus in the state).

The so called “market-based sourcing” rule (applied to service and intangible revenue) applies to C corporations, effective for tax years beginning on or after January 1, 2016, and for pass-through entities, effective for tax years beginning on or after January 1, 2017.


As of January 1, 2017, apportionment methodologies will be consistent among all legal entity and tax types, regardless whether the legal entity is in the form of a corporation or a limited liability company (and other entities treated as pass-through entities for tax purposes). By providing favorable income tax legislation to Connecticut-based businesses, businesses that are already here should be able to invest their dollars in Connecticut people and property without the fear of increasing their Connecticut income tax liability.  Businesses that are not here, such as those looking to start-up or relocate, should find Connecticut’s income tax regime a deciding factor when making its U.S. location decision.  

Connecticut-based and out-of-state businesses should begin to determine how their Connecticut income tax liabilities will be affected as a result of this legislation.  If you have any questions about how this legislation might affect your business or owners, please contact Tony Switajewski at (860) 561-6810 or  

(Note: Portions of the above apportionment legislation with respect to C corporations was enacted during the 2015 and the 2016 legislative session.  The apportionment legislation with respect to pass-through entities was enacted during the 2016 legislative session.  The discussion is a general explanation of the new tax provisions and the examples are for conceptual illustrative purposes only; please consult your tax advisor). 

How BlumShapiro Can Help

BlumShapiro offers the accounting, tax and business consulting expertise non-profits need today. We are one of the largest non-profit accounting service providers in New England, our blend of accounting expertise and knowledge of non-profit organizations means we can offer you tremendous added value. We can assist you in complying with state and federal grant requirements, charitable giving rules, capital campaigns, endowment fund responsibilities and other specialized needs. Learn more >>

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein.  Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities.  This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.


Advisors | Auditors | Consultants | CPAs - Blum Shapiro is one of the premier public accounting firms in the northeast and a Top 100 CPA Firm in the U.S. Our professionals serve businesses, individuals and organizations in Boston (MA), Hartford (CT), Cranston (RI), Shelton (CT) ,Quincy (MA) and Newton (MA) with audit, tax and business consulting services. Our firm has developed practice areas in automotive, construction, education, government, healthcare, hospitality, manufacturing, nonprofit organizations and professional service firms. New Haven CT, Fairfield CT, Norwalk CT, Waterbury CT.