State & Local Tax Alert
Breaking state and local tax developments from Grant Thornton LLP
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Release date
Connecticut Enacts Legislation Amending Mandatory Combined
Reporting, Adopting Singles Sales Factor Apportionment
States
On December 29, 2015, Connecticut Governor Dan Malloy signed a budget bill passed by
the legislature during a recent special session that makes many tax law changes, including
amendments to the mandatory unitary combined reporting statutes and adoption of a
single sales factor apportionment formula.1 The legislation also amends the corporate
income tax general credit limitations and the net operating loss (NOL) provisions. In
addition, the legislation enacts personal income tax sourcing provisions for nonresidents
who perform services. This is the latest round of major tax reform legislation enacted by
Connecticut. On June 30, 2015, Connecticut enacted budget legislation that contained
sweeping tax reform featuring unitary mandatory combined reporting.2
Mandatory Unitary Combined Reporting
In June 2015, budget legislation was enacted that adopted mandatory unitary combined
reporting for tax years beginning on or after January 1, 2016. The recent legislation
amends several of the unitary combined reporting provisions, generally effective for tax
years beginning on or after January 1, 2016, including placing a cap on the incremental
amount of tax owed as a result of the mandatory unitary combined reporting.
Incremental Tax Cap
As amended, the tax calculated for a combined group on a combined unitary basis, prior
to the surtax and application of credits, may not exceed the “nexus combined base tax” by
more than $2.5 million.3 The nexus combined base tax equals the tax measured on the
sum of the net income or loss of each taxable member, or the minimum tax base of each
taxable member, as if the members were not required to file a combined unitary tax
return.4 However, this is limited to the extent that the income, loss or minimum tax base
1
Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015; Special Notice 2015(11), Connecticut
Department of Revenue Services, Dec. 22, 2015.
2 Public Act 15-244 (H.B. 7061), Laws 2015; Public Act 15-5 (S.B. 1502), June Spec. Sess., Laws
2015. For a detailed discussion of the budget legislation that was enacted in June 2015, see GT
SALT Alert: Connecticut Enacts Sweeping Tax Reform Including Mandatory Unitary Combined
Reporting Requirement.
3 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, adding Public Act 15-244
(H.B. 7061), Laws 2015, § 139(k)(1).
4 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, adding Public Act 15-244
(H.B. 7061), Laws 2015, § 139(k)(2)(A).
.
January 14, 2016
Connecticut
Issue/Topic
Multiple Taxes
Contact details
Matthew DiDonato
New York - Manhattan
T 212.542.9960
E [email protected]
Art Burkard
New York - Manhattan
T 212.542.9600
E [email protected]
Rob Michaelis
Boston
T 508.983.3150
E [email protected]
Jamie C. Yesnowitz
Washington, DC
T 202.521.1504
E [email protected]
Chuck Jones
Chicago
T 312.602.8517
E [email protected]
Lori Stolly
Cincinnati
T 513.345.4540
E [email protected]
Priya Nair
Washington, DC
T 202.521.1546
E [email protected]
www.GrantThornton.com/SALT
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of any taxable member is separately apportioned to the state pursuant to Connecticut
statute except for the specific intercompany eliminations discussed below. Intercompany
dividends are eliminated in computing the separate net income or loss. Intangible expenses
and costs and interest expense are also eliminated, as is the income attributable to such
items, provided those expenses are subject to Connecticut’s addback provisions and
provided that the related members are both taxable members of the combined group.5
Additionally, intercorporate stockholdings are eliminated in computing the combined
additional tax base.6
Items Included in Combined Group’s Net Income
The recent legislation amends the provisions listing the items that must be included in a
combined group’s net income. Under existing law, if the unitary business has income from
an entity that is treated as a pass-through entity, the combined group’s net income must
include its member’s direct and indirect share of the pass-through entity’s unitary business
income.7 As amended, the distributive share of income received by a limited partner from
an investment partnership will not be considered to be derived from a unitary business
unless the general partner of the investment partnership and the limited partner have
common ownership.8 If the limited partner is otherwise carrying on or doing business in
the state, it must apportion its distributive share of income from an investment
partnership using special apportionment provisions.9 If the limited partner is not otherwise
carrying on or doing business in the state, its distributive share of income from an
investment partnership is not taxable.10
Application of Federal Consolidated Return Regulations
The June 2015 legislation provided that intercompany gains among members of the same
combined group are treated in a manner consistent with Treas. Reg. Section 1.1502-13 and
generally deferred.11 The recent legislation replaces this provision to clarify that the
principles set forth in the Treasury Regulations promulgated under Internal Revenue Code
(IRC) Section 1502, including the principles relating to deferrals, eliminations and
exclusions, apply to the extent consistent with the Connecticut combined group
membership and reporting principles.12
5
Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, adding Public Act 15-244
(H.B. 7061), Laws 2015, § 139(k)(2)(B).
6 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, adding Public Act 15-244
(H.B. 7061), Laws 2015, § 139(k)(2)(A).
7 Public Act 15-244 (H.B. 7061), Laws 2015, § 139(a)(4).
8 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, adding Public Act 15-244
(H.B. 7061), Laws 2015, § 139(a)(4)(B).
9 See CONN. GEN STAT. § 12-218(g)(2).
10 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, adding Public Act 15-244
(H.B. 7061), Laws 2015, § 139(a)(4)(B).
11 Public Act 15-244 (H.B. 7061), Laws 2015, § 139(a)(6).
12 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, amending Public Act 15-244
(H.B. 7061), Laws 2015, § 139(a)(6).
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Entities Included in Group
The recent legislation amends the provision concerning the entities that are included in the
combined group. Under existing law, a combined unitary group generally files a return on
a water’s edge basis, but it may elect to file on a worldwide unitary or federal affiliated
group basis.13 Combined unitary groups filing on a water’s edge combined basis generally
include U.S. companies, any companies with at least 20 percent of their payroll and
property in the U.S., and companies located in designated tax havens.14 The recent
legislation repeals the inclusion of companies earning at least 20 percent of their gross
income from intangible property or service-related activities.15 Also, while retaining a
qualitative list of factors contained in the definition of the term “tax haven,” the recent
legislation explicitly provides that “tax haven” does not include a jurisdiction that has
entered into a comprehensive income tax treaty with the U.S.16 Furthermore, the Tax
Commissioner is no longer directed to publish a list of tax havens.
Apportionment
Existing law provides that each taxable member of a combined group must use
Connecticut apportionment law, including sourcing rules, to compute its applicable
apportionment factor.17 If any member of the group is taxable outside Connecticut, all
members have the right to apportion income in accordance with the rules provided in
determining a combined group apportionment factor.18 This provision is amended to
allow financial service companies that are members of the combined group the same right
to apportion income in accordance with the rules provided in determining a combined
group apportionment factor.19
Capital Base Tax
Each combined unitary group also is subject to a capital base tax.20 In determining the
combined group’s additional capital base tax, the recent legislation provides that assets and
liabilities attributable to transactions with another member of the combined group,
including, but not limited to, a financial service company, are eliminated.21
13
Public Act 15-244 (H.B. 7061), Laws 2015, § 140(a), (b).
Id.
15 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 37, repealing Public Act 15-244
(H.B. 7061), Laws 2015, § 140(b)(3).
16 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 37, amending Public Act 15-244
(H.B. 7061), Laws 2015, § 140(b)(4).
17 Public Act 15-244 (H.B. 7061), Laws 2015, § 139(b)(1).
18 Public Act 15-244 (H.B. 7061), Laws 2015, § 139(b)(5).
19 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, amending Public Act 15-244
(H.B. 7061), Laws 2015, § 139(b)(5).
20 Public Act 15-244 (H.B. 7061), Laws 2015, § 139(f).
21 Public Act No. 15-1 (S.B. 1601), Dec. Spec. Sess., Laws 2015, § 36, amending Public Act 15-244
(H.B. 7061), Laws 2015, § 139(f)(1). Note that financial service companies are excluded from the
calculation of the capital base for combined unitary groups and are instead subject to the capital
base tax at the minimum $250 amount. Public Act 15-244 (H.B. 7061), Laws 2015, § 139(f)(2),
(h)(2).
14
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Foreign Corporations
Under existing law, any company that derives income from sources within Connecticut
and that has a substantial economic presence within the state, without regard to physical
presence, and to the extent permitted by the U.S. Constitution, is subject to the state’s
corporate income tax.22 However, these provisions do not apply to a company that is
treated as a foreign corporation under federal law and has no income effectively connected
with a U.S. trade or business.23
To the extent that a company that is treated as a foreign corporation under federal law has
income effectively connected with a U.S. trade or business, the company’s gross income,
notwithstanding any of the combined reporting provisions, is its income effectively
connected with its U.S. trade or business.24 For apportionment purposes, only items
effectively connected with the company’s U.S. trade or business are considered in
calculating the company’s apportionment fraction. As amended, the provisions in this
paragraph do not apply to a foreign corporation that is included in a combined group.25
Single Sales Factor Apportionment
For tax years beginning on or after January 1, 2016, the legislation adopts a single sales
apportionment factor that will apply to most taxpayers.26 Taxpayers previously used
different apportionment formulas in Connecticut depending on their type of business. In
general, net income derived from business other than the manufacture, sale or use of
tangible personal or real property was apportioned using a single sales factor.27 Net income
derived from the manufacture, sale or use of tangible personal or real property was
apportioned using a three-factor formula with a double-weighted sales factor.28 However,
there were some exceptions to these general rules. For example, the income of a taxpayer
that was primarily engaged in manufacturing activities was apportioned using a single sales
factor.29
As amended, most taxpayers will apportion income to Connecticut using a single sales
factor. However, the statute continues to provide that a taxpayer that receives at least 75
percent of its income from the sale of tangible personal property to the U.S. government
may elect to use a three-factor formula with a double-weighted sales factor.30
The change to the single sales factor method of apportionment applies only to the income
tax base and does not apply to the capital base (which will continue to require
apportionment based on the value of intangible assets and tangible property).31
22
CONN. GEN STAT. § 12-216a(a).
CONN. GEN STAT. § 12-216a(b)(1).
24 CONN. GEN STAT. § 12-216a(b)(2).
25 Id.
26 CONN. GEN STAT. § 12-218(b).
27 Former CONN. GEN STAT. § 12-218(b).
28 Former CONN. GEN STAT. § 12-218(c).
29 Former CONN. GEN STAT. § 12-218(k).
30 CONN. GEN STAT. § 12-218(j).
31 CONN. GEN STAT. § 12-219a(a).
23
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General Credit Limitations
For tax years beginning on or after January 1, 2015, the June 2015 budget legislation limits
the application of credits to 50.01 percent of tax due.32 For tax years beginning on or after
January 1, 2016, the recent legislation allows taxpayers to claim certain credits in excess of
the general 50.01 percent limitation.33 The increased credit limitation applies to the “excess
credits” available under the research and experimental expenditures tax credit,34 research
and development expenses tax credit,35 and urban and industrial site reinvestment tax
credit.36 Taxpayers may claim these excess credits that remain after application of the
general 50.01 percent limitation.37 However, the aggregate amount of tax credits and
excess credits may not exceed the following amounts:
•
•
•
•
For tax years beginning in 2016, 55 percent;
For tax years beginning in 2017, 60 percent;
For tax years beginning in 2018, 65 percent; and
For tax years beginning after 2018, 70 percent.38
NOL Election
The recent legislation amends the NOL election provisions that were enacted earlier in
2015. Under the June 2015 legislation, for tax years beginning on or after January 1, 2015,
the amount of NOLs that may be applied against income is limited to an amount equal to
50 percent of net income.39 However, combined groups with over $6 billion of unused
NOLs for tax years beginning before January 1, 2013 may make an election to forfeit 50
percent of their unused NOL balance and use the reduced balance to exceed the 50
percent limitation in tax years beginning on or after January 1, 2017. The recent legislation
allows combined groups to make this election for tax years beginning on or after January
1, 2015. Also, the recent legislation amends the statute to provide that combined groups
making the election cannot use the remaining NOLs to reduce the group’s tax to less than
$2.5 million, prior to the surtax and application of credits.40
Personal Income Tax Sourcing
For tax years beginning on or January 1, 2016, personal income tax sourcing rules are
added for nonresident employees who perform personal services in Connecticut.41
Specifically, compensation for personal services rendered in Connecticut by a nonresident
employee who is present in the state for up to 15 days during a taxable year is not sourced
to Connecticut.42 However, if a nonresident employee is present in Connecticut for more
than 15 days during a taxable year, all compensation that the employee receives for the
rendering of all personal services in the state is sourced to Connecticut. This provision
32
CONN. GEN STAT. § 12-217zz(a)(2). Previously, credits had been allowed to reduce taxable
income by up to 70 percent.
33 CONN. GEN STAT. § 12-217zz(a)(3).
34 CONN. GEN STAT. § 12-217j.
35 CONN. GEN STAT. § 12-217n.
36 CONN. GEN STAT. § 32-9t.
37 CONN. GEN STAT. § 12-217zz(a)(3).
38 Id.
39 CONN. GEN STAT. § 12-217(a)(4).
40 Id.
41 CONN. GEN STAT. § 12-711(b)(2).
42 CONN. GEN STAT. § 12-711(b)(2)(A).
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only applies to compensation for personal services rendered by a non-resident employee
and excludes the income of an athlete, entertainer or performing artist.43
The statute also was amended to provide that income from a business, trade, profession or
occupation carried on in Connecticut includes, but is not limited to, compensation paid to
a nonresident natural person for rendering personal services as an employee in the state.44
Commentary
The implementation of mandatory unitary combined reporting in Connecticut has been a
lengthy and complex process. The initial budget bill, H.B. 7061, was passed by the
legislature on June 3, 2015, at the conclusion of the regular legislative session by a slim
margin,45 despite significant efforts from large Connecticut-based corporations to prevent
its passage. Before the initial budget bill was signed into law by Governor Malloy, several
prominent Connecticut-based companies voiced significant concern regarding its tax
implications and threatened to move their operations outside the state.
As a result, the legislature was called into special session to enact S.B. 1502 implementing
the budget and altering some of the more controversial provisions included in the original
law. Specifically, the new legislation delayed implementation of the unitary combined
reporting requirement and discarded a proposed increase to the sales and use tax rate
applicable to sales of computer and data processing services.
Despite the changes made by S.B. 1502, there continued to be controversy surrounding
the combined reporting provisions. As a result, the legislature was called into special
session during December 2015 to further amend the combined reporting statutes as well
as other provisions. Several of the recent changes were specifically tailored to benefit the
Connecticut-based companies that had challenged the enactment of the legislation earlier
in 2015. For example, the incremental tax cap is set at a very high amount, so that the
effect of the cap in limiting any additional tax burden resulting from mandatory unitary
combined reporting will only be felt by a select few taxpayers. On the other hand, the
exclusion of companies earning at least 20 percent of their gross income from intangible
property or service-related activities from the combined group may have broader effect.
The legislation contains significant amendments beyond the scope of combined
reporting.46 The move to a single sales factor for most taxpayers is an important
development. Apportionment of income to Connecticut traditionally has been a complex
procedure because the apportionment formula varied depending on the source of a
43
CONN. GEN STAT. § 12-711(b)(2)(C).
CONN. GEN STAT. § 12-711(b)(2)(A). Note that this provision applies “[b]efore, on and after the
effective date of this section.”
45 The legislation was approved by the Senate by a 19-17 vote just before the scheduled expiration
of the legislative session on June 3. House members had approved the bill by a vote of 73-70
earlier the same day.
46 In addition to the income tax provisions, this legislation repeals the sales and use tax exemption
for residential weatherization products and compact fluorescent light bulbs for sales occurring on
or after January 1, 2016. CONN. GEN STAT. § 12-412k. The Connecticut Department of Revenue
Services is providing transitional rules for eliminating the exemption for sales of residential
weatherization products. Special Notice 2015(11), Connecticut Department of Revenue Services,
Dec. 22, 2015.
44
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taxpayer’s income. Taxpayers were required to make a determination of whether they
should use a three-factor formula with a double-weighted sales factor or a single sales
factor formula. The adoption of a single sales factor method for most taxpayers should
simplify this procedure. Also, the increase in the general credit limitations for certain
“excess credits” should encourage companies to invest in their Connecticut operations.
In addition, the personal income tax amendments should assist nonresident individuals
who perform personal services in the state for up to 15 days during a taxable year. For
these taxpayers, the income from personal services is no longer sourced to Connecticut.
Congress has considered this issue on a national basis by proposing the Mobile Workforce
State Income Tax Simplification Act,47 which would prevent a state from taxing the
income of a nonresident employee who is present and performing work in the state for 30
days or less during the calendar year. Similar legislation has been considered in prior
sessions of Congress. Given the current status of the proposed federal legislation,
Connecticut may have decided to provide some income tax relief to nonresident
employees who spend a short amount of time in the state. It will be interesting to see if
other states decide not to wait for Congressional intervention on this issue and provide
their own specific form of relief to nonresident employees, and whether such activity may
encourage Congress to move on this issue in the coming year.
Finally, since the income tax law changes discussed above were enacted on December 29,
2015, such changes should be accounted for as a fourth quarter event by calendar year
taxpayers for ASC 740 purposes.
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47
H.R. 2315.