News and Insights

Connecticut Adopts Market-Based Sourcing

Tax Development Jun 10, 2016

On June 2, 2016, Connecticut Governor Dannel Malloy signed legislation (S.B. 502) adopting market-based sourcing provisions for purposes of assigning receipts from services. For income years commencing on or after January 1, 2016, corporate business taxpayers must assign gross receipts from services to Connecticut if the services are used at a location in the state. Previously, Connecticut assigned receipts from services to the location where the services were performed. This change follows a trend among the states to source receipts from services to where the benefit to the customer is received, as opposed to where the taxpayer incurred the costs to perform those services. The effective date of this change coincides with the adoption of mandatory combined reporting and single sales factor apportionment, both of which were signed into law last year.

Market-based sourcing and single sales factor apportionment are generally seen as decreasing the tax burden of companies based in the state, while increasing the tax burden of out-of-state companies, although the actual effect on an individual company will vary. Proponents of mandatory combined reporting believe it promotes tax fairness and reduces the ability to shift income out of the state, while opponents often cite the increased complexity for taxpayers to comply and for the state to enforce.

These are complex changes for any company doing business in Connecticut. It remains to be seen if other states in the Northeast will follow Connecticut’s lead. We can assist any company that would like to understand the ramifications of these changes.


Rick Langberg