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Connecticut Revises Personal Income Tax Law


Synopsis
Connecticut recently enacted legislation changing various personal income and sales tax provisions, with the most notable changes relating to the manner in which flow-through entities apportion income to Connecticut and accelerating the due date of sales tax returns.       

Issue
On June 11, 2014, Connecticut Governor Dannel Malloy signed into law Public Act 14-155 (“the Act”).  The Act, among other items, includes the following provisions:  (1) changes how a nonresident apportions income to the state; (2) extends the state’s income tax to a nonresident’s income from a nonqualified deferred compensation plan; (3) requires nonresidents to pay tax on gains or losses from a sale or other disposition of an interest in certain entities owning real property; (4) requires trusts and  estates to include lump-sum distributions received during the tax year in Connecticut adjusted gross income; and (5) accelerates the due date of monthly and quarterly sales tax returns.  

Nonresidents’ business income apportionment: In apportioning income to Connecticut, the Connecticut Department of Revenue Services (DRS), with respect to the sales factor of the three factor apportionment formula, required that receipts be sourced to Connecticut if the receipts were generated by a sales person based in Connecticut. The Act changes this sourcing rule. Effective January 1, 2014, gross receipts from the sale of property are sourced to Connecticut when the property is delivered or shipped to a purchaser within the state, regardless of the F.O.B. point or other conditions of the sale. Income from the sales of services is sourced to Connecticut if the services are performed in Connecticut by an employee, agent, or independent contractor based from a Connecticut office. The location of the sales office is no longer a consideration.

Deferred compensation: Previously, nonresident individuals were not subject to Connecticut personal income tax on income from nonqualified deferred compensation plans related to services performed within the state. Effective January 1, 2014, such income is now subject to Connecticut’s personal income tax.   

Sale of a pass-through entity owning real property: For tax years beginning on or after January 1, 2014, nonresidents are required to include in income gains and losses relating to the sale or disposition of an interest in a pass-through entity (e.g. a partnership, limited liability company (LLC), or S corporation) that owns real property located in Connecticut and the fair market value of which is equal to or greater than 50% of the assets of the entity as of the date of the sale or other disposition.  

Connecticut fiduciary adjustment: For tax years beginning on or after January 1, 2014, the total amount of lump-sum distributions received by a trust or estate, to the extent not includable in federal taxable income prior to deductions relating to distributions to beneficiaries, are required to be added to the Connecticut income of a trust or estate.  

Sales tax return due date:  Historically, sales tax returns were due on the last day of the month following the close of the tax period.  Effective for tax returns due after October 1, 2014, the due date of sales tax returns is moved up to the 20th of the month following the end of the tax period. 

What Does CohnReznick Think?
The most significant change implemented by the Act relates to the apportionment of income by nonresident individuals. This is a practical, common-sense change, ensuring that nonresident owners of Connecticut based pass-through entities are fairly taxed in Connecticut.  Taxpayer should also update their “tax calendars” to ensure that they note the correct due date for their Connecticut sales tax returns.

Contact
For more information, please contact Matt Nick, Senior Manager – State and Local Tax Practice, at 860-271-7933 or Patrick Duffany, Partner and State and Local Tax Practice Leader, at 860-368-3607.

To learn more about CohnReznick’s State and Local Tax Practice, please visit our webpage.


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