The Manufacturing Apprenticeship tax credit has been a tool that Connecticut’s small and midsize manufacturers have wanted to take advantage of for years.
HB 5636, approved during the 2016 General Assembly session, modifies the credit to make it more workable by permitting S Corporations and other pass-through entities to claim it against the personal income tax.
Pass-through entities, which comprise roughly 90% of Connecticut businesses, pay tax on their business income through the state’s personal income tax.
Previously, only manufacturers classified as C Corporations, which pay the corporate income tax, could claim the credit, while pass-throughs could only reap some of the benefits by selling the credits—at a discount—to C Corporations.
Move to Market-Based Sourcing
SB 502 (Sections 199–201) creates market-based sourcing rules for service companies under corporate and personal income taxes.
Market-based sourcing allows service businesses to locate in Connecticut without being penalized for being in the state by sourcing sales receipts to the customer location rather than the business location.
Adopting market-based sourcing eliminates the possibility of getting taxed twice on the same income.
“Our neighbors, including Massachusetts, New York, and Rhode Island, have already adopted market-based sourcing, putting Connecticut-based service businesses at risk for double taxation on their sales to customers in those states—owing income tax to Connecticut and the state where the customer is located.
“Adopting market-based sourcing eliminates the possibility of getting taxed twice on the same income.”
It also increases revenue for Connecticut, Stewart explains, because out-of-state companies that sell to customers here will pay Connecticut income tax resulting from their sales to the Connecticut marketplace.
In addition, SB 502 spreads single-sales factor apportionment to the personal income tax, also making Connecticut more attractive to service companies.