2015 Tax Legislation: Connecticut Adopts Combined Reporting and Alabama Enacts Factor Presence Nexus

Effective Jan. 1, 2016, Connecticut requires combined groups to file a combined return. In the southern half of the country, Alabama has enacted factor presence nexus for tax years beginning on or after Jan. 1, 2015.


On June 30, 2015, Connecticut Governor Dannel Malloy signed two bills, H.B. 7061 and S.B. 1502, that provide for significant tax changes, the most significant of which is the adoption of mandatory combined reporting, which is discussed in more detail below.

Effective Jan. 1, 2016, Connecticut requires combined groups to file a combined return (H.B. 7061 had originally made combined reporting effective for 2015, but S.B. 1502 delayed the effective date). The combined return must be filed on a water’s-edge basis, unless an election is made to file on a worldwide or affiliated group basis. Either election must be made on an original timely filed return by the group’s designated taxable member (either the parent of the group or, if the parent is not a taxable member, then a taxable member that is appointed by the group) and is binding for the year the election is made and the immediately succeeding 10 years. [1] Under the affiliated group election, the combined group generally consists of the federal affiliated group plus members incorporated in “tax haven” jurisdictions (see below for more detail), regardless of whether the entities are engaged in a unitary business.

A combined group is a group of entities that (i) have common ownership (more than 50 percent of voting control, directly or indirectly, is owned by a common owner(s)) and (ii) is engaged in a unitary business. A “unitary business” is defined as a “single economic enterprise that is made up of either separate parts of a single business entity or of a group of business entities under common ownership, which enterprise is sufficiently interdependent, integrated, or interrelated through its activities so as to provide mutual benefit and produce a significant sharing or exchange of value among such entities, or a significant flow of value among the separate parts.”

A water’s-edge combined group will generally include only an entity that (i) has at least 20 percent of its property and at least 20 percent of its payroll in the U.S., (ii) earns more than 20 percent of its gross income from intangible property or services-related activities, the costs of which are deductible for federal income tax purposes against income of other group members (in which case, such entity will be included only to the extent of its income and apportionment factors related to such gross income), and (iii) is incorporated in a jurisdiction determined by the Commissioner to be a “tax haven.” A tax haven is a jurisdiction that (1) has laws or practices preventing the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the tax regime; (2) has a tax regime that lacks transparency; (3) facilitates the establishment of foreign-owned entities without the need for a local substantive presence or prohibits these entities from having any commercial impact on the local economy; (4) explicitly or implicitly excludes the jurisdiction’s resident taxpayers from taking advantage of the tax regime benefits or prohibits enterprises benefiting from it from operating in the jurisdiction’s domestic market; or (5) has created a tax regime favorable for tax avoidance, based on an overall assessment of relevant factors, including whether the jurisdiction has a significant untaxed offshore financial or services sector relative to its overall economy. The Commissioner will publish a list of tax haven jurisdictions.

For purposes of computing net income of the combined group, dividends paid by one group member to another are excluded, and intercompany transactions among members are deferred in a manner similar to Treas. Reg. § 1.1502-13. For purposes of computing the apportionment factor, each taxable member uses its statutorily mandated formula with the following modifications: (i) the denominator of the property and payroll factors include the aggregate amounts for the entire group and (ii) each taxable member must add to the numerator if its sales factor a share of the aggregate sales of the nontaxable members based on the ratio of such taxable member’s sales to the sales of all the taxable members.


On Aug. 11, 2015, Governor Robert Bentley signed H.B. 49, thereby joining several states, such as New York, California, Washington, and Colorado, that have enacted factor presence nexus standards. Effective for tax years beginning on or after Jan. 1, 2015, a non-resident business or individual taxpayer has substantial nexus – for business privilege tax, income tax and financial institution excise tax purposes – if it exceeds any of the following factor presence thresholds in the state: (i) $50,000 of property, (ii) $50,000 of payroll, (iii) $500,000 of sales or (iv) 25 percent of total property, payroll or sales. [2] The new law defines property, payroll and sales for this purpose, and taxpayers should be aware that the measurement of sales for nexus purposes may be different than the measurement used for sales factor apportionment purposes.

Aprio’s SALT team can assist taxpayers in evaluating the potential state tax impact of these new laws. Particularly with respect to the Alabama legislation, it is possible that a taxpayer that otherwise did not have nexus may now have nexus in Alabama for the 2015 tax year, and may need to evaluate whether or not any estimated payments should be made. Unfortunately, the new legislation does not address this. We continue to monitor state tax developments and will include any significant items in future issues of the newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] A taxable member is a member of the group that has nexus with Connecticut; a nontaxable member is a member of the group that does not have nexus with Connecticut.

[2] These amounts may be adjusted based on changes in the Consumer Price Index.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.