This Week in State Tax

Connecticut: Department Issues Policy Statement on Application of Payments to Bad Debts

The Connecticut Department of Revenue Services (Department) updated its policy for applying payments received from purchasers when claiming a credit for sales tax previously paid on worthless accounts receivable. When a retailer extends credit to a purchaser, the retailer is responsible for remitting sales tax on the total purchase price at the time of the sale. If the purchaser fails to pay the full amount due to the retailer, the retailer may claim a credit for sales tax paid on the bad debt once the receivable is written off as uncollectible for federal income tax purposes. If a retailer later collects any amount from an account for which a credit was previously claimed, the amount collected—up to the amount of the credit—must be reported on the sales tax return for the period in which the collection occurred. The guidance notes that in many cases retailers had been applying such payments first to their own charges like penalty, interest, or other fees and not the sales tax.

The Policy Statement indicates a law change has clarified that any payment made by a consumer with respect to such an account shall first be applied toward the amount of sales tax the retailer remitted at the time of the purchase, rather than any other charges. The Department also clarified that claims of bad debt submitted on and after July 8, 2019, must be calculated in such a manner that all payments received by a retailer are first applied toward the sales tax and that any claims that do not conform with Conn. Gen. Stat. § 12-408(2) will be adjusted and potentially denied by the Department. Please contact Cheryl Ladyzhets for more information on Connecticut Policy Statement No. 2001(1.1).

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Massachusetts: Appellate Board Finds Taxpayer is Manufacturer; Must Use Single Sales Factor

The Massachusetts Appellate Tax Board (Board) ruled that a shoe company qualified as a manufacturer and was therefore required to use single sales factor apportionment. The taxpayer’s employees developed the product and created design prototypes before sending the prototype to a third-party factory for mass production. The taxpayer oversaw the materials used in production and inspected the product repeatedly during the creation and manufacturing processes. Once completed, the shoes were shipped to the taxpayer’s distribution centers. Recall that, for tax years prior to 2025 (including the years at issue here), Massachusetts applied a three-factor formula generally, but required taxpayers within certain industries, including any “manufacturing corporation,” to use a single-factor formula. Starting in 2025, the default method has changed to single-factor apportionment for all taxpayers. The taxpayer filed returns using the three-factor method available to non-manufacturers. On audit, the Commissioner of Revenue determined that the taxpayer should have been treated as a manufacturer and issued an assessment based on additional tax due under single-factor apportionment.

The Board began its analysis by noting that a manufacturing corporation is a corporation that is “engaged, in substantial part, in transforming raw or finished physical materials by hand or machinery, and through human skill and knowledge, into a new product possessing a new name, nature and adapted to a new use.” Courts have construed the phrase “engaged in manufacturing” to broadly cover any “essential and integral part of a total manufacturing process” and have included the creation of blueprints or other design sheets within that scope. The taxpayer argued that its prototypes were not full designs because they did not include detailed manufacturing instructions; the Board disagreed, finding that the taxpayer’s employees played a central role in the creation of a product. As there was no evidence to dispute that the taxpayer derived a substantial part of its income from the sale of footwear that it helped manufacture, it was engaged in manufacturing in substantial part and thus required to use single sales factor apportionment in computing Massachusetts taxable income. Contact Nikhil Sequeira with questions about Skechers USA, Inc. v. Commissioner of Revenue.

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Texas: Legislature Simplifies and Extends R&D Franchise Tax Credit

The Texas Legislature passed a bill that extends and modifies the franchise tax credit for certain research and development (R&D) expenses; the credit was previously set to expire on December 31, 2026. The R&D credit is generally calculated as a percentage of the difference between the amount of qualified research expenses incurred in the current period and 50 percent of the average amount of qualified research expenses from the three most recent tax periods. The bill does not change this basic calculation, but it increases the rate at which such expenses are credited to a new general rate of 8.722 percent of the difference.

Additionally, the bill allows certain taxable entities that do not owe any franchise tax for the period to claim and receive a refund in the amount of the credit it would have received had it owed tax. Taxpayers who may benefit from the refundability of the revised credit include new veteran-owned businesses, entities with less than a $1,000 franchise tax liability, and entities whose total revenue from its entire business fall below the prescribed “no tax due” threshold. The bill also redefines a “qualified research expense” to tie specifically to the portion of the amount reported on line 48 of federal Form 6765 for the tax year in question attributable to research conducted in Texas; this provision replaces the current definition that tied to the federal definition of R&D expenses as codified in the IRC for tax year 2014. The new version of the R&D credit will be effective starting January 1, 2026. Contact Jeffrey Benson or Karey Barton with questions about S.B. 2206.

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This Week in State Tax (TWIST) is a series providing the latest updates on the ever-changing state and local tax environment.

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What’s included: Discussion on noteworthy developments with broad applicability to taxpayers across the country. Brought to you by: KPMG Washington National Tax – State and Local Tax practice.

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State and Local Tax developments for the week of June 16, 2025

Connecticut: Department Issues Policy Statement on Application of Payments to Bad Debts

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Massachusetts: Appellate Board Finds Taxpayer is Manufacturer; Must Use Single Sales Factor

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Texas: Legislature Simplifies and Extends R&D Franchise Tax Credit

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