Colorado ~ Corporate Income Tax: Nexus Potentially Created by Sales Within State

CCH Tax Day Report

The Colorado Department of Revenue has issued a general information letter in response to a franchisor corporation’s (taxpayer’s) request for guidance regarding whether it has substantial nexus with Colorado for corporate income on the basis of its sales. The taxpayer is an out-of-state corporation which sells franchises that sell cooking oil cleaning products for use in commercial facilities. Generally, a company is presumed to have nexus for Colorado for corporate income tax purposes if it exceeds the minimum standards of P.L. 86-272 and either its sales, property, or payroll in Colorado rises above a threshold during a given tax year. Under the facts presented, the taxpayer did not appear to have payroll or property in Colorado.

The taxpayer’s sales of certain tangible personal property delivered to out-of-state franchisees were not counted toward the sales threshold because they were not received in Colorado. However, its sales to Colorado business locations constituted relevant sales. The franchisees owned the rights and licenses to use the taxpayer’s intangibles such as trademark and trade name following a contractual agreement. Therefore, payments such as royalties and territory fee received from the franchisees were likely to be considered as relevant sales because the trademark and trade name were primarily used in Colorado. The advertising fees received from the franchisees were likely to be treated as a sale of a service, and would be apportioned if the service was performed in several states. However, the income from training services could be allocated entirely to another state because it was represented as being performed outside of Colorado.

GIL-16-004, Colorado Department of Revenue, May 3, 2016, released September 13, 2016, ¶201-339



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