Will an out-of-state company owe Colorado corporate income tax if it lets one overhead employee work from a home office in Colorado, even though he generates no revenue?

Plain-English summary

An out-of-state company asked a very practical question: if it lets a prospective administrative-support employee work from his home in Colorado, will that make the company owe Colorado corporate income tax? Most of the company's workforce is overseas providing analytical support to the U.S. military; this new hire would be pure overhead — recruitment, accounting, business development — not supporting a paying customer or directly generating revenue. The company explicitly didn't want to extend the offer if the Colorado home office would create a Colorado tax liability.

The Department's answer is essentially yes, it likely would. Two threads:

• Cost-of-performance sourcing. Colorado taxes corporations on income derived from Colorado sources (§ 39-22-301(1)(a)). Service income is sourced to where the service is performed, and a service is performed in Colorado "if, and to the extent that, the costs of performing that service are incurred in Colorado." The Department's own example: if a company's only cost of generating service income is employee labor and just one employee is in Colorado, its service income is apportioned to Colorado in proportion to that one employee's cost relative to total employee cost.

• Nexus from an in-state employee. The Department states plainly that "a company that has an employee residing in Colorado will generally have nexus for income tax purposes."

The notable part is that the employee's overhead, non-revenue role doesn't shield the company. The cost of that employee's work is still a cost of performing the company's services, so it still pulls a slice of income into Colorado — and the in-state residence still generally establishes nexus. This is one of the Department's earliest clean statements of the cost-of-performance + employee-nexus rule, later echoed in [[gil-13-024-colorado-source-income]] and [[gil-14-011-s-corporation-colorado-source-of-income]].

What this means for you

Out-of-state companies with (or considering) a remote Colorado worker

A single Colorado-resident employee — even a back-office, non-revenue one — can generally establish Colorado income-tax nexus and apportion a portion of your service income to the state via cost of performance. Letting someone "just work from home in Colorado" is a tax decision, not only an HR one. Model the apportionment (and wage withholding) before you make the offer.

Service businesses generally

Where your people perform the work drives sourcing. Overhead labor still counts as a cost of performance. Concentrating costs outside Colorado keeps income out; placing costs in Colorado pulls income in, regardless of whether that specific worker "earns" revenue.

Accountants and tax professionals

Two findings to apply: (1) nexus generally attaches once an employee resides in Colorado; (2) apportionment follows cost of performance — here, the ratio of the Colorado employee's cost to total employee cost. Note this GIL predates and is consistent with the post-2009 single-sales-factor regime; the cost-of-performance principle for sourcing services carried forward.

Common questions

Q: Does one remote employee in Colorado create income-tax nexus?
A: Generally yes. The Department says a company with an employee residing in Colorado will generally have nexus for income tax purposes.

Q: The employee is overhead and makes no money for us — does that matter?
A: Not for this purpose. The cost of that employee's work is still a cost of performing the company's services, so it still apportions some income to Colorado, and the in-state residence still generally creates nexus.

Q: How much income gets apportioned to Colorado?
A: It follows cost of performance. In the Department's example, if employee labor is the only service cost and one of several employees is in Colorado, income is apportioned in proportion to that employee's cost relative to total employee cost.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, not binding on the Department. For a binding determination on your facts, request a private letter ruling (which requires a fee).

Citations and references

Statutes and rules:
- § 39-22-301(1)(a), C.R.S. (income tax on corporations with Colorado-source income)
- Department Regulation 24-35-103.5 (general information letters and private letter rulings)

Related rulings:
- [[gil-13-024-colorado-source-income]] — cost-of-performance sourcing; remote employee's personal status irrelevant to entity sourcing
- [[gil-14-011-s-corporation-colorado-source-of-income]] — remote out-of-state service provider; Colorado-incurred cost of performance sourced here

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: GIL-09-010.pdf

Original ruling text

Office of Tax Policy
P.O. Box 17087
Denver, CO 80217-0087
[email protected]

GIL-09-010
February 24, 2009
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: Colorado income tax
Dear XXXXXXXXXXX,
You request guidance regarding the applicability of Colorado income tax to your company. The
Department issues general information letters and private letter rulings. A general information
letter provides a general overview of the applicable tax law and is not binding on the
department. A private letter ruling is a determination of the applicability of tax to a specific set
of circumstances and is binding in the department. A party requesting a private letter ruling
must provide certain information and remit a fee. For more information about general
information letters and private letter rulings, please refer to the Department’s regulation 24-35103.5, C.R.S., which is available on our web site at: www.colorado.gov/revenue/tax.
I will initially treat your request as one for a general information letter. You may resubmit this
request for a private letter ruling.
Issue
Is your company subject to Colorado income tax if one of its employees is located in Colorado?
Background
Your company is based in XXXXX [another state]. The majority of is employees are based
overseas providing analytical support to the United States military. The company has three
administrative support employees who work in direct support of the headquarters and are
involved in recruitment, accounting, and business development activities for the company and
not directly supporting a paying customer.

The company is interested in hiring another administrative support employee to support the
company’s headquarters and he would like to perform his duties out of a home he has in
Colorado. He would not be working in support of a customer or directly generating revenue for
the company but would be strictly supporting the company in an overhead capacity. The

1 37 5 S HER MA N S TREE T
D EN VER, CO L ORA DO 8 02 03

company does not wish to extend an offer of employment to him in the event having him work
out of his home office location in Colorado will make the company subject to Colorado
corporate income taxes or other business/state taxes.
Discussion.
Colorado levies a tax on income of corporations who derive income from sources in Colorado.
§39-22-301(1)(a), C.R.S. Whether income is derived from sources within Colorado will depend
on the nature of the income (e.g., income generated from the sale of goods, real property,
services, interest income, franchises, etc.). Income generated from services will generally be
sourced to the state where the service is performed. A service is performed in Colorado if, and
to the extent that, the costs of performing that service are incurred in Colorado. For example, if
a company’s only cost in generating service income is the labor cost of its employees, and only
one of its employees is located in Colorado, then the company’s service income will be
apportioned to Colorado in proportion to the cost of the one Colorado employee to the total
cost of all its employees. Finally, a company that has an employee residing in Colorado will
generally have nexus for income tax purposes.
As noted earlier, this is a general information letter that provides a general and nonbinding
discussion of Colorado tax law and does not provide a determination regarding the specific
circumstances of your company.
Miscellaneous
Enclosed is a redacted version of this ruling. Pursuant to statute and regulation, this redacted
version of the ruling will be made public within 60 days of the date of this letter. Please let me
know in writing within that 60 day period whether you have any suggestions or concerns about
this redacted version of the ruling.
Sincerely,

Office of Tax Policy
Colorado Department of Revenue

2