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 whether Colorado income tax would apply if one employee worked from a Colorado home. The employee would provide administrative support, including recruitment, accounting, and business development, and would not directly support a paying customer or generate revenue. The Department treated the request as a General Information Letter and said it does not determine the company's specific circumstances.

The letter gives general rules. Colorado taxes corporations on income from Colorado sources. Service income is generally sourced to where the service is performed, and a service is performed in Colorado if, and to the extent that, the costs of performing it are incurred in Colorado. The Department's example assumes labor is the company's only cost of generating service income and says that, when one employee is in Colorado, the income is apportioned in proportion to that employee's cost compared with the total employee cost.

The Department also says that a company with an employee residing in Colorado will generally have income-tax nexus. It does not decide how those rules apply to this company's proposed overhead employee.

What this means for you

Companies considering a Colorado employee

This GIL provides general rules about an employee located in Colorado and service-income sourcing. It does not determine whether the described company would owe tax or how much income would be apportioned. A company seeking an answer for its own facts would need a private letter ruling.

Service businesses

The letter's example uses the ratio of one Colorado employee's labor cost to total employee cost when labor is the only cost of generating service income. The GIL does not separately decide whether a particular overhead role is a cost of performing a company's services.

Common questions

Q: Does this letter decide whether one particular remote employee creates Colorado income-tax nexus?
A: No. The Department states the general rule that a company with an employee residing in Colorado will generally have nexus, but it says the GIL does not determine the specific circumstances of the requesting company.

Q: Does the letter decide whether the proposed overhead employee's costs must be included in service-income apportionment?
A: No. It gives a general cost-of-performance example based on employee labor and does not decide the treatment of this proposed employee's costs.

Q: How can a company get a determination on its facts?
A: It can request a private letter ruling. The GIL says that a private letter ruling determines the applicability of tax to a specific set of circumstances and requires the requested information and a fee.

Q: Can I rely on this letter?
A: No. A General Information Letter provides general, nonbinding guidance and does not determine the specific circumstances of the requesting company.

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

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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

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