Does an out-of-state manufacturer that stores inventory in a Colorado warehouse have Colorado income-tax nexus, or is it protected by Public Law 86-272?

Plain-English summary

An out-of-state glassware manufacturer (commercially domiciled elsewhere) asked whether it has Colorado income-tax nexus. It ships products to customers in the northwest; only about 0.35% of its 2007 sales went to Colorado destinations; and it stores inventory in a common warehouse that the Department assumed is in Colorado and that "serves no independent business function other than to facilitate deliveries." The company argued Public Law 86-272 shields it from Colorado income tax.

The Department wouldn't make a binding nexus determination in a GIL, but its "general observations" point clearly one way: the Colorado warehouse defeats P.L. 86-272. That federal law protects a company only when its sole Colorado activity is soliciting orders that are approved and shipped from a point outside the state. Keeping a warehouse and inventory inside Colorado is the opposite of shipping from outside — and the Department, quoting Hellerstein and its own Colorado Revenue Determination No. 70, says "local warehousing and delivery of goods out of a local warehouse are clearly beyond the pale" of the immunity. Maintaining inventory in Colorado creates nexus, and P.L. 86-272 (like any tax exemption) is construed against the taxpayer. The tiny 0.35% sales share doesn't save it.

The Department also flagged the sourcing consequences. Under the sales-factor rule (Reg. 39-22-305.5(4)(B)(1)), receipts from tangible personal property are Colorado sales when the property is delivered or shipped to a recipient in Colorado — including drop shipments to an ultimate consumer here. And there's a throwback rule: goods shipped from a Colorado warehouse to a customer in another state are thrown back into the Colorado numerator if the company isn't taxable in that other state. So the warehouse both creates nexus and can pull additional income into Colorado.

Compare the P.L. 86-272 line drawn in [[gil-13-021-public-law-86-272]] (activities related to solicitation) and [[gil-13-009-c-corporation-income-tax-return]] (services aren't protected at all).

What this means for you

Out-of-state sellers using a Colorado warehouse, 3PL, or fulfillment center

If your inventory sits in Colorado — even in a third-party warehouse whose only job is faster delivery — you very likely have Colorado income-tax nexus and cannot rely on P.L. 86-272. The size of your Colorado sales is irrelevant; the physical presence of inventory is what breaks the shield. Modern marketplace/3PL arrangements that place your stock in a Colorado fulfillment center carry the same risk.

The throwback trap

Shipping from a Colorado warehouse to customers in states where you're not taxable can throw those sales back into your Colorado sales factor, increasing your Colorado-apportioned income. Map where your goods originate and whether the destination states can tax you.

Accountants and tax professionals

Two doctrines: (1) nexus — in-state inventory/warehousing exceeds P.L. 86-272 (Coors Porcelain; Revenue Determination No. 70); (2) sourcing — destination sourcing of TPP to the recipient, plus throwback under Reg. 39-22-305.5(4)(B)(1) when shipped from a Colorado place of storage to a state that can't tax the company. P.L. 86-272 is construed against the exemption.

Common questions

Q: Does storing inventory in a Colorado warehouse create income-tax nexus?
A: Yes. Maintaining a warehouse and inventory in Colorado exceeds Public Law 86-272's mere-solicitation protection and gives Colorado income-tax nexus.

Q: We only ship a tiny fraction of sales to Colorado. Does that matter?
A: No. The Department noted Colorado sales of about 0.35% but found the in-state warehouse and inventory controlling. Volume doesn't restore P.L. 86-272 protection lost by physical presence.

Q: What is the throwback rule here?
A: Goods shipped from a Colorado warehouse to a customer in another state are sourced (thrown back) to Colorado if the company isn't taxable in that other state — increasing Colorado-apportioned income.

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, rules, and authorities:
- § 39-22-303, C.R.S. (income tax on foreign corporations with Colorado-source income)
- Department Regulation 39-22-305.5(4)(B)(1) (sales-factor sourcing of TPP; throwback)
- 15 U.S.C. § 381 (Public Law 86-272)
- Department Regulation 39-22-301.1 (doing business in Colorado — P.L. 86-272 minimum standards)
- Coors Porcelain Co. v. State of Colorado, 183 Colo. 325, 517 P.2d 838 (1973)
- Colorado Revenue Determination No. 70 (01/01/1993) (warehousing/inventory establishes nexus)

Related rulings:
- [[gil-13-021-public-law-86-272]] — where P.L. 86-272 protection is and isn't lost (activities related to solicitation)
- [[gil-13-009-c-corporation-income-tax-return]] — P.L. 86-272 inapplicable to services; nexus thresholds

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: GIL-09-012.pdf

Original ruling text

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

GIL-09-012
July 7, 2009
XXXXXXXXXXXXXX
Attn: XXXXXXXXXX
XXXXXXXXXXXXXX
XXXXXXXXXXXXXX
Re: income nexus
Dear XXXXXXXXXXX,
You request guidance regarding whether XXXXXXXXXXXXXXXXXX (“Company”) has nexus
with Colorado for state income tax purposes. I apologize for the delay in responding to your
inquiry.
The Department issues general information letters and private letter rulings. A general
information letter provides a general overview of the applicable tax law, does not provide a
specific determination, 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 24-35-103.5, C.R.S., which is available on our web
site at: www.colorado.gov/revenue/tax.
Although you request a “determination,” I will initially treat your request as one for a general
information letter because the request does not contain the information necessary for a private
letter ruling. You may resubmit this request as a request for a private letter ruling.
Issue
Does the Company have nexus for state income tax purposes?
Background
The Company manufactures glassware and its commercial domicile is in XXXXXX [another
state]. The Company ships by common its products to Colorado based on orders from
customers who are located the northwest. Approximately .35% of the Company’s 2007 sales
were shipped to Colorado destinations. In order to provide better service to these customers,
the Company uses a common warehouse for storage of its inventory. We assume from the
nature of your question that this warehouse is located in Colorado. The Company further

asserts that the warehouse serves no independent business function other than to facilitate
deliveries to its customers. The Company asserts that PL 86-272 prohibits Colorado from
asserting income liability under the circumstances it has described.
The department does not make specific determinations regarding nexus in general information
letters, which are limited to a general discussion of the law.
Discussion
Colorado levies income tax on foreign corporations that derive income from sources within
Colorado. §39-22-303, C.R.S. For tax years beginning on or after January 1, 2009,
corporations that have sources of income within and outside Colorado must apportion the
income based on a single factor (sales) apportionment methodology. For tax years that began
prior to January 1, 2009, corporations had an election to apportion income using either a two or
three factor apportionment methodologies. Under any of these apportionment methodologies,
income derived from sales of tangible personal property includes sales where the “recipient” of
the property is located in Colorado. For example, a company, located in State A, must
apportion income to Colorado if it sells goods to a purchaser, located in State B, and delivers
the goods to a recipient (ultimate consumer) located in Colorado (i.e., a drop shipment).1
Similarly, a company must apportion income to Colorado if it maintains a warehouse in
Colorado and ships its goods to a recipient located in another state if the company is not
subject to income tax in the other state.
In general, Colorado imposes income tax on foreign corporations that engage in activities that
exceed the minimum thresholds set forth in PL 86-272 and have nexus with Colorado.2 PL 86272 prohibits a state from imposing income tax liability if the company’s only connection with
the state is soliciting order for sales, approval of such orders is made outside the state, and the
property is shipped from a point outside the state.3 As is the case of any exemption from
taxation, this law is generally construed against the exemption.

1 Department Regulation (39)22-305.5(4)(B)(1), states, in part:

“(1) Gross receipts from sales of tangible personal
property are in this state:
(a) if the property is delivered or shipped to a purchaser within this state regardless of the f.o.b. point or other
condition of sale; or
(b) if the property is shipped from an office, store, warehouse, factory, or other place of storage in this state and
the taxpayer is not taxable in the state to which the property is shipped.”

2 Coors Porcelain Company v. State of Colorado and John H. Heckers, 183 Colo 325 517 P2d 838 (Colo. 1973)

(“We mention initially that we are inclined to agree with the statement of the Attorney General that our General
Assembly has sought to tax all the income that Colorado can constitutionally tax.”). See, also, Colo. Code Regs. 3922-301.1 Doing business in Colorado (“A corporation will be considered to be doing business in Colorado whenever
the minimum standards of Public Law 86-272 are exceeded.”)

3 15 USCA

§381, states, in part: “(a) Minimum standards: No State, or political subdivision thereof, shall have
power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived
within such State by any person from interstate commerce if the only business activities within such State by or on
behalf of such person during such taxable year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal
property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by
shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit
of a prospective customer of such person, if orders by such customer to such person to enable such customer
to fill orders resulting from such solicitation are orders described in paragraph (1).”

2

A company that maintains a warehouse in a state exceeds the minimum threshold established
in PL 86-272. See, e.g., Colorado Revenue Determination No. 70, 01/01/1993 (“In the case of
the parent, taxable nexus is demonstrated, in part, by the storage, warehousing, and shipping
of food products within Colorado under the management, direction and control of the parent,
and, in part, by their market research, advertising, and credit activities.”); Hellerstein, State
Taxation, ¶6.17, General Analysis of Public Law 86-272 (“Local warehousing and delivery of
goods out of a local warehouse are clearly beyond the pale of the minimum standards
established for immunity. Instead, shipment must be made from a point outside the state.”);
compare, CalRoof Wholesale v. Tax Com., 242 Or 435 , 447 (1966), aff'g 2 OTR 91 (1965), and
Herff Jones Co. v. Tax Com., 247 Or 404 , 411 (1967), aff'g 2 OTR 207 (1965) (“The provisions
of subsection (a) of section 1 of the bill [PL 86-272] will not be available to grant immunity to a
person where the orders are filled by a shipment or delivery from a stock of goods, warehouse,
plant, or factory maintained by the person within the State.”); In the Matter of NL Industries, Inc.
1230 Avenue of the Americas New York, NY 10020, Iowa Department of Revenue and Finance
Declaratory Order 84-116-2A-A, 09/18/1987; but, see, American Brands, Inc. v. Wisconsin
Department of Revenue, I-7376, 07/03/1986.
Moreover, a company that maintains an inventory of its products within Colorado has nexus
with Colorado for income tax purposes. Colorado Revenue Determination No. 70, 01/01/1993.
Other states have come to a similar conclusion. Compare, Florida Technical Assistance
Advisement 01(C)1-004, 03/07/2001; Illinois Dept. of Rev. General Information Letter IT 980085-GIL, 11/04/1998 (maintaining inventories in state exceeds activities protected by PL 86272 and likely creates nexus for state income tax purposes).
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

3