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 asked whether it had Colorado income-tax nexus. It reported that about 0.35% of its sales went to Colorado and that it stored inventory in a common warehouse the Department assumed was in Colorado. The Department treated the request as a General Information Letter and expressly said it does not make specific nexus determinations in GILs.

The letter discusses the general rule under Public Law 86-272: protection applies when the in-state activity is limited to soliciting orders that are approved and filled by shipment from outside the state. It says a company that maintains a warehouse in a state exceeds the minimum threshold established by that law, and that a company maintaining inventory in Colorado has nexus for Colorado income-tax purposes. Those statements are the Department's general discussion; the GIL does not decide the requesting company's liability.

The letter also quotes Colorado's sales-factor rules for goods delivered to a Colorado recipient and for goods shipped from a Colorado warehouse to another state when the taxpayer is not taxable in the destination state.

What this means for you

Businesses with Colorado inventory

This GIL describes the Department's general view that a Colorado warehouse or inventory can exceed Public Law 86-272's protection. It does not make a taxpayer-specific nexus determination. The facts of the warehouse, inventory, and activities should be reviewed for the particular business.

Sales-factor sourcing

The letter quotes rules addressing goods delivered to a Colorado purchaser and goods shipped from a Colorado warehouse to a state where the taxpayer is not taxable. It does not calculate an individual company's sales factor.

Common questions

Q: Does this GIL make a specific finding that the requesting company has Colorado nexus?
A: No. The Department says GILs provide a general discussion and do not make specific nexus determinations. The letter states the general view that maintaining a warehouse or inventory in Colorado exceeds the Public Law 86-272 threshold.

Q: What activity does Public Law 86-272 protect?
A: As quoted in the GIL, it protects limited solicitation when orders are sent outside the state for approval or rejection and, if approved, are filled by shipment or delivery from outside the state.

Q: What sourcing rules does the letter quote?
A: It quotes rules treating property delivered or shipped to a purchaser in Colorado as Colorado receipts and treating property shipped from a Colorado place of storage to a state where the taxpayer is not taxable as Colorado receipts.

Q: Can I rely on this letter for my company's facts?
A: No. It is general, nonbinding guidance. A private letter ruling is the route identified in the GIL for a specific determination.

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

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