Does an out-of-state insurer with a Colorado insurance license — but no Colorado employees — have Colorado income-tax nexus?

Plain-English summary

An out-of-state insurance company wrote a workers' compensation policy for a client whose main office is in California but who has employees in Colorado. The insurer has no employees in Colorado, doesn't communicate with the client's employees, but does hold a Business Entity Insurance license from the Colorado Division of Insurance. It asked whether it has Colorado income-tax nexus.

The Department said nexus is a fact-intensive question ill-suited to a GIL, so it didn't decide — but it offered useful "observations":

• Colorado taxes C corporations doing business in Colorado that derive Colorado-source income (§ 39-22-301(1)(d)), and "doing business" means activity that both exceeds Public Law 86-272 and creates constitutionally sufficient nexus. The statute is read broadly to reach all income Colorado may constitutionally tax.
• The governing test (from Tyler Pipe, 483 U.S. 232) is whether the in-state activity is "significantly associated with the taxpayer's ability to establish and maintain a market" in Colorado.
• Mere registration with the secretary of state to do business does not create income-tax nexus.
• But a license to conduct insurance business in Colorado "may create a more substantial connection with the state," particularly if the licensee has important legal obligations toward the insured employees that are performed in Colorado — for example, participating in administrative proceedings in Colorado to resolve insurance claims. The Department expressly declined to examine whether Colorado law imposes such obligations.

So the practical signal: a bare registration is not nexus, but an active insurance license tied to claim-handling duties performed in Colorado can tip toward nexus. A footnote adds that P.L. 86-272 protects only solicitation of tangible personal property sales (not services), and that a "safe harbor" lease transaction by itself doesn't create nexus.

What this means for you

Insurers and licensed out-of-state businesses

A license to operate in Colorado is not the same as a harmless corporate registration. If your license carries duties you actually perform in Colorado — adjusting or litigating claims, appearing in Colorado administrative proceedings, servicing Colorado insureds — those activities can establish income-tax nexus even with zero Colorado employees. Inventory of what your license obligates you to do inside the state.

The line the Department drew

• Not nexus by itself: registering with the Colorado secretary of state.
• Possibly nexus: holding a Colorado business license plus legal obligations to insureds performed in Colorado (e.g., claim proceedings).

Accountants and tax professionals

Run the Tyler Pipe "establish and maintain a market" test against the company's actual in-state activities, not just its paperwork. Distinguish passive registration from an active license with in-state performance obligations. Because the Department won't resolve this in a GIL, a company needing certainty should request a private letter ruling.

Common questions

Q: Does registering to do business in Colorado create income-tax nexus?
A: Not by itself. The Department says mere registration with the secretary of state does not create nexus for income tax purposes.

Q: What about holding a Colorado insurance (or business) license?
A: It may create a more substantial connection — especially if the license carries legal obligations to insureds that the company performs in Colorado, such as participating in Colorado administrative proceedings to resolve claims.

Q: We have no employees in Colorado. Are we safe?
A: Not necessarily. Nexus turns on whether your in-state activity is significantly associated with maintaining a Colorado market, which can exist through licensed obligations performed here even without in-state employees.

Q: Can I rely on this letter?
A: No. A General Information Letter is general guidance, not binding on the Department, and it expressly declined to make a nexus determination. For a binding answer, request a private letter ruling (which requires a fee).

Citations and references

Statutes, rules, and cases:
- § 39-22-301(1)(d), C.R.S. (income tax on C corporations doing business in Colorado)
- Department Regulation 39-22-301.1 (doing business in Colorado; P.L. 86-272; safe-harbor lease)
- 15 U.S.C. § 381 (Public Law 86-272 — protects solicitation of tangible personal property, not services)
- Tyler Pipe Industries v. Washington Dept. of Revenue, 483 U.S. 232 (1987) (nexus = activity significantly associated with maintaining an in-state market)

Related rulings:
- [[gil-13-009-c-corporation-income-tax-return]] — nexus thresholds; services not protected by P.L. 86-272
- [[gil-09-012-income-nexus]] — physical presence (in-state warehouse/inventory) creating nexus

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: GIL-09-028.pdf

Original ruling text

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

GIL-09-028
June 30, 2009
XXXXXXXXXXXXXXXXX.
Attn: XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXX
Re: income tax nexus
Dear XXXXXXXXX,
You request guidance regarding whether XXXXXXXXXXXXXXXXXXXXXXXXX. (“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.
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 writes a worker’s compensation insurance policy for a client that has employees
in Colorado. The client’s main office is in California. The Company does not have employees
located in Colorado, but it has obtained a Business Entity Insurance license from the Colorado
Division of Insurance. The Company does not communicate with the client’s employees.
Discussion

GIL 09-028
June 30, 2009
Page 2
The department typically does not make specific determinations regarding nexus in general
information letters. These are fact intensive reviews are ill-suited for resolution in a general
information letter.
We can, however, make a few observations. First, Colorado, as do most states, levies income
tax on domestic and foreign C corporations that are “doing business in Colorado” and that
derive income from sources within Colorado.1 A corporation is doing business in Colorado
when its activities in Colorado both exceed the minimum standards set forth in Public Law 86272 (mere solicitation of sales by independent contractors)2 and create sufficient nexus with
Colorado to meet minimum Constitutional standards. This income statute is broadly construed
to apply to all income that can be permissibly reached under the United States Constitution.
The crucial factor governing nexus is whether the activities preformed in Colorado by or on
behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and
maintain a market in this state. Tyler Pipe, 483 U.S. 232 at 250. In general, the department
believes that the mere registration by a taxpayer with the secretary of state to do business in
this state does not create nexus for income tax purposes. However, a license to conduct
insurance business in Colorado may create a more substantial connection with the state,
particularly if the licensee has important legal obligations vis a vis the insured employees and
these obligations are performed in Colorado, such as participating in administrative
proceedings in Colorado to resolve insurance claims. We have not examined Colorado law to
determine whether or to what extent Colorado law imposes such legal obligations.
If you would like a determination regarding the particular facts of your company, you must
submit the request as one for a private letter ruling.
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

1

39-22-301(1)(d), C.R.S.

Department regulation 39-22-301.1 (“A corporation will be considered to be doing business in Colorado whenever the minimum
standards of Public Law 86-272 are exceeded. Public Law 86-272 protects manufacturers whose only business activity conducted
in a state is soliciting orders for sale of tangible personal property. Sales of services are not protected by Public Law 86-272. A
“safe harbor” lease transaction, by itself, does not create nexus for Colorado income tax purposes.”).

2

2