Does an out-of-state C corporation that only solicits sales orders for manufacturers — a service — have to file a Colorado corporate income tax return if it has a Colorado employee?

Plain-English summary

An out-of-state C corporation asked the Colorado Department of Revenue whether it had to file a Colorado corporate income tax return. The company is a manufacturers' representative: it solicits orders in many states for various manufacturers, sends those orders to its out-of-state corporate office for approval, and passes accepted orders to the manufacturer, who ships the goods and pays the company a commission. The company doesn't sell any products itself — it only solicits orders. It had recently hired a Colorado resident to solicit orders in western states and was already withholding Colorado income tax for that employee.

The Department's answer has two steps. First, nexus. A corporation must file a Colorado return if it does business in or derives income from Colorado, and it is "doing business" once it has substantial nexus — meaning it crosses any one of these thresholds: $50,000 of property, $50,000 of payroll, $500,000 of sales, or 25% of its total property, payroll, or sales in Colorado (Regulation 39-22-301.1). Below all of those, no filing obligation.

Second, the Public Law 86-272 shield — and why it doesn't help here. P.L. 86-272 (15 U.S.C. § 381) bars a state from taxing the income of an out-of-state business whose only in-state activity is soliciting orders for sales of tangible personal property that are approved and shipped from outside the state. The crucial limit: it protects sellers of tangible personal property only — not sellers of services. The Department concluded this company is selling the service of soliciting orders for manufacturers, not selling goods of its own. So P.L. 86-272 gives it no protection, and if it crosses a nexus threshold it must file, apportioning its business income to Colorado under the single-sales-factor method in effect since January 1, 2009.

This is the service-side counterpart to [[gil-13-021-public-law-86-272]] (a wholesaler that does sell tangible property, where the question was whether its employee's duties stayed within "solicitation"), and it lines up with the later nexus rulings [[gil-16-001-lcc-employee-in-colorado]] and the remote-services analysis in [[gil-14-011-s-corporation-colorado-source-of-income]].

What this means for you

Manufacturers' reps and sales-agency companies

If you earn commissions for soliciting orders on behalf of manufacturers, you are providing a service, and P.L. 86-272 will not shield you from Colorado income tax. Putting even one employee or enough sales activity in Colorado to cross a nexus threshold can create a filing obligation. Don't assume the "we only solicit orders" framing protects you — that protection runs to the manufacturer shipping tangible goods, not to the rep selling solicitation services.

Out-of-state companies hiring a Colorado employee

A single in-state employee can push you past the $50,000 payroll threshold and establish substantial nexus. Whether you then owe tax depends on whether P.L. 86-272 applies — which turns on whether you sell tangible personal property or services.

Accountants and tax professionals

Run the two-step test: (1) substantial nexus under Reg. 39-22-301.1 ($50k property / $50k payroll / $500k sales / 25%); (2) if nexus exists, is the income from selling tangible personal property (potentially protected) or services (never protected)? Service income that crosses nexus is apportioned by the single sales factor under § 39-22-303.5(4)(a).

Common questions

Q: Does P.L. 86-272 protect a company that only solicits orders?
A: Only if it solicits orders for its own tangible personal property, sent out of state for approval and shipped from outside the state. It does not protect a company whose business is selling the service of soliciting orders for others.

Q: When does an out-of-state C corp have to file in Colorado?
A: When it has substantial nexus — over $50,000 of property, over $50,000 of payroll, over $500,000 of sales, or 25% of its total property, payroll, or sales in Colorado — and is not shielded by P.L. 86-272.

Q: How is the income apportioned?
A: For tax periods beginning on or after January 1, 2009, Colorado uses single-factor apportionment: business income times the ratio of Colorado sales to total sales.

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:
- Department Regulation 39-22-301.1 (substantial-nexus thresholds: $50k property / $50k payroll / $500k sales / 25%)
- 15 U.S.C. § 381 (Public Law 86-272 — protects solicitation of tangible personal property, not services)
- § 39-22-303.5(4)(a), C.R.S. (single-factor apportionment for periods from Jan. 1, 2009)

Related rulings:
- [[gil-13-021-public-law-86-272]] — wholesaler of tangible goods; whether employee duties exceed "solicitation"
- [[gil-16-001-lcc-employee-in-colorado]] — one Colorado sales rep and the full nexus-threshold set
- [[gil-14-011-s-corporation-colorado-source-of-income]] — remote out-of-state service provider, cost-of-performance sourcing

Source

• Landing page: Colorado All Letter Rulings
• Original PDF: GIL-13-009.pdf

Original ruling text

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

GIL-13-009
April 18, 2013
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
Re: C Corporation Income Tax Return
Dear XXXXXXXXXXX,
You submitted on behalf of your client (“Company”) a request for guidance to determine
whether Company will be subject to filing a C Corporation Income Tax Return to the State of
Colorado.
The Colorado Department of Revenue (“Department”) issues general information letters and private
letter rulings. A general information letter provides a general overview of the relevant tax issues
and is not binding on the Department. A private letter ruling provides a specific determination for a
specific set of facts, is binding on the Department but not on the taxpayer, and requires payment of
a fee. For more information about general information letters and private letter rulings, please see
Department regulation 24-35-103.5 at www.colorado.gov/revenue/tax > Tax Library > Rulings.
The Department initially treats your request as one of a general information letter. If you would like
the Department to issue a private letter ruling on the issues you raise, you can resubmit a request
and fee in compliance with regulation 24-35-103.5. It is important to remember that general
information letters, such as this one, are general discussions of tax law and are not a determination
of the tax consequence of any particular action or inaction.
Issue
Is Company subject to filing a C Corporation Income Tax Return to the State of Colorado?
Background
Company provides representative services to a number of manufacturers. Company, which is a C
Corporation, solicits orders in many states for various manufacturers. The orders are sent back to
Company’s corporate office, which is located outside of Colorado, for approval and passed along to
the respective manufacturer(s). A manufacturer(s) can accept or reject any order requests. Orders
that are accepted are sold by the manufacturer(s) who ships the tangible personal property to
customers located throughout the country. The Manufacturer(s) pay commissions to Company for
soliciting their sales, which, in turn, pays the wages for Company’s employees. Company

represents that it does not sell any tangible or intangible property, but merely solicits orders for the
manufacturers it represents.
Company has hired a Colorado resident to assist with solicitation of order in various western states.
Company has registered as a withholding agent for the new employee, and is withholding and
submitting Colorado Income Tax to the State. The question at issue is whether Company is subject
to filing a C Corporation Income Tax Return to the State of Colorado.
Discussion
A C Corporation must file a Colorado corporate income tax return if it does business in
Colorado or derives income from Colorado sources. A corporation is considered to be doing
business in Colorado if it has substantial nexus with Colorado. Substantial nexus is established
when a business entity organized outside of Colorado has property, payroll or sales that
exceed any of the following thresholds in any tax period:
(i) a dollar amount of $50,000 of property; or
(ii) a dollar amount of $50,000 of payroll; or
(iii) a dollar amount of $500,000 of sales; or
(iv) twenty-five percent of total property, total payroll or total sales.1
If Company does not exceed any of these thresholds, then it does not have substantial nexus
with Colorado and is not be required to file a C Corporation Income Tax Return. If, however,
Company does exceed any of these thresholds, we then look to whether Company is protected
under Public Law (“P.L”) 86-272 (15 U.S.C. 381), which states,
(a) 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, the following:
(1) The solicitation of orders by such person, or his representative, in such State
for sales of tangible personal property, which 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 of 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).
...
(c) For purposes of subsection (a) of this section, a person shall not be considered
to have engaged in business activities within a State during any taxable year merely
by reason of sales in such State, or the solicitation of orders for sales in such State,
of tangible personal property on behalf of such person by one or
more independent contractors, or by reason of the maintenance of an office in such
State by one or more independent contractors whose activities on behalf of such
person in such State consist solely of making sales, or soliciting orders for sales, of
tangible personal property.2
1

Department Regulation 39-22-301.1

2 15 U.S.C. § 381.

2

More specifically, if a corporation located outside of Colorado is only soliciting sales of tangible
personal property, and the sales orders are sent out of Colorado for acceptance and fulfillment,
the corporation does not have a filing obligation with Colorado.
However, the protection of P.L. 86-272 applies only to those businesses engaged in the
interstate commerce of selling tangible personal property, and does not apply to the sale of
services.3 Company appears to be selling the service of soliciting sales for manufacturers
rather than selling tangible personal property. Therefore, P.L. 86-272 would not immunize
Company from the liability of reporting and remitting Colorado corporate income tax if they
exceed any of the thresholds to establish substantial nexus.
If a corporation has taxable income derived from sources in Colorado and outside Colorado,
then the corporation must apportion its business income and allocate its non-business income.
For tax periods commencing on or after January 1, 2009, income is generally apportioned
based on the single factor apportionment method.4 All business income is apportioned to
Colorado by multiplying such business income by a fraction, the numerator of which is the total
sales of the taxpayer in Colorado during the tax period and the denominator of which is the
total sales of the taxpayer everywhere during the tax period. For more information about
apportionment and allocation, see Department regulation 39-22-303.5.4 and 303.5.4, which
you can view at www.Colorado.gov/revenue/tax > Tax Library > Rules and Regulations > Final
Regulations > Income.

Miscellaneous
This letter represents the good faith opinion of Department personnel who are knowledgeable on
state taxes issues. However, the Department does not make a specific determination here on any
of the issues raised and the Department is not bound by this general information letter.
The Department administers state and state-administered local sales and use taxes. This letter
does not address sales and use taxes administered by home-rule cities and home-rule counties.
You may wish to consult with local governments which administer their own sales or use taxes
about the applicability of those taxes. Visit our web site at www.colorado.gov/revenue/tax for more
information about state and local sales taxes.
Enclosed is a redacted version of this letter. Pursuant to statute and regulation, this redacted letter
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 letter.
Sincerely,

3 Other states have reached the same conclusion. See, Statement of Information Concerning Practices of Multistate

4

Tax Commission and Signatory States Under Public Law 86-272; Arizona Corporate Tax Ruling No. 99-5;
Connecticut Informational Publication No. 2010(29.1), 12/28/2010; Florida Technical Assistance Advisement
99(C)1-002, 06/03/1999; Ill. Admin. Code 100.9720, Nexus.
§39-22-303.5(4)(a), C.R.S.

3

Office of Tax Policy
Colorado Department of Revenue

4