Does an out-of-state company owe Colorado income tax just because one of its sales representatives lives in Colorado?

Plain-English summary

An out-of-state company — an LLC that elected to be taxed as an S corporation — sells technical surveillance products to government and military buyers worldwide. It has no Colorado office, closes all sales at its out-of-state headquarters, and has one sales representative who lives in Colorado (doing about 90% of his work out of state). The rep only shows products when asked; he doesn't close sales. The company asked whether it owes Colorado income tax.

The Department laid out the two-step test (without deciding, since it's a general letter):

• Step 1 — Is the S corporation "doing business" in Colorado (substantial nexus)? An S corporation itself isn't subject to Colorado income tax, but its shareholders must file if the company does business here and has Colorado-source income. A company has substantial nexus if, during the tax period, it exceeds any one of these thresholds (Rule 39-22-301.1):
• $50,000 of property, or
• $50,000 of payroll, or
• $500,000 of sales, or
• 25% of total property, total payroll, or total sales.
  The Department said the few facts given didn't show whether any threshold was crossed. If none is, there's no filing obligation.
• Step 2 — Even with nexus, does Public Law 86-272 protect the company? This federal law (15 U.S.C. § 381) bars a state income tax when the only in-state activity is soliciting orders for tangible personal property that are approved and shipped from outside the state. A rep who just shows products and solicits orders stays protected. But activities beyond solicitation — for example, regularly accepting returns or handling warranty claims — break the protection. The Department can't decide in a general letter whether this rep crossed that line.

Bottom line: one Colorado-resident salesperson can create nexus, but P.L. 86-272 may still shield the company from income tax if the rep does nothing more than solicit orders filled from out of state. As a GIL, this is general guidance only.

(The PDF's subject line reads "LCC Employee" — a typo for "LLC." )

What this means for you

Out-of-state sellers with a salesperson living in Colorado

Having a rep in Colorado isn't automatically fatal. First check whether you cross a nexus threshold ($50k property, $50k payroll, $500k sales, or 25%). If you do, you may still be protected by P.L. 86-272 — but only if your in-state people do nothing beyond soliciting orders for goods shipped from out of state. The moment they start accepting returns, doing warranty work, or providing services, you likely lose the shield.

S corporations and their shareholders

The S corporation doesn't pay Colorado income tax, but nexus flows to the shareholders, who must file Colorado returns on Colorado-source income if the company is doing business here.

Accountants and tax professionals

Two separate gates: (1) the Rule 39-22-301.1 economic thresholds, and (2) the P.L. 86-272 activity test (Colorado follows the MTC Statement, including its list of unprotected activities like returns and warranty handling). Note P.L. 86-272 only protects income tax — not sales/use tax or other obligations (the company here was already setting up withholding and sales tax accounts).

Common questions

Q: One of our salespeople lives in Colorado. Do we owe Colorado income tax?
A: Maybe. You first need substantial nexus (exceeding a property, payroll, or sales threshold). Even then, P.L. 86-272 can bar the tax if the rep only solicits orders for goods shipped from outside Colorado.

Q: What are the nexus thresholds?
A: Exceeding any one of: $50,000 of property, $50,000 of payroll, $500,000 of sales, or 25% of total property, payroll, or sales in the tax period.

Q: What activity breaks P.L. 86-272 protection?
A: Anything beyond soliciting orders — for example, regularly accepting returns or handling warranty claims. Then the protection is lost.

Q: Does P.L. 86-272 cover sales tax too?
A: No. It only protects against a net income tax. Sales/use tax and withholding are separate questions.

Q: Can I rely on this letter?
A: No. It's a General Information Letter — general guidance only, not binding on the Department. A binding answer requires a private letter ruling.

Citations and references

Statutes, rules, and guidance:
- 1 CCR 201-2, Department Rule 39-22-301.1 (substantial-nexus thresholds)
- 15 U.S.C. § 381 (Public Law 86-272)
- Multistate Tax Commission Statement of Information on P.L. 86-272 (3rd revision, 2001; Colorado signatory)
- 1 CCR 201-1, Rule 24-35-103.5 (GIL/PLR procedure)

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-16-001.pdf

Original ruling text

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

GIL-16-001
January 4, 2016
XXXXXXXXXXXXXXX
Attn: XXXXXXXXXXX
XXXXXXXXXXXXXXX
XXXXXXXXXXXXXXX
Re: LCC Employee in Colorado
Dear XXXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXX (“Company”) a request for guidance to
determine whether Company is subject to Colorado income tax.
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 but
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 treats this request as one for a general information letter. It is important to
remember that general information letters, such as this one, are general discussions of tax law and
are not binding on the Department. If Company would like the Department to issue a private letter
ruling on the issue raised here, the retailer can submit a request and fee in compliance with
Department Regulation 24-35-103.5.
Is Company subject to Colorado income tax?

Issue

Background
Company is a LLC that made the S Corporation tax election. None of Company’s shareholders have
nexus with Colorado and do not conduct any business in Colorado. Company does not have offices
or locations in Colorado.
Company sells technical surveillance products to law enforcement and military governmental
customers worldwide. All sales are finalized either by telephone or email at its headquarters located
outside of Colorado and all contracts for sales are accepted only at the headquarters. Company has
several sales representatives but only one lives in Colorado. Sales representatives do not finalize or
close any sales; they only show products to customers when a customer requests to see the
products. Roughly ninety percent of the work of the Colorado representative will be performed out-ofstate.

Company is establishing unemployment, withholding and possibly sales tax accounts with Colorado
because of the presence of its sales representative in Colorado. However, Company does not
believe it is subject to Colorado income tax.
Discussion
Because Company elected to file as an S Corporation, we begin by describing the income tax rules
for S Corporations. An S-Corporation is not subject to Colorado income tax. However, members of
the S corporation must file a Colorado income tax return if the S Corporation does business in
Colorado and derives income from Colorado sources. A corporation is 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 the 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
It is not clear from the relatively few facts provided whether Company exceeds any of the thresholds.
If Company does not satisfy any of these criteria, then it has no obligation to file a Colorado income
tax return.
Even if Company does meet at least one of these thresholds, Company may still not have any
Colorado income tax obligation if it falls within the protection of P.L 86-272, which states, in pertinent
part,
(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).2
We cannot rule in a general information letter, such as this, whether Company exceeds the
protection of P.L. 86-272. If the employee is doing more than soliciting sales or activities closely
related to solicitations of orders, Company exceeds the protection of P.L. 86-272. For example, a
company, whose employee regularly accepts returns on behalf of a company or regularly handles
warranty claims, will likely be viewed as having engaged in activities that exceed those protected by
P.L. 86-272.3

1
2
3

2

Department Regulation 39-22-301.1
15 U.S.C. § 381.
Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under
Public Law 86-272.(Third revision adopted by the Multistate Tax Commission on July 27, 2001). Colorado
is a signatory of this Statement and follows the guidance provided therein.
DR 4010A (06/11/14)

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/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,

Office of Tax Policy
Colorado Department of Revenue

3

DR 4010A (06/11/14)