When does an out-of-state partnership that provides investment-advisory services to mutual funds have Colorado income-tax nexus?

Plain-English summary

An out-of-state partnership whose revenue came from investment-advisory services to regulated investment companies (mutual funds) asked how Colorado decides whether it has nexus — the connection that forces it to file and comply with Colorado income tax. The Department's answer: a pass-through is tested the same way a corporation is.

The mechanics:

• Same standards as corporations. Colorado applies its corporate substantial-nexus standards to partnerships and other pass-throughs (§ 39-22-601(5)(a); Rule 39-22-301).
• Test at the entity level. The partnership looks at its sales, property, and payroll and asks whether it exceeds any one of the threshold amounts or percentages (Rule 39-22-301(1)(2)(c)(v)). Crossing just one threshold is enough.
• Consequence of nexus. A partnership that exceeds a threshold has substantial nexus, must file Colorado returns, and must comply with the requirements for nonresident partners (§ 39-22-601(5)(a)).
• The mutual-fund wrinkle. For a partnership rendering management, distribution, or administration services to a registered investment company, the sales threshold — $500,000 or 25% of total sales — is computed and sourced under the special mutual-fund-sales rule in § 39-22-303.7(2) and Rule 39-22-303.7-2 (these "mutual fund sales" are also defined in § 39-22-303.7(1)(e)).

The letter spells out the sales threshold dollar figure ($500,000 or 25%) but doesn't restate specific property/payroll dollar amounts — those live in Rule 39-22-301. The headline is that an out-of-state fund adviser organized as a pass-through can be pulled into Colorado by its sourced Colorado sales alone, using the mutual-fund sourcing rule. This is a General Information Letter — general guidance, not binding.

What this means for you

Out-of-state fund advisers and pass-through service firms

You can have Colorado nexus without any Colorado office or staff if your Colorado-sourced sales exceed $500,000 or 25% of total sales. For mutual-fund management/distribution/administration work, where the sale is sourced is governed by the special rule in § 39-22-303.7(2) — so the location of the fund and its shareholders, not your office, can drive the result.

Partnerships generally

The nexus test runs at the entity level across sales, property, and payroll, and any one threshold triggers it. Once tripped, you file in Colorado and handle the nonresident-partner obligations for partners who aren't Colorado residents.

Accountants and tax professionals

Pull Rule 39-22-301 for the full set of threshold amounts/percentages, and apply the mutual-fund-sales sourcing of § 39-22-303.7(2) / Rule 39-22-303.7-2 (and Rule 39-22-303.6-10(4)(c)(iv)) when the client services registered investment companies. "Partnership" here is the § 39-22-103(5.6) definition (I.R.C. § 761(a), § 6031(a) filer).

Common questions

Q: Can an out-of-state partnership owe Colorado income tax with no office here?
A: Yes. If it exceeds any one of the entity-level sales, property, or payroll thresholds, it has substantial nexus and must file. Colorado-sourced sales over $500,000 (or 25% of total sales) can be enough on their own.

Q: Are partnerships tested differently from corporations?
A: No. Colorado applies the same substantial-nexus standards to pass-through entities as to corporations.

Q: How are sales to mutual funds sourced for the test?
A: Under the special mutual-fund-sales rule in § 39-22-303.7(2), C.R.S., and Rule 39-22-303.7-2, not by where the adviser's office sits.

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 and rules:
- § 39-22-103(5.6), C.R.S. (definition of "partnership")
- § 39-22-601(5)(a), C.R.S. (same nexus standards for pass-throughs; nonresident-partner requirements)
- 1 CCR 201-1, Rule 39-22-301; Rule 39-22-301(1)(2)(c)(v) (nexus standards; threshold amounts/percentages)
- § 39-22-303.7(2), C.R.S.; 1 CCR 201-1, Rule 39-22-303.7-2 (mutual-fund/RIC sales sourcing)
- § 39-22-303.7(1)(e), C.R.S.; Rule 39-22-303.7-1(4) ("mutual fund sales")
- 1 CCR 201-1, Rule 39-22-303.6-10(4)(c)(iv)

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/GIL-21-004.pdf

Original ruling text

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

GIL 21-004
July 30, 2021
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Re: Colorado Nexus for Out-of-State Pass-Through Entity

Dear XXXXXXXXXX:
You submitted a request for a general information letter regarding nexus for an out-of-state,
pass-through entity. 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, and
requires payment of a fee. For more information about general information letters and private
letter rulings, please see 1 CCR 201-1, Rule 24-35-103.5.
Issue
How is Colorado nexus determined for a partnership1 that derives its revenue from investment
advisory services provided to regulated investment companies?
Discussion
Colorado applies the same standards for determining if a corporation has substantial nexus to
partnerships and other pass-through entities.2 Under the nexus rules, a partnership must
determine if it exceeds any of the threshold amounts or percentages for sales, property, or
payroll at the entity level.3 Partnerships that exceed any one of these thresholds have
substantial nexus with Colorado and must make returns and comply with the requirements for
nonresident partners.4

1 § 39-22-103(5.6), C.R.S.

(“’Partnership’ means any group or organization that is a partnership, as defined by
section 761(a) of the internal revenue code, and is required to file a return under section 6031 (a) of the internal
revenue code.”)
2 See § 39-22-601(5)(a), C.R.S.; see also 1 CCR 201-1, Rule 39-22-301 (establishing nexus standards for
corporations and pass-through entities, including partnerships).
3 1 CCR 201-1, Rule 39-22-301(1) (2)(c)(v).
4 § 39-22-601(5)(a), C.R.S.

GIL 21-004
July 30, 2021
Page 2

When determining nexus for a partnership rendering management, distribution, or
administration services to a registered investment company,5 the sales threshold amounts of
$500,000 or 25% of total sales is computed and sourced in accordance with section 39-22303.7(2), C.R.S., and 1 CCR 201-1, Rule 39-22-303.7-2.6

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 on any
of the issues raised, and the Department is not bound by this general information letter.
Sincerely,

Office of Tax Policy Analysis
Colorado Department of Revenue

5 Also referred to as “mutual fund sales” in section 39-22-303.7(1)(e), C.R.S. and in 1 CCR 201-1, Rule 39-22-303.7-

1(4).
6 1 CCR 201-1, Rule 39-22-303.6-10(4)(c)(iv).