Can a financial institution use an alternative, deposits-based apportionment instead of the financial-institution rule that sources investment income to where decisions are made?

Plain-English summary

A savings-and-loan holding company with a bank subsidiary and a broker-dealer subsidiary is a financial institution, so it must apportion its Colorado income under Special Regulation 7A. A big chunk of its income comes from investing and trading cash that mostly belongs to customers (bank deposits and brokerage cash swept and invested daily). Under 7A, receipts from investment and trading assets are sourced to the regular place of business where the day-to-day decisions about the asset are made — essentially a cost-of-performance rule. The company argued that doesn't reflect the market that produces this income, and asked to use an alternative method. The Department agreed and approved one.

The Department's reasoning:

• The default rule is a weak market proxy. 7A sources investment/trading receipts to the taxpayer's decision-making location precisely because these receipts are assumed to have no true market. The Department conceded the taxpayer's location isn't the market.
• But the payor's location is no better. Sourcing to where the payor of the investment return sits would be arbitrary — likely a single commercial-domicile/headquarters/incorporation location standing in for what's really a regional, national, or global activity.
• A "deposits factor" is the best available proxy. The Department analogized the company to a mutual-fund management company — both earn income by investing assets that belong to customers (the fee-vs-margin difference being immaterial). It adopted a deposits factor like Minnesota's as the best proxy for the otherwise "opaque" investment market.

So the Department allowed — and, once adopted, requires — this formula for the Colorado numerator of investment receipts:

Colorado numerator = (investment-asset receipts) × (Colorado customer-account deposits ÷ total customer-account deposits), where a deposit is "Colorado" if the customer's primary contact address is in Colorado.

The rest of the company's apportionment stays as otherwise required by law. As a PLR, it binds the Department only for this company. (Note: the ruling's closing boilerplate erroneously says it "applies only to sales and use taxes" — a copy-paste artifact; the substance is an income-tax apportionment ruling.)

This pairs with [[plr-15-006-apportionment-of-corporate-income-tax]] (another search for the right market proxy when standard sourcing fails) and contrasts with [[gil-14-017-alternative-apportionment]] (where a poorly-documented alternative-apportionment request was denied).

What this means for you

Banks, broker-dealers, and other financial institutions

If Special Regulation 7A's decision-location sourcing over-assigns your investment and trading income to your home state, a deposits-based market proxy may be available through alternative apportionment — but you'll need to make the case, and once approved you're bound to use it. The metric here keyed to the customer's primary contact address.

Firms earning income by investing customer assets

The Department treated the company like a mutual-fund manager — what matters is that you earn income investing customers' money, regardless of whether you're paid a fee or a margin. That framing supports a market/customer-based factor over a pure decision-location rule.

Accountants and tax professionals

The default is 7A's §§ 1)c)xiii)(2)/(5) (regular place of business / day-to-day decisions). Alternative apportionment under § 39-22-303.5(7)(b) can substitute a deposits factor (Colorado deposits ÷ total deposits, by primary contact address). Contrast the denied petition in GIL 14-017 — approval here followed a coherent market-proxy rationale, not a bare assertion of distortion.

Common questions

Q: How does Special Regulation 7A normally source a bank's investment income?
A: To the regular place of business where the day-to-day decisions about the asset are made — a cost-of-performance approach.

Q: What did the Department approve instead?
A: A deposits factor: the Colorado numerator of investment receipts equals total investment receipts times Colorado customer deposits divided by total customer deposits (Colorado determined by the customer's primary contact address).

Q: Why not source to where the payor of the investment return is located?
A: The Department found that too arbitrary — a single location standing in for what is really a regional, national, or global activity.

Q: Can another financial institution rely on this ruling?
A: No. A private letter ruling binds the Department only for the taxpayer and facts it was issued to and cannot be relied upon by anyone else.

Citations and references

Statutes, rules, and authorities:
- 1 CCR 201-3, Special Regulation 7A (financial institutions; investment/trading receipt sourcing, §§ 1)c)xiii)(2), (5))
- § 39-22-303.5(7)(b), C.R.S. (alternative / equitable apportionment)
- Department Regulation 24-35-103.5 (private letter ruling procedure)
- Minnesota deposits-factor apportionment (model for the approved method)

Source

• Landing page: https://tax.colorado.gov/all-letter-rulings
• Original PDF: https://tax.colorado.gov/sites/tax/files/documents/PLR-13-001.pdf

Original ruling text

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

PLR-13-001

January 24, 2013

xxxxxxxxxxxxxxxxx
ATTN:XXXXXXXXXXXX
xxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxx
Dear XXXXXXXXXX,
You submitted on behalf of XXXXXXXXXXXXXXXXX ("Company") a request for a private
letter ruling to the Colorado Department of Revenue ("Department") pursuant to Regulation
24-35-103.5. This letter is the Department's private letter ruling.
Issues
1.

May Company file its income tax returns under an alternative method of apportionment,
different from the method required by Special Regulation 7A - Financial Institutions?
Conclusion

1.

Company may file under an alternative method of apportionment as described below.
Background

Company is a savings and loan holding company. Company has multiple subsidiaries. One
subsidiary, "Broker", is a securities broker-dealer, whose principal business is the sale of
broker-dealer services to clients. Another Company subsidiary, "Bank", is a bank, the
principal business of which is to provide banking services to clients. Bank's primary customer
base is made up of clients of Broker, although non-clients of Broker may also be clients of
Bank. Company and its subsidiaries are financial institutions, required to file a Colorado
income tax return under Special Regulation 7A- Financial Institutions.
Company has represented that it has a substantial amount of receipts from investment and
trading assets and activities. These activities consist generally of investments of cash. The
source of the cash being invested is generally cash on deposit by customers. Bank
customers maintain deposit accounts with Bank, and the cash in those accounts is invested.
Broker's clients may have cash on deposit with Broker, either because the customer wishes to
maintain such cash on account or due to trades on the customer's behalf that resulted in

excess cash. Most cash maintained in Broker's customer accounts is swept daily and
invested by Bank. Some cash is maintained on Broker's books
Company notes that, with respect to its receipts from investment and trading assets and
activities under 1)c)xiii)(2) of the financial institutions special regulation, it is required to
calculate the Colorado numerator on the basis of the location of the regular place of business
of the activities, and that, pursuant to 1)c)xiii)(5), such location is determined on the basis of
the location of the day-to-day decisions regarding the asset or activity.
Company argues that such a rule does not fairly represent the extent of the taxpayer's
activities in Colorado. Company notes that the overall purpose of the rule is to source
receipts to the location from which such receipts arise (the market principle) and that the
current rule reflects a cost of performance principle rather than a market principle.
Discussion
The financial institution rule regarding investment and trading assets and activities
presupposes that these types of receipts have no true market that gives rise to the receipt.
Thus, the traditional rule substitutes the location of the taxpayer from which the activities are
directed.
The Department recognizes that the taxpayer's location is not a reflection of the market giving
rise to the receipt. However, the Department also does not believe that the location of the
payor of the investment return represents the "market" giving rise to the receipt. The
"location" of the payor is likely to be a relatively arbitrary single location (representing either
commercial domicile, headquarters location, or incorporation location) of what is likely to be a
regional, nationwide, or worldwide activity that generates the return on the taxpayer's original
investment.
While the Department feels that neither the existing rule nor a "payor" substitute adequately
serve as proxies for the market for the receipt, the Department does conclude that a
"deposits" factor, such as the one employed by the State of Minnesota is a reasonable proxy
for the market for such activities.
The Department believes that the Company's situation described herein is similar to the
apportionment of income of a mutual fund management company. In that circumstance, a
taxpayer derives income (and receipts) from the investment of assets that belong to a
customer (either of the taxpayer or a party related to the taxpayer). Although the receipts of a
mutual fund investment advisor reflect fees rather than a margin between return received and
return paid, we do not perceive that difference to be significant.
The Department recognizes that the Bank's and Broker's customer accounts reflect more a
source of capital than the investment of capital. However, the Department concludes that
such a rule serves as the best possible proxy for an otherwise opaque investment "market".

2

The Department will therefore allow and, once accepted and utilized by Company, require,
Company to calculate the sales factor numerator under the alternative apportionment method
as follows.
Company will calculate the ratio of total deposits from Colorado customer accounts
(determined by a primary contact address in Colorado) to total deposits from all customer
accounts. Company will multiply that ratio by its receipts from investment assets and
activities. The resulting product will be the amount of Colorado numerator receipts from
investment assets and activities.
The remainder of Bank's, and Company's, apportionment shall be as otherwise required by
law.
Miscellaneous
This ruling applies only to sales and use taxes administered by the Department. Please note
that the Department administers state and state-collected city and county sales taxes and
special district sales and use taxes, but does not administer sales and use taxes for self­
collected home rule cities and 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.
This ruling is premised on the assumption that Company has completely and accurately
disclosed all material facts. The Department reserves the right, among others, to
independently evaluate Company's representations. This ruling is null and void if any such
representation is incorrect and has a material bearing on the conclusions reached in this
ruling. This ruling is subject to modification or revocation in accordance to Department
Regulation 24-35-103.5.
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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