Colorado corporate income taxes will incorporate a new method of sourcing sales of services, following a trend of states abandoning the cost of performance approach. The enactment of HB 18-1185 changes the procedure of sourcing services to a market-based approach, effective for tax years beginning on or after January 1, 2019.
Historically, most states used the cost of performance method to source sales of services to the location where the income-producing activity is performed. The details of this method vary among the states as to the definition of an income-producing activity and, as well, as to what costs should be included, resulting in a lack of uniformity among states. This also results in court cases for the same taxpayer being decided with opposite results based on the different state law distinctions, even with identical facts.
At this point, approximately half of the states have adopted market-based sourcing for sales of services revenue. Many follow the model rules proposed by the Multistate Tax Commission, in whole or in part. This methodology allows a state to tax out-of state entities that provide services to in-state residents. Gross receipts of a taxpayer, other than from tangible personal property, are sourced to Colorado if the taxpayer’s market is in Colorado. The taxpayer’s market is in Colorado to the extent that the service is delivered to a location in Colorado. If the state of assignment cannot be determined, the state must be reasonably determined. If a determination cannot be made, the receipts in question must be removed from the denominator of the apportionment factor.
If the allocation and apportionment methods dictated by this new law do not fairly represent the extent of business activity in Colorado, the taxpayer may petition for an alternative allocation and apportionment method that is reasonable for the taxpayer’s industry.
The intended purpose of this law change is to conform to the Multistate Tax Commission’s model act, which simplifies the collection and administration of income taxes for the state and relieves taxpayers’ compliance burden.
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