Colo. Code Regs. 39-22-303.6-17
Current through Register Vol. 47, No. 23, December 10, 2024
Rule 39-22-303.6-17 - Apportioning Gross Receipts of Taxpayers with De Minimis or No ReceiptsBasis and Purpose. The bases of this rule are §§ 39-21-112, 39-22-301, 39-22-303, and 39-22-303.6, C.R.S. The purpose of this rule is to clarify how taxpayers with de minimis or no receipts shall determine their receipts factor. Consistent with the General Assembly's adoption of § 39-22-303.6, C.R.S., these rules are intended to conform the state's income tax laws to the Multistate Tax Commission's model statute and regulation except when those model provisions are inconsistent with Colorado statute. See 2018 Colo. Sess. Laws, ch. 369, § 1(2).
(1)General Rule. This Rule 39-22-303.6 -17 applies to the determination of the receipts factor if the taxpayer's receipts are less than 3.33 percent of the taxpayer's gross receipts. A taxpayer's receipts subject to assignment under § 39-22-303.6 paragraph (5) and (6), C.R.S., are assigned under those sections and are not assigned by this Rule 39-22-303.6 -17.(2)Definitions.(a) "Gross receipts from lending activities" means interest income and other gross receipts arising from the activities described in paragraphs (1)(c)(iv) through (1)(c)(x) of 1 CCR 201-2, Special Rule 7A, Financial Institutions.(b) An entity's apportionment factor is "de minimis" if the denominator is less than 3.33 percent of the entity's apportionable gross receipts or if the factor is insignificant in producing income.(3) The following gross receipts are included in the receipts factor denominator and are assigned to the receipts factor numerator in Colorado as follows: (a) Dividends paid by a related party are assigned to the receipts factor numerator in Colorado as follows: (i) If paid from earnings that can be reasonably attributed to a particular year, the dividends are assigned to the receipts factor numerator in Colorado in a proportion equal to the dividend payor's apportionment factor in Colorado for that year as determined pursuant to § 39-22-303.6, C.R.S.(ii) If the dividends were paid from earnings that cannot reasonably be attributed to a particular year, the dividends are assigned to the receipts factor numerator in Colorado in a proportion equal to the dividend payor's average apportionment factor in Colorado for the current and preceding year as determined pursuant to § 39-22-303.6, C.R.S.(iii)Example. Taxpayer Bigbox Holding, Inc. (Holding) is a domestic corporation, domiciled in Delaware, with numerous foreign and domestic subsidiaries. Holding has no "receipts." Holding is the corporate parent of Bigbox Retailing, Inc. (Retailing), a domestic corporation with its commercial domicile in State X. During the tax year, Holding receives $100 million in dividends from Retailing. In both the current tax year and the prior tax year, Retailing conducted operations in ten states, including Colorado. Retailing's apportionment factor in Colorado in the current year is 20%, and the factor was 18% in the prior year. The dividends received from Retailing cannot be reasonably attributed to that entity's earnings in any specific year. Therefore, pursuant to paragraph (3)(a)(ii), Holding's receipts factor in Colorado is calculated by including the $100 million of apportionable dividends received from Retailing in the denominator, and $19 million in the receipts factor numerator in Colorado, based on the average of Retailing's apportionment factors in Colorado in the current year (20%) and prior year (18%).(b) Gains are assigned to the receipts factor numerator in Colorado as follows: (i) Gains (net of related losses, but not less than zero) from the disposition of stock (or other intangible property rights) representing at least a 20% ownership interest in an entity are assigned to the receipts factor numerator in Colorado in a proportion equal to what the entity's separate apportionment factor was in Colorado for the tax year preceding the disposition as determined pursuant to § 39-22-303.6, C.R.S.(ii) Gains (net of related losses, but not less than zero) from the disposition of assets of an entity or segment of a business are assigned to the receipts factor numerator in Colorado in a proportion equal to what the entity's separate apportionment factor was in Colorado in the tax year preceding the disposition as determined pursuant to § 39-22-303.6, C.R.S.(iii) In applying paragraphs (3)(b)(i) or (ii), in any case in which the entity did not exist in the prior year, or had an apportionment factor of zero, or had only a de minimis apportionment factor, the gross receipts from the gain are attributed to the receipts factor numerator of Colorado under paragraphs (4) or (5) of this Rule 39-22-303.6 -17, as appropriate.(iv) In applying this paragraph (b), in the case of an entity that was not subject to entity-level taxation, the apportionment percentage shall be computed as if the entity were a C corporation.(v)Examples.(A)Example (i). Taxpayer, Nuclear Corp. (Nuclear) is a holding company with no "receipts" from transactions and activities in the ordinary course of business. In the prior tax year, Nuclear formed Target Corp. (Target) and transferred its stock ownership interest in three power plants, located in three states, one of which is in Colorado, to Target in exchange for the stock of Target. In the current tax year, Nuclear sells the stock of Target to Risky Investments for $500 million in cash, recognizing a gain of $100 million. In the tax year preceding the sale, Target's apportionment factor in Colorado was 30%. Based on Target's prior year apportionment factor, Nuclear would include $100 million in the denominator of its receipts factor and would assign $30 million to the receipts factor numerator in Colorado.(B)Example (ii). Same facts as example (i) except during the current tax year Nuclear formed Target and then sold the Target stock on the same day. Because Target did not exist in the year preceding the disposition, Nuclear would have to use paragraph (4) or (5), as appropriate, to assign a portion of the $100 million gain to its receipts factor numerator in Colorado.(c) Gross receipts from lending activities are included in the receipts factor denominator and assigned to the receipts factor numerator in Colorado to the extent those gross receipts would have been assigned to Colorado under 1 CCR 201-2, Special Rule 7A, Financial Institutions (including the rule of assignment to commercial domicile under (1)(c)(xv) of that rule) as if the taxpayer were a financial institution subject to Special Rule 7A, except that:(i) in the case of gross receipts derived from loans to a related party, which are not secured by real property, including interest, fees, and penalties, the gross receipts are included in Colorado's numerator in a proportion equal to the related party's apportionment factor in Colorado as determined by § 39-22-303.6, C.R.S., in the year the gross receipts were included in apportionable income; and(ii) gross receipts derived from accounts receivable previously sold to or otherwise transferred to the taxpayer are assigned under paragraph (3)(d).(iii)Examples.(A)Example (i). Taxpayer Bigbox Holding, Inc. (Holding) is a domestic corporation domiciled in Delaware, with numerous foreign and domestic subsidiaries. Holding has no "receipts." Holding is the corporate parent of Bigbox Retailing, Inc. (Retailing), a domestic corporation with its commercial domicile in state X. During the current tax year, Holding receives $100 million in dividends from Retailing. In both the current tax year and the prior tax year, Retailing conducted operations in ten states, including Colorado. Retailing's apportionment factor in Colorado in the current year is 20%, and its factor was 18% in the prior year. In a prior year, Holding lent its excess capital to Retailing as an unsecured loan. In repayment of that loan, Holding received $40 million of interest income from Retailing in the current tax year, in addition to the $100 million of dividend income that Holding received from Retailing. Pursuant to paragraph (3)(c) of this Rule 39-22-303.6 -17, Holding's interest income would be included in its receipts factor denominator, and 20% of Holding's interest income ($8 million) would be included in its receipts factor numerator in Colorado because 20% of Retailing's apportionment factors were in Colorado in the year the interest income was included in taxable income. Assuming Holding had no other gross receipts, Holding's receipt factor numerator in Colorado is 19.28% ($27 million /$140 million).(B)Example (ii). Taxpayer Loan Participation Inc. (LPI) was formed to acquire and hold a participation in loans secured by real property originated by an unrelated financial institution. LPI has no employees or property and no other gross receipts except for payments of interest on the participation loan held. Even though LPI would not be considered a financial institution under 1 CCR 201-2, Special Rule 7A, LPI's gross receipts are included in the denominator and assigned to the receipts factor numerator in Colorado under paragraph (1)(c)(iv) of 1 CCR 201-2, Special Rule 7A in proportion to the value of loans secured by real property in Colorado compared to the value of loans secured by real property everywhere.(d) Gross receipts derived from accounts receivable previously sold to or otherwise transferred to the taxpayer are included in the denominator and assigned to the receipts factor numerator in Colorado to the extent those accounts receivable are attributed to borrowers located in Colorado.(i)Examples.(A)Example (i). Taxpayer IH Factoring, Inc. (Factoring) is a Delaware corporation that has twenty employees, all of whom are located in Delaware. Factoring purchases installment agreements (accounts receivable) from its parent corporation, Iron Horse Motorcycles, Inc. (Iron Horse). Factoring has access to information showing the addresses of the installment agreement customers. Factoring purchases installment agreements originating from Iron Horse's borrowers in States A and Colorado. Factoring is taxable in State A and Colorado. Factoring resells the agreements as securitized instruments to institutional investors. Factoring's gross receipts from selling the securitized instruments originating from Iron Horse's borrowers in State A and Colorado would be included in the receipts factor denominator, and Factoring's gross receipts from selling securitized instruments originating from Iron Horse's borrowers in Colorado would be assigned to the receipts factor numerator in Colorado.(B)Example (ii). Same facts as example (i), but IH Factoring retains its ownership in the installment agreements and receives principal, interest, and related fees from Iron Horse's customers (borrowers). The principal, interest, and related fees received by Factoring from borrowers in State A and Colorado would be included in Factoring's receipts factor denominator, and Factoring's receipts received from Iron Horse's customers (borrowers) in Colorado would be assigned to the receipts factor numerator in Colorado.(e) The net amount (but not less than zero) of gross receipts not otherwise assigned under this paragraph (3) arising from investment activities, including the holding, maturity, redemption, sale, exchange, or other disposition of marketable securities or cash, are assigned to the receipts factor numerator in Colorado if the gross receipts would be assigned to Colorado under paragraphs (1)(c)(xiii) or (1)(c)(xv) of 1 CCR 201-2, Special Rule 7A; all other gross receipts from investment activities not otherwise assigned under this paragraph (3) are assigned to the receipts factor numerator in Colorado if the investments are managed in Colorado.(4) Except for gross receipts included and assigned under paragraph (3), gross receipts of a taxpayer whose income and receipts factor are included in a combined report in Colorado are included in the receipts factor denominator and are assigned to the receipts factor numerator in Colorado in the same proportion as the ratio of: (A) the total of the receipts factor numerators of all members of the combined group in Colorado, whether taxable or nontaxable, as determined pursuant to § 39-22-303(11), C.R.S., to (B) the denominator of the combined group. (a)Example. Taxpayer Windfall, Inc. (Windfall) is a wholly owned subsidiary of ABC Manufacturing Company (ABC). Windfall's only gross receipt during the year is $1 billion received in settlement of ABC's patent infringement suit against a business competitor that has been ongoing for several years. Windfall is included on a combined report filed by ABC on behalf of ABC, Windfall, and other direct and indirect controlled subsidiaries of ABC (collectively, the Combined Subsidiaries). The ratio of the total numerators of ABC and Combined Subsidiaries in Colorado, as reported on the combined report, to the denominator of the combined group is 25 percent. Windfall would include $1 billion in its receipts factor denominator and would include $250 million in the receipts factor numerator in Colorado. (5) Except for those gross receipts included and assigned under paragraphs (3) or (4), gross receipts of a taxpayer that files as part of a federal consolidated return are included in the receipts factor denominator and are assigned to the receipts factor numerator in Colorado in a proportion equal to a percentage (but not greater than 100%), the numerator of which is the total of the consolidated group members' income allocated or apportioned to Colorado pursuant to § 39-22-303.6, C.R.S., and the denominator of which is the total federal consolidated taxable income. (a)Example. Taxpayer Windfall, Inc. (Windfall) is a wholly owned subsidiary of ABC Manufacturing Corp. (ABC). Windfall's only gross receipt is $1 billion received in settlement of ABC's patent infringement suit against a business competitor that has been ongoing for several years. Windfall is not included on a combined report filed in Colorado, but is included on a consolidated federal return filed by ABC on behalf of Windfall and other affiliated corporations that are included in such consolidated return. The total federal taxable income of that consolidated group is $5 billion, and the total amount of that income that is apportioned to Colorado by members of the consolidated group other than Windfall is $500 million. Because the percentage of the consolidated group's income that would be apportioned to Colorado is 10%, Windfall would include $1 billion in its receipts factor denominator and would assign 10% of that amount ($100 million) to the receipts factor numerator in Colorado.(6) Nothing in this Rule 39-22-303.6 -17 shall prohibit a taxpayer from petitioning for, or the Department from applying, an alternative method to calculate the taxpayer's receipts factor in order to fairly represent the extent of the taxpayer's business activity in Colorado as provided for in § 39-22-303.6(9)(b), C.R.S., including the application of this rule in situations that do not meet the threshold of paragraph (1) of this Rule 39-22-303.6 -17. Such alternative method may be appropriate, for example, in situations otherwise addressed under paragraph (3)(a) where dividends were paid from earnings that were generated by the activities of a related party of the dividend payor, in which case the dividends may be more appropriately assigned to the receipts factor numerator in Colorado using the related party's average apportionment factors in Colorado.Colorado Register, Vol 37, No. 14. July 25, 2014, effective 8/14/201437 CR 18, September 25, 2014, effective 10/15/201437 CR 19, October 10,2014, effective 10/30/201437 CR 22, November 25, 2014, effective 12/16/201438 CR 04, February 25, 2015, effective 3/17/201538 CR 07, April 10, 2015, effective 4/30/201538 CR 11, June 10, 2015, effective 6/30/201538 CR 22, November 25, 2015, effective 12/15/201538 CR 24, December 25, 2015, effective 1/14/201638 CR 24, December 25, 2015, effective 1/19/201639 CR 01, January 10, 2016, effective 1/30/201639 CR 16, August 25, 2016, effective 9/14/201640 CR 08, April 25, 2017, effective 5/15/201740 CR 12, June 25, 2017, effective 7/15/201740 CR 16, August 25, 2017, effective 9/14/201740 CR 23, December 10, 2017, effective 1/1/201841 CR 14, July 25, 2018, effective 8/14/201841 CR 20, October 25, 2018, effective 11/14/201842 CR 02, January 25, 2019, effective 12/18/201842 CR 02, January 25, 2019, effective 12/18/2018, expires 4/17/201942 CR 06, March 25, 2019, effective 4/14/201943 CR 04, February 25, 2020, effective 3/16/202043 CR 13, July 10, 2020, effective 6/2/202043 CR 17, September 10, 2020, effective 9/30/202044 CR 03, February 10, 2021, effective 3/2/202144 CR 07, April 10, 2021, effective 4/30/202144 CR 08, April 25, 2021, effective 5/15/202145 CR 01, January 10, 2022, effective 1/30/202245 CR 04, February 25, 2022, effective 3/17/202245 CR 05, March 10, 2022, effective 3/30/202246 CR 11, June 10, 2023, effective 5/2/202346 CR 09, May 10, 2023, effective 5/30/2023