Colo. Code Regs. 39-22-303.6-7

Current through Register Vol. 47, No. 8, April 25, 2024

Rule 39-22-303.6-7 - Sales Other Than Sales of Tangible Personal Property in Colorado

Basis 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 provide guidance for determining which gross receipts from sales other than sales of tangible personal property are included in a taxpayer's 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.

(a) In general, § 39-22-303.6(6), C.R.S., provides for the inclusion in the numerator of the receipts factor of gross receipts arising from transactions other than sales of tangible personal property

(b) Receipts, other than receipts described in § 39-22-303.6(5), C.R.S., (from sales of tangible personal property) are in Colorado within the meaning of § 39-22-303.6(6), C.R.S., and Rules 39-22-303.6 -7 through-13 if and to the extent that the taxpayer's market for the sales is in Colorado. In general, the provisions in this section establish uniform rules for (1) determining whether and to what extent the market for a sale other than the sale of tangible personal property is in Colorado, (2) reasonably approximating the state or states of assignment when the state or states cannot be determined, (3) excluding receipts from the sale of intangible property from the numerator and denominator of the receipts factor pursuant to § 39-22-303.6(6)(d)(III), C.R.S., and (4) excluding receipts from the denominator of the receipts factor, pursuant to § 39-22-303.6(6)(f), C.R.S., where the state or states of assignment cannot be determined or reasonably approximated.

(2)General Principles of Application. In order to satisfy the requirements of Rules 39-22-303.6 -7 through-13, a taxpayer's assignment of receipts from sales of other than tangible personal property must be consistent with the following principles:

(a) A taxpayer shall apply the rules set forth in Rules 39-22-303.6 -7 through-13 based on objective criteria and shall consider all sources of information reasonably available to the taxpayer at the time of its tax filing including, without limitation, the taxpayer's books and records kept in the normal course of business. A taxpayer shall determine its method of assigning receipts in good faith, and apply it such method consistently with respect to similar transactions year to year. A taxpayer shall retain contemporaneous records that explain the determination and application of its method of assigning its receipts, including its underlying assumptions, and shall provide those records to the Department upon request.

(b) Rules 39-22-303.6 -7 through-13 provide various assignment rules that apply sequentially in a hierarchy. For each sale to which a hierarchical rule applies, a taxpayer must make a reasonable effort to apply the primary rule applicable to the sale before seeking to apply the next rule in the hierarchy, and must continue to do so with each succeeding rule in the hierarchy, where applicable. For example, in some cases, the applicable rule first requires a taxpayer to determine the state or states of assignment, and if the taxpayer cannot do so, the rule requires the taxpayer to reasonably approximate the state or states. In these cases, the taxpayer must attempt to determine the state or states of assignment (i.e., apply the primary rule in the hierarchy) in good faith and with reasonable effort before it may reasonably approximate the state or states.

(c) A taxpayer's method of assigning its receipts, including the use of a method of approximation, where applicable, must reflect an attempt to obtain the most accurate assignment of receipts consistent with the standards set forth in Rules 39-22-303.6 -7 through-13, rather than an attempt to lower the taxpayer's tax liability. A method of assignment that is reasonable for one taxpayer may not necessarily be reasonable for another taxpayer, depending upon the applicable facts.

(3)Rules of Reasonable Approximation.

(a) In general, Rules 39-22-303.6 -7 through-13 establish uniform rules for determining whether and to what extent the market for a sale other than the sale of tangible personal property is in Colorado. Each rule also sets forth rules of reasonable approximation, which apply if the state or states of assignment cannot be determined. In some instances, the reasonable approximation must be made in accordance with specific rules of approximation prescribed in Rules 39-22-303.6 -7 through-13. In other cases, the applicable rule in Rules 39-22-303.6 -7 through-13 permits a taxpayer to reasonably approximate the state or states of assignment using a method that reflects an effort to approximate the results that would be obtained under the applicable rules or standards set forth in Rules 39-22-303.6 -7 through-13.

(b)Approximation Based Upon Known Sales. In an instance where, applying the applicable rules set forth in Rule 39-22-303.6 -10 (Sale of a Service), a taxpayer can ascertain the state or states of assignment for a substantial portion of its receipts from sales of substantially similar services ("assigned receipts"), but not all of those sales, and the taxpayer reasonably believes, based on all available information, that the geographic distribution of some or all of the remainder of those sales generally tracks that of the assigned receipts, it shall include receipts from those sales that it believes tracks the geographic distribution of the assigned receipts in its receipts factor in the same proportion as its assigned receipts. This rule also applies in the context of licenses and sales of intangible property where the substance of the transaction resembles a sale of goods or services. See paragraph (5) of Rule 39-22-303.6 -11 and paragraph (1)(c) of Rule 39-22-303.6 -12.

(c)Related-Party Transactions. Where a taxpayer has receipts subject to these Rules 39-22-303.6 -7 through-13 from transactions with a related-party customer, information that the customer has that is relevant to the sourcing of receipts from these transactions is imputed to the taxpayer.

(4)Rules with Respect to Exclusion of Receipts from the Receipts Factor.

(a) The receipts factor only includes those amounts defined as receipts under § 39-22-303.6(1)(d), C.R.S., and applicable rules.

(b) Certain receipts arising from the sale of intangibles are excluded from the numerator and denominator of the receipts factor pursuant to § 39-22-303.6(6)(d)(III), C.R.S. See paragraph (1)(d) of Rule 39-22-303.6 -12.

(c) In a case in which a taxpayer cannot ascertain the state or states to which receipts of a sale are to be assigned pursuant to the applicable rules set forth in Rules 39-22-303.6 -7 through-13 (including through the use of a method of reasonable approximation, when relevant) using a reasonable amount of effort undertaken in good faith, the receipts must be excluded from the denominator of the taxpayer's receipts factor pursuant to § 39-22-303.6(6)(f), C.R.S., and these rules.

(d) Receipts of a taxpayer from hedging transactions, or from holding cash or securities, or from the maturity, redemption, sale, exchange, loan or other disposition of cash or securities, shall be excluded pursuant to §§ 39-22-303.6(1)(d) and (6), C.R.S., except as provided in 1 CCR 201-2, Special Rule 7A and Special Rule 9A.

(5)Changes in Methodology; Department Review.

(a)No Limitation on § 39-22-303.6(9), C.R.S., or Rules 39-22-303.6 -16 and-17. Nothing in the rules adopted here pursuant to § 39-22-303.6(6), C.R.S., is intended to limit the application of § 39-22-303.6(9), C.R.S., or the authority granted to the Department under § 39-22-303.6(9), C.R.S. To the extent that rules adopted pursuant to § 39-22-303.6(9), C.R.S., conflict with provisions of these rules adopted pursuant to § 39-22-303.6(6), C.R.S., the rules adopted pursuant to § 39-22-303.6(9), C.R.S., control. If the application of § 39-22-303.6(6), C.R.S., or the rules adopted pursuant thereto result in the attribution of receipts to the taxpayer's receipts factor that do not fairly represent the extent of the taxpayer's business activity in Colorado, the taxpayer may petition for, or Department may require, the use of a different method for attributing those receipts.

(b)General Rules Applicable to Original Returns. In any case in which a taxpayer files an original return for a taxable year in which it properly assigns its receipts using a method of assignment, including a method of reasonable approximation, in accordance with the rules stated in Rules 39-22-303.6 -7 through-13, the application of such method of assignment shall be deemed to be a correct determination by the taxpayer of the state or states of assignment to which the method is properly applied. In those cases, neither the Department nor the taxpayer (through the form of an audit adjustment, amended return, abatement application or otherwise) may modify the taxpayer's methodology as applied for assigning those receipts for the taxable year. However, the Department and the taxpayer may each subsequently, through the applicable administrative process, correct factual errors or calculation errors with respect to the taxpayer's application of its filing methodology.

(c)Department's Authority to Adjust a Taxpayer's Return. The provisions contained in this paragraph (5)(c) are subject to paragraph (5)(b). The Department's authority to review and adjust a taxpayer's assignment of receipts on a return to more accurately assign receipts consistently with the rules or standards of Rules 39-22-303.6 -7 through-13 includes, but is not limited to, each of the following potential actions.

(i) In a case in which a taxpayer fails to properly assign receipts from a sale in accordance with the rules set forth in Rules 39-22-303.6 -7 through-13, including the failure to properly apply a hierarchy of rules consistent with the principles of paragraph (2)(b), the Department may adjust the assignment of the receipts in accordance with the applicable rules in Rules 39-22-303.6 -7 through-13.

(ii) In a case in which a taxpayer uses a method of approximation to assign its receipts and the Department determines that the method of approximation employed by the taxpayer is not reasonable, the Department may substitute a method of approximation that the Department determines is appropriate or may exclude the receipts from the taxpayer's numerator and denominator, as appropriate.

(iii) In a case in which the Department determines that a taxpayer's method of approximation is reasonable, but has not been applied in a consistent manner with respect to similar transactions or year to year, the Department may require that the taxpayer apply its method of approximation in a consistent manner.

(iv) In a case in which a taxpayer excludes receipts from the denominator of its receipts factor on the theory that the assignment of the receipts cannot be reasonably approximated, the Department may determine that the exclusion of those receipts is not appropriate, and may instead substitute a method of approximation that the Department determines is appropriate.

(v) In a case in which a taxpayer fails to retain contemporaneous records that explain the determination and application of its method of assigning its receipts, including its underlying assumptions, or fails to provide those records to Department upon request, the Department may treat the taxpayer's assignment of receipts as unsubstantiated, and may adjust the assignment of the receipts in a manner consistent with the applicable rules in Rules 39-22-303.6 -7 through- 13.

(vi) In a case in which the Department concludes that a customer's billing address was selected by the taxpayer for tax avoidance purposes, the Department may adjust the assignment of receipts from sales to that customer in a manner consistent with the applicable rules in Rules 39-22-303.6 -7 through-13.

(d)Taxpayer Authority to Change a Method of Assignment on a Prospective Basis. A taxpayer that seeks to change its method of assigning its receipts under Rules 39-22-303.6 -7 through-13 must disclose, in the original return filed for the year of the change, the fact that it has made the change. If a taxpayer fails to adequately disclose the change, the Department may disregard the taxpayer's change and substitute an assignment method that the Department determines is appropriate.

(e)Department Authority to Change a Method of Assignment on a Prospective Basis. The Department may direct a taxpayer to change its method of assigning its receipts in tax returns that have not yet been filed, including changing the taxpayer's method of approximation, if upon reviewing the taxpayer's filing methodology applied for a prior tax year, the Department determines that the change is appropriate to reflect a more accurate assignment of the taxpayer's receipts within the meaning of Rules 39-22-303.6 - 7 through-13, and determines that the change can be reasonably adopted by the taxpayer. The Department will provide the taxpayer with a written explanation as to the reason for making the change. In a case in which a taxpayer fails to comply with the Department's direction on subsequently filed returns, the Department may deem the taxpayer's method of assigning its receipts on those returns to be unreasonable, and may substitute an assignment method that the Department determines is appropriate.

(f)Further Guidance. The Department may issue further public written statements with respect to the rules set forth in this rule. These statements may, among other things, include guidance with respect to:

(1) what constitutes a reasonable method of approximation within the meaning of the rules, and

(2) the circumstances in which a filing change with respect to a taxpayer's method of reasonable approximation will be deemed appropriate.

39-22-303.6-7

Colorado Register, Vol 37, No. 14. July 25, 2014, effective 8/14/2014

37 CR 18, September 25, 2014, effective 10/15/2014

37 CR 19, October 10,2014, effective 10/30/2014

37 CR 22, November 25, 2014, effective 12/16/2014

38 CR 04, February 25, 2015, effective 3/17/2015

38 CR 07, April 10, 2015, effective 4/30/2015

38 CR 11, June 10, 2015, effective 6/30/2015

38 CR 22, November 25, 2015, effective 12/15/2015

38 CR 24, December 25, 2015, effective 1/14/2016

38 CR 24, December 25, 2015, effective 1/19/2016

39 CR 01, January 10, 2016, effective 1/30/2016

39 CR 16, August 25, 2016, effective 9/14/2016

40 CR 08, April 25, 2017, effective 5/15/2017

40 CR 12, June 25, 2017, effective 7/15/2017

40 CR 16, August 25, 2017, effective 9/14/2017

40 CR 23, December 10, 2017, effective 1/1/2018

41 CR 14, July 25, 2018, effective 8/14/2018

41 CR 20, October 25, 2018, effective 11/14/2018

42 CR 02, January 25, 2019, effective 12/18/2018

42 CR 02, January 25, 2019, effective 12/18/2018, expires 4/17/2019

42 CR 06, March 25, 2019, effective 4/14/2019

43 CR 04, February 25, 2020, effective 3/16/2020

43 CR 13, July 10, 2020, effective 6/2/2020

43 CR 17, September 10, 2020, effective 9/30/2020

44 CR 03, February 10, 2021, effective 3/2/2021

44 CR 07, April 10, 2021, effective 4/30/2021

44 CR 08, April 25, 2021, effective 5/15/2021

45 CR 01, January 10, 2022, effective 1/30/2022

45 CR 04, February 25, 2022, effective 3/17/2022

45 CR 05, March 10, 2022, effective 3/30/2022

46 CR 11, June 10, 2023, effective 5/2/2023

46 CR 09, May 10, 2023, effective 5/30/2023