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Colorado Implements Market-Based Sourcing Apportionment Methodology

DALLASJune 12, 2018 / Prexly / — 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.

About Ryan
Ryan, an award-winning global tax services and software provider, is the largest Firm in the world dedicated exclusively to business taxes. With global headquarters in Dallas, Texas, the Firm provides an integrated suite of federal, state, local, and international tax services on a multi-jurisdictional basis, including tax recovery, consulting, advocacy, compliance, and technology services. Ryan is a six-time recipient of the International Service Excellence Award from the Customer Service Institute of America (CSIA) for its commitment to world-class client service. Empowered by the dynamic myRyan work environment, which is widely recognized as the most innovative in the tax services industry, Ryan’s multi-disciplinary team of more than 2,200 professionals and associates serves over 14,000 clients in more than 45 countries, including many of the world’s most prominent Global 5000 companies. More information about Ryan can be found at ryan.com. “Ryan” and “Firm” refer to the global organizational network and may refer to one or more of the member firms of Ryan International, each of which is a separate legal entity.

TECHNICAL INFORMATION CONTACTS:

Mark Nachbar
Principal
Ryan
630.515.0477
mark.nachbar@ryan.com

Mary Bernard
Director
Ryan
401.272.3363
mary.bernard@ryan.com

SOURCE Ryan