By Stephanie Do and Pilar Mata

The Colorado Department of Revenue determined that an out-of-state S corporation was not subject to Colorado income taxes and was not required to register with the Department. The S corporation provided information technology consulting services and designed accounting software systems. One of the S corporation’s clients was located in Colorado; however, the S corporation performed its work for that client from outside the state and accessed the client’s system through a virtual private network. Neither the S corporation nor its subcontractor traveled to Colorado to perform services on behalf on the client. The Department applied its factor presence nexus rule to determine whether the S corporation had nexus with the state, which provides that nexus is established when a business organized outside of Colorado has more than: (1) $50,000 of property; (2) $50,000 of payroll; (3) $500,000 of sales; or (4) 25% of the total property, total payroll or total sales in the state. The S corporation represented that it had no payroll or property in Colorado and did not have any apportioned sales to Colorado (presumably under a cost of performance sourcing methodology). Because the S corporation did not exceed any of these economic nexus thresholds, the Department held that the S corporation was not obligated to file a Colorado income tax return. Colo. Dep’t of Revenue, Gen. Info. Letter GIL-14-011 (Apr. 28, 2014).