Colorado House Bill No. HB21-1311

On May 10, 2021, Colorado House Bill No. HB21-1311 was introduced, which if enacted would make sweeping changes to Colorado’s unique combined reporting regime.  Specifically, for tax years beginning on or after January 1, 2022, the bill would repeal the states’s unique “3 of 6” test for determining C corporations that can be included in a combined report and would require members of an affiliated group of C corporations that are “members of a unitary business” to file a combined report.

Although the bill would maintain Colorado’s water’s edge reporting requirements (i.e., a C corporation with 80% or more of its property and payroll assigned to locations outside the U.S. cannot be included in a combined report), it includes a “tax haven” provision that would require affiliated C corporations “incorporated in a foreign jurisdiction for the purpose of tax avoidance” to be included in a taxpayer’s combined report.  The bill includes a “blacklist” containing 44 “listed jurisdictions,” similar to Montana’s tax haven blacklist, and C corporations incorporated in those jurisdictions are presumed “to be incorporated for the purpose of tax avoidance.”

While the bill allows taxpayers to rebut the “tax haven” presumption, including a blacklist creates numerous compliance challenges and tax policy concerns.  Also, the bill requires a taxpayer to subtract from federal taxable income certain foreign source income (i.e., subpart F or GILTI) from C corporations “incorporated in a foreign jurisdiction for the purpose of tax avoidance,” which – while necessary to avoid double taxation – calls into question the rationale for enacting a tax haven provision to begin with.

Finally, for apportionment purposes, the bill would require the apportionment factor to be calculated on a combined group basis, “regardless of the separate entity to which those factors may be attributed.”  Thus, if enacted, the bill would transition Colorado from a “Joyce” state to a “Finnigan” state.

Colorado House Bill No. HB21-1312

Also on May 10, Colorado House Bill No. HB21-1312 was introduced, which proposes to amend the definition of “tangible personal property” in the sales and use tax statutes to include “digital goods.”  The bill defines a “digital good” to mean “any item of tangible personal property that is delivered or stored by digital means, including but not limited to video, music, electronic books, or computer files.”