Colorado: Governor Signs Controversial Tax Bills

On June 23, 2021, Colorado Governor Jared Polis signed into law two bills that were opposed by many taxpayer advocacy groups. The first bill, HB21-1311, makes changes to Colorado’s corporate income tax laws. Effective for tax years beginning on or after January 1, 2022, a combined group will include any C-corporation member that is incorporated in a foreign jurisdiction for the purpose of tax avoidance. The bill sets forth a list of “listed jurisdictions” (generally exotic locations), and taxpayers that are incorporated those jurisdictions are presumed to be incorporated in a foreign jurisdiction for purposes of tax avoidance unless the taxpayer can prove to the satisfaction of the Executive Director that its operations in the foreign jurisdiction have economic substance.  Guidance is providing on determining the “federal taxable income” of a non-U.S. corporation. The bill also changes Colorado’s apportionment rule for combined groups from the so-called Joyce rule to the Finnigan rule effective for tax years beginning on or after January 1, 2022.  In terms of tax base changes, the legislation provides that for income tax years commencing on or after January 1, 2022, but before January 1, 2023, an addback is required equal to the amount of any federal deduction for business meals that exceeds 50 percent. New subtractions apply for amounts included in income under IRC sections 951(a) and 951A(a) with respect to a controlled foreign corporation that is a C-Corporation incorporated in a foreign jurisdiction for the purposes of tax avoidance. The bill also makes clear that the subtraction for any amount treated as a dividend under IRC section 78 does not include any amount received as a dividend received from a C Corporation incorporated in a foreign jurisdiction for tax avoidance purposes.  Finally, “disqualified insurance companies, which are defined as captive insurance companies with less than half of their revenue being generated from insurance premiums in a given taxable year, are subject to the state income tax rather than the insurance premium tax.

The second bill, HB21-1312, addresses numerous indirect taxes. On the sales tax side, the bill redefines tangible personal property to include digital goods and notes that the method of delivery does not affect the taxability of a sale of tangible personal property. “Examples of methods used to deliver tangible personal property under current technology include, but are not limited to, compact disc, electronic download, and internet streaming.” “A digital good means any item of tangible personal property that is delivered or stored by digital means, including but not limited to, video, music or electronic books.”  Per the bill, the definition of "digital goods" codifies the Department of Revenue's long-standing treatment of digital goods and does not expand or contract the definition of tangible personal property.  Further, the bill provides that the delivery methods outlined in the revised law are not meant to be exhaustive, and sales of digital goods that are delivered via new technologies should also be taxed. Colorado’s sales tax law is also revised to provide that the purchase price paid or charged upon all sales of tangible personal property at retail includes the amount charged for mainframe computer access, photocopying, and packing and crating. Finally, beginning January 1, 2022, a retailer is not permitted to retain any money to cover the retailer's expenses in collecting and remitting sales tax for any filing period that the retailer's total taxable sales were greater than $1 million.  Please contact Derek Weisbruch with questions on the income tax changes, or Steve Metz with sales tax questions.