Today I want to give a state taxing agency credit for doing the right thing. In this case the honors go to the Colorado Department of Revenue.
This story involves a manufacturing company. It had a Colorado headquarters and two manufacturing divisions. Its Colorado division makes product for the energy industry and its Illinois division makes products for the aerospace industry.
The company sold an interest in a LLC which functioned as part of the operations of the Illinois division. The company asked Colorado whether the sales proceeds must be included in its Colorado sales factor. This issue is important to Colorado since it uses a single sales factor to apportion income to Colorado.
In a private letter ruling, Colorado said that ordinarily the sales proceeds would be included in the Colorado sales factor because proceeds from the sale of an intangible asset (and an interest in a LLC is an intangible asset) is sourced to Colorado’s sales factor if the company’s commercial domicile is in Colorado. The company’s Colorado headquarters makes Colorado the company’s commercial domicile.
However, Colorado law permits its taxing agency to exercise discretion and not source the LLC sales proceeds to the company’s Colorado sales factor if doing so “fairly represent(s) the extent of the taxpayer’s business activities in Colorado”. In this ruling, Colorado excluded the sales proceeds from the company’s Colorado sales factor. Here is the taxing agency’s explanation for its ruling:
“Under the facts presented, sourcing the entire Gain to Colorado on the basis of commercial domicile would not fairly represent the extent of the taxpayer’s activities in Colorado. All the accounting, financial, payroll, engineering, manufacturing, and distribution departments that account for and manage Company A’s business activities that relate to the Gain are performed in Illinois. Based on these facts, sourcing the entire Gain to Colorado on the basis of commercial domicile would not effectuate an equitable apportionment or allocation of the taxpayer’s income. Instead, apportionment of the Gain on the basis of the taxpayer’s other sales, which presumably represent more accurately the taxpayer’s business activities in the state, appears to most fairly represent the extent of the taxpayer’s business activities in Colorado.”
The Colorado Department of Revenue Private Letter Ruling is PLR-17-009 (December 29, 2017), and can be found at: https://www.colorado.gov/pacific/sites/default/files/Treatment%20of%20Gain%20Private%20Letter%20Ruling%20PLR-17-009.pdf
Comment. Colorado could have easily invoked its standard apportionment formula and include the LLC interest sales proceeds in the Colorado sales factor. Instead it exercised its discretion to be fair and adopted an alternative apportionment formula
By John McCauley: I help people buy and sell businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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