Colorado's Authority to Tax Multistate Commercial Enterprises
| Publication year | 1979 |
| Pages | 1912 |
1979, October, Pg. 1912. Colorado's Authority to Tax Multistate Commercial Enterprises
This article deals with the question of whether a foreign corporation and, in some cases, a non-resident individual is subject to tax in Colorado as a result of business activities conducted by or on behalf of those entities. The answer to this question turns largely upon the interplay between Public Law ("P.L.") 86-272, the Commerce Clause, the Due Process Clause, and the Colorado statutes and regulations imposing the taxes involved.
The Colorado taxes of major concern to business enterprises are the income tax and the sales or use tax. The income tax imposed upon a foreign corporation and non-resident individual is a tax imposed directly upon the particular taxpayer. On the other hand, the sales or use tax obligation of a foreign corporation or nonresident individual is generally not that of a taxpayer, but that of a tax collector. Thus, if the foreign corporation or nonresident individual sells tangible personal property at retail in this state and the sale was consummated in this state, it has the obligation to collect and remit the sales tax to Colorado. If the sale was consummated outside the state, the goods were shipped or delivered to customers within the state, and the seller's activities in the state are sufficient to establish nexus, the seller has the obligation to collect and remit the use tax.
This article first discusses the application of P.L. 86-272, since there is a substantial amount of current litigation both in Colorado and the rest of the nation regarding the proper standard to be applied in administering this law.
P.L. 86-272 was enacted in 1959(fn1) in response to a series of U.S. Supreme Court decisions(fn2) which seemed to extend the states' jurisdiction to tax beyond previously established limits. The law establishes minimum activities which may be engaged in by a foreign corporation or non-resident individual selling tangible personal property in a state without incurring liability for that state's income tax.
Basically, P.L. 86-272 provides that a foreign corporation or non-resident individual is not subject to tax in a state if that corporation or non-resident individual limits activities in the state to the solicitation of orders for the sale of tangible
personal property. The law provides that the solicited orders must be sent outside the state for acceptance or rejection and, if accepted, filled by shipment or delivery from inventories outside the particular state.
The Colorado Supreme Court has handed down only one case which involves the interpretation of P.L. 86-272---Coors Porcelain Co. v. State of Colorado.(fn3) The issue in this case was not whether that corporation was doing business in Colorado, but whether the corporation had sufficient business activities in other states to assign income to those states under the Colorado income tax allocation and apportionment provisions. The Court relied on P.L. 86-272 as authority in holding that income could not be assigned to a state other than Colorado.
The essence of the decision was that Coors Porcelain's activities in the states where the merchandise was delivered did not exceed solicitation as that term was used in P.L. 86-272. Therefore, since the other states were prevented from taxing the net income generated by the sales, Colorado would tax it. Based on this decision, the Colorado Supreme Court would have to hold that activities similar to those carried out by Coors Porcelain's representatives in the other states would not be sufficient to subject a foreign corporation or non-resident individual carrying out similar activities in Colorado to its income tax.
In Coors Porcelain, employees or sales agents were employed in each of the states and foreign countries in which the products were sold. All orders obtained from customers in these states and foreign countries were subject to acceptance in Colorado and were filled from inventories maintained in Colorado. The employees or sales agents solicited orders and rendered technical service regarding the use of the products. Each field representative presented quotations and negotiated prices, performed public relations activities, maintained essential records, carried samples, maintained an office in his home in the locality where he resided, and was supplied an automobile. In rendering technical service, the representative was responsible for the design of parts which would fit the needs of the customer, discussed engineering problems, helped solve the problems involved, and developed new applications for the Coors product.
The Colorado Supreme Court held that none of these activities exceeded solicitation as that term is used in P.L. 86-272. As a result, it appears that a foreign corporation or non-resident individual selling tangible personal property in this state could carry on a significant amount of pre- and post-sales activities without incurring an obligation to pay the nonresident or corporate income tax.
The Court's decision in Coors Porcelain seems to manifest a disregard for the plain language of the statute and the explanation of the law contained in the committee report. P.L. 86-272, by express provision, excludes domestic corporations from coverage and thus, despite the fact that the Court rejected this argument, its use against Coors Porcelain should have been precluded.
Moreover, P.L. 86-272 does not apply to foreign governments, but if it did, it would be clearly ineffective. Congress cannot bind or limit the rights of foreign governments to tax transactions with their citizens. The mere sale and delivery to a foreign national should have been enough to allow Coors to apportion income between Colorado and the foreign country.(fn4)
According to the committee reports, P.L. 86-272 was not designed to extend the taxing authority of the distribution or
manufacturing state; nor was the purpose of the law to transfer the incidence of taxation from the market state to the distribution state.(fn5) For these types of merchants, the law was aimed at creating a national market free of state taxation. Unfortunately, the Colorado Supreme Court did not have the language of the committee report before it when considering the issue.
Further, it appears that the court's decision is in conflict with Colorado's own regulatory scheme. The pertinent regulation provides that, for purposes of allocation and apportionment, a corporation has income in another state if that income is derived from the activities of its employees in that other state.(fn6) Since Coors Porcelain had sales representatives actively soliciting orders and servicing its customers in these other states, it is difficult to understand how the Colorado Supreme Court failed to conclude that the state's argument was in conflict with the Department of Revenue's own regulations.
The Court expressed its agreement with the Colorado Attorney General that the purpose of the statute was to permit taxation of all income which the state could reach consistent with constitutional principles. Colorado has an optional statute(fn7) which permits corporations to select, on an annual basis, one of two apportionment formulae. Therefore, the accuracy of this conclusion is doubtful since it seems axiomatic that a corporation will always select the formula which produces the lower tax.
Finally, in 1979, to encourage small business in Colorado to warehouse in and export merchandise beyond the borders of this state, the Colorado General Assembly specifically eliminated the so-called throw-back rule.(fn8)
Nonetheless, if the Colorado Supreme Court were to remain consistent, it would hold that pre- and post-sales activities similar to those carried out by representatives of Coors Porcelain would not constitute activities in excess of those enumerated in P.L. 86-272. Therefore, the activities of representatives of a foreign corporation or a non-resident individual who do the following---design parts, discuss engineering problems of the customers, present quotations and negotiate prices, develop new products, conduct activities necessary for maintaining a good public relationship with technical employees or purchasing agents of the customers, maintain all essential records, discuss complaints or problems involving the use of the taxpayer's products, carry sample materials, maintain offices in their homes, and use a taxpayer's supplied automobile in Colorado---should not result in the out-of-state multistate enterprise being subjected to a tax measured by net income...
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