Colorado addresses LLC nexus and income tax considerations
Remote LLC members may have filing responsibility
TAX ALERT |
On May 17, 2016, the Colorado Department of Revenue released General Information Letter GIL-16-001, responding to a request for guidance on determining whether a limited liability company (LLC) that made an S corporation election, was subject to Colorado income tax. The company, a technical surveillance equipment retailer, maintained no offices or locations in Colorado. Additionally, none of the company’s shareholders had nexus in Colorado nor conducted any business in the state. The company’s presence in the state was limited to a sales representative who mostly conducted business outside of the state.
In reviewing those facts, the department emphasized that an S corporation itself is not subject to tax, but members of the corporation are required to file a Colorado income tax return if the company does business in the state and derives income from sources within the state. ‘Doing business in the state’ requires substantial nexus that is established when one of the following factor-presence thresholds is exceeded:
- A dollar amount of $50,000 of property
- A dollar amount of $50,000 of payroll
- A dollar amount of $500,000 of sales
- 25 percent of total property, total payroll or total sales
Exceeding any one of those thresholds would require the members of the corporation to file a state income tax return. It is important to note that Public Law 86-272’s protections for solicitation activities could still be applicable to the company if one of the thresholds was exceeded. Members of an LLC should be cognizant of the filing responsibilities resulting from establishing nexus in Colorado.