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November 30, 2022

Colorado appeals court finds subsidiary includible in taxpayer's combined return

In Avnet, Inc.,1 the Colorado Court of Appeals (court) held that a taxpayer's subsidiary was an "includible corporation" for combined reporting purposes under Colo. Rev. Stat. 39-22-303(12)(c) because 20% of its property and payroll, considered together, was in the United States.

The taxpayer, a Delaware corporation, was headquartered in Arizona and had an office in Colorado. The taxpayer formed a subsidiary, which raised funds through securitizing the company's accounts receivables. The subsidiary outsourced its personnel services to third parties and had no payroll. Its property consisted only of an assigned cubicle at the taxpayer's Arizona headquarters. The taxpayer did not include the subsidiary in its Colorado combined corporate income tax returns for tax years 2011-14. The Colorado Department of Revenue (Department) conducted an audit, concluding the subsidiary should have been included in the combined return, and assessed tax against the taxpayer.

Colo. Rev. Stat. 39-22-303(11) requires combined reporting for affiliated groups of corporations if certain requirements are met. For the audit period at issue, Colorado Rev. Stat. 39-22-303(12) defined an "affiliated group" as an "includible corporation." An "includible corporation" was defined as any corporation that "has more than [20%] of [its] property and payroll as determined by factoring pursuant to [Colorado Rev. Stat. 24-60-1301] assigned to locations inside the United States." The taxpayer argued that the subsidiary was not an includible corporation because the subsidiary did not have 20% of its property and 20% of its payroll within the United States.

The court, agreeing with the Department, held that Colorado Rev. Stat. 39-22-303(12) applies the 20% figure to one number, which is computed by combining the results produced by property and payroll factoring. The court said that the separate calculation of the property and payroll factors does not necessarily mean that Colorado Rev. Stat. 39-22-302(12)'s 20% requirement must apply to each of those factors separately. The court reasoned that "[n]ouns joined by coordinating conjunctions are usually treated as a single, compounded unit … " The court also said that its conclusion was consistent with the 80/20 test in Colorado Rev. Stat. 39-22-303(8). The court noted the two tests were "reciprocal" of one another, with the 80/20 test in Colorado Rev. Stat. 39-22-303(8) measuring a percentage of property and payroll outside the United States and the 20% test in Colorado Rev. Stat. 39-22-303(12) measuring a complementary percentage of property and payroll in the United States. Finally, the court observed that Colo. Rev. Stat. 24-60-1301, art. IV(9) requires the averaging of payroll, property and sales factors into one number.


This decision may be of limited application as the statutory provisions reviewed in the case were repealed and replaced by Colo. Rev. Stat. 39-22-303(11)(f), which deems any C corporation formed under the laws of any state, or the United States, with de minimis or no property and payroll, to satisfy the statutory requirements for inclusion in a combined group. These changes were effective on August 2, 2019; however, taxpayers with tax years still open under the statute of limitations should consider the effect of this decision. The statute of limitations in Colorado is generally the federal statute of limitations period plus one year (e.g., four years).


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Bill Nolan (

Published by NTD’s Tax Technical Knowledge Services group; Jennifer Brittenham, legal editor


1 Avnet, Inc. v. Colorado Department of Revenue, No. 21CA1231 (Colo. App. Ct. Nov. 17, 2022)(Unpublished).