Colorado - Gain from LLC sale excluded from Colorado sales factor

Overview

Gain from the sale of an interest in an LLC is not sourced to Colorado (the state of the taxpayer’s commercial domicile) because such sourcing would not fairly represent the taxpayer’s activity in Colorado. The taxpayer sold an LLC whose activities were nearly exclusively in Illinois. Because the taxpayer was domiciled in Colorado, the gain from LLC’s sale would have been required under Colorado law to be sourced to Colorado.

However, the Department found that sourcing the entire gain to Colorado would not fairly represent the extent of the taxpayer’s activities in Colorado because all the accounting, financial, payroll, engineering, manufacturing, and distribution departments that account for and manage the taxpayer’s business activities that relate to the gain are performed in Illinois.

Accordingly, the Department found that the gain should be excluded from the taxpayer’s apportionment factor.

The takeaway

This letter ruling should serve as a reminder to taxpayers that alternative apportionment requests may be successful when a taxpayer can assert that the statutory apportionment method results in an unfair representation of its activity in the state.