Colorado Rules that Foreign Company Had Nexus Due to Consignment

Foreign companies that structure their U.S. business to avoid creating a permanent establishment in the U.S. may still be subject to state sales and use tax.

By Alissa Graffius, SALT senior associate

States require that a company collect and remit sales tax if it is doing business (i.e., has nexus) within the state. Typically, a company’s physical presence in the state, whether established by owning property, having employees, or, in certain cases, having independent contractors in the state, will be sufficient to establish nexus. This rule can often catch foreign (i.e., non-U.S.) companies off-guard since they are typically focused on not creating a permanent establishment (“PE”) in order to avoid a U.S. income tax obligation and don’t realize that they can create state tax nexus even in the absence of a PE.

One common example of this occurs when a foreign company that wants to sell products in the U.S. places its product on consignment in a warehouse or other facility owned and operated by a third party. While this typically does not create a PE in the U.S., an additional question must be addressed: what are the state tax implications of this arrangement? Recently, Colorado issued a general information letter in which it provided guidance stating that a German company that owned goods on consignment in a Colorado warehouse had nexus with the state and was required to collect and remit sales tax on sales where the goods are shipped to a purchaser in Colorado. [1]

The German company wanted to establish a consignment warehouse in Colorado, and it would not have any employees located within the state. A local company would conduct the daily operations of the warehouse (i.e., fulfill and ship the goods at the direction of the German company). The German company would issue invoices directly to customers from outside the U.S. The issue arose as to whether the German company had nexus with Colorado and therefore had an obligation to collect and remit Colorado sales tax on goods shipped to purchasers in Colorado.

In Colorado, “[a] person is presumed to be doing business in this state if, among other things, they or a third-party acting on their behalf maintains a warehouse in this state to facilitate the delivery of taxable goods sold by such person.” [2] Colorado concluded that the German company would have nexus, and therefore an obligation to collect and remit sales tax on Colorado sales. The letter then explained that whether a sale is a Colorado sale depends upon the place where possession of the good is transferred. If the buyer takes possession of the goods in Colorado (either because the goods are shipped to a purchaser at a Colorado location or the purchaser picks up the goods at the consignment location), then Colorado sales tax applies and the German company is responsible for collecting and remitting that tax. However, if those goods are shipped via common carrier out of state and the buyer takes possession outside of Colorado, the sale is not subject to Colorado sales tax.

Foreign companies that are looking to structure operations in the U.S. so as to not establish a PE (and thus avoid a U.S. income tax obligation) must also pay attention to the state tax consequences of that activity. For state tax purposes, and particularly for sales/use tax, states are not bound by any U.S. income tax treaties with other countries; even if there is no PE for U.S. income tax purposes, there can be nexus for state tax purposes.

Aprio’s SALT team has experience assisting foreign companies regarding the state tax consequences of their investment and activity in the U.S. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Alissa Graffius, SALT senior associate, at alissa.graffius@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2016 SALT Newsletter. To view the newsletter, click here.

[1] Colorado GIL-16-016 (Aug. 6, 2016). A general information letter provides a general overview of the relevant tax issues, but is not binding on the Department.

[2] C.R.S. § 39-26-102(3). Colorado could also have likely determined that nexus existed based solely on the fact that the German company owned tangible personal property located in the state.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.