The Colorado Office of State Planning and Budgeting recently proposed a number of revisions to Colorado tax exemptions and credits, in an attempt to close a projected fiscal shortfall. Among the proposals are elimination of exemptions or credits, either temporary or permanent, that would affect:

* direct mail advertising
* energy use in industrial and manufacturing sectors
* non-essential contaners for food services
* candy and soft drinks
* agricultural compounds
* pestisides
* enterprise zone investment tax credit
* alternative fuel vehicles
* gross conservation easement credit
* alternative minimum tax and alternative minimum tax credit
* software sales tax exemption
* sales taxes for online purchases
* net operating loss limitations

Regarding the software sales tax exemption, it is expected that the definition of software would be expanded. Currently, software is defined as taxable only if 1) it is packaged for repeated sale, 2) it is subject to a non-negotiable, tear open license agreement, and 3) it is delivered on a tangible medium. By definition, this would exclude software sold over the Internet or by “load and leave”. Presumably, these types of software purchases would be taxable under the proposed changes.

It is expected that the corporation net operating loss limitation provisions would be revised to limit the amount of net operating losses that could be utilized to offset income for the next three years, beginning January 1, 2010, to $250,000.

These changes, if enacted, would have a significant impact on how businesses operate in Colorado.

Let’s face it, hiring employees can be expensive; not just the cost of the services provided, but all of the administration that surrounds it, like payroll taxes and unemployment taxes. Now, at least in Colorado, add to that a state assessed fine beginning July 1, 2009 for all situations where the Division of Employment finds that an employer “with willful disregard of the law, misclassified employees” as independent contractors. And the fines are steep: $5,000 for each misclassified employee the first time, and $25,000 for each misclassified employee for the second and subsequent violations. OUCH!

In determining whether an independent contractor relationship exists, the sincle most important test is the amount of control maintained by the employer. If the employer controls the contractor then generally an employment relationship exists. In order to substantiate a contractor relationship, we suggest documenting the specific reasons why each independent contractor is not being classified as an employee, focusing on the lack of employer control.

Still haven’t filed your 2008 Colorado corporation income tax return? If you apportion your income to a number of states, maximize your 2008 Colorado NOL carryover by calculating the year’s loss under both the two factor and three factor method; choose the method that provides the greatest loss. Colorado has adopted the single factor method of apportionment for multi-state companies for years beginning after January 1, 2009. There is no limitation on the NOL carryover based on the method chosen in a prior year. This means a company can maximize their NOL for 2008 even if it is a different method than utilized in a prior year.