Colorado Governor Jared Polis Signs Legislation Changing Rules for Combined Reporting in Corporate Taxes

Colorado Governor Jared Polis has signed legislation that will change the way the state determines the members of a unitary group for combined reporting purposes. The current “3 of 6” rule will be replaced with the Multistate Tax Commission’s standard, according to the Legislative Council Staff.

Under the current law, a combined report can only include members of an affiliated group of corporations that meet three out of six criteria. These criteria include factors such as sales or leases between affiliates, shared back-office services, and common board members or officers.

The new law will require all members of a “unitary business” to file a combined report. A unitary business is defined as a group of entities that are interconnected and provide mutual benefit to each other.

While Colorado’s water’s-edge rule will remain in place, the new law includes exceptions for entities incorporated in foreign jurisdictions for tax avoidance purposes. The legislation identifies specific nations where corporations will be presumed to be incorporated for tax avoidance, such as the Cayman Islands and Luxembourg.

Unless Colorado voters file a referendum petition to overturn the legislation in November, the new standard will take effect for tax years starting on or after January 1, 2026. This change aims to streamline the reporting process and ensure a fair tax system for businesses operating in the state.