Colorado Governor Jared Polis has signed legislation that would replace Colorado’s unique “3 of 6” rule for determining the members of a unitary group for combined reporting purposes and instead adopt what Legislative Council Staff has called “the Multistate Tax Commission’s standard” for determining the members of a combined filing group.

Under current law, a combined report may only contain those members of an affiliated group of corporations as to which three of the following six facts have been in existence in the tax return year and the two preceding years:

1. Sales or leases between one affiliate and another constitute 50% or more of the gross operating receipts or cost of goods sold of the entity making the sales/leases
2. Certain back-office services are provided by one affiliate for the benefit of another
3. Twenty percent or more of the long-term debt of one affiliate is owed to or guaranteed by another affiliate
4. One affiliate substantially uses certain intellectual property of another affiliate
5. Fifty percent or more of the board of one affiliate are members of the board or are corporate officers of another affiliate
6. Twenty-five percent or more of the 20 highest ranking officers of an affiliate are members of the board or are corporate officers of another affiliate.

Under the new law all members of a “unitary business” will be required to file a combined report. A “unitary business” is defined as an affiliated group of entities “that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.”

The new law keeps Colorado’s water’s-edge rule in place, but it’s notable that said rule provides an exception for any entity “incorporated in a foreign jurisdiction for the purpose of tax avoidance” while identifying a list of nations where a corporation will be presumed to be incorporated for tax avoidance purposes (including the Cayman Islands, Luxembourg, Monaco, etc.).

Presuming Colorado voters don’t file a referendum petition and get the legislation overturned in November, the new standard would go into effect for tax years beginning on or after January 1, 2026.

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