Colorado Becomes First State to Address OBBBA Changes

To address the fiscal impact of the One Big Beautiful Bill Act (OBBBA), Colorado Gov. Jared Polis has signed several bills, including H.B. 25B-1001, H.B. 25B-1002, and HB 25B-1005, that were passed during a special session of the General Assembly.

The OBBBA extended and created corporate and individual tax changes that would have negatively affected Colorado tax revenues. Because Colorado is a rolling conformity state, it automatically incorporates into its tax base any changes to the Internal Revenue Code (IRC) unless it acts to decouple from any IRC provisions. To address the projected budget deficit resulting from the OBBBA, Polis called a special legislative session.

Qualified Business Deduction Add-Back

H.B. 25B-1001 makes indefinite the requirement that some taxpayers add back their federal qualified business income (QBI) deduction under IRC Section 199A when calculating Colorado taxable income. 

The addback requirement initially applied to tax years 2021 through 2025. HB 25B-1001 updates Colo. Rev. Stat. §39-22-104(3)(o) by removing the original sunset date of January 1, 2026, and making the addback provision permanent. 

Tax-Haven Jurisdictions

Colorado has identified more than 40 jurisdictions that are often presumed to be used by corporations for income tax avoidance purposes. 

Effective January 1, 2026, H.B. 25B-1002 adds five countries to the tax haven list: Hong Kong, Ireland, Liechtenstein, the Netherlands, and Singapore. 

Colo. Rev. Stat. §39-22-303(8)(b) requires any C corporation incorporated in any listed jurisdiction to be included in a combined group return unless the taxpayer “proves to the satisfaction of the executive director [of the Department of Revenue], or if the executive director determines,” that the corporation is incorporated in the jurisdiction for reasons that meet economic substance. The economic substance doctrine in IRC Section 7701(o) generally requires a particular transaction or business activity to have some “meaningful” impact on the taxpayer's economic position or to otherwise arise from some “substantial” or business purpose beyond the mere desire to generate a tax benefit. 

Foreign-Derived Deduction-Eligible Income Add-Back

Effective January 1, 2026, the OBBBA broadens the category of foreign-derived deduction-eligible income (FDDEI) and revises the related federal deduction percentage under IRC Section 250. 

HB 25B-1002 decouples the state from the federal FDDEI rules by creating an addition to the calculation of Colorado taxable income equal to the federal deduction. It amends Colo. Rev. Stat. §39-22-304(2) to include new subparagraph (l): 

(2) There shall be added to federal taxable income:  . . .  (l) for income tax years commencing on or after January 1, 2026, an amount equal to a federal deduction claimed for the income tax year for foreign-derived deduction eligible income pursuant to section 250 of the Internal Revenue Code.

The bill also removes from Colo. Rev. Stat. §39-22-304(3) references to the phrase “global intangible low-taxed income” to conform to the income’s new name, net CFC tested income (NCTI). However, H.B. 1002 includes no substantive state conformity changes to IRC Section 951A.

Elimination of Sales Tax Vendor's Fee

Effective January 1, 2026, HB 25B-1005 eliminates the retailer allowance provided in exchange for the administrative burdens and costs of collecting sales tax on behalf of the state.

Before, Colorado allowed eligible retailers to retain 4% of sales tax collected from customers, up to $1,000 per year. Under HB 25B-1005, retailers cannot retain any portion of sales taxes collected under any circumstances.