Hello and welcome to Just Answer again, my name is Bill.
Wherfe did the letter come from? The IRS or Colorado?
If you issued him a 1099 for the amount of income he earned then he needs to include this on his federal tax return.
If he earned the money in TX then it is only taxable income to him in TX. You would need to report it all as CO income if you live there but you could also deduct as payments to sub contractors what you paid out.