It is a truth universally acknowledged that a taxpayer doing business in Colorado must be in want of serious help. Sales and use tax compliance is more difficult here than in any other state. Why? The answer is simple. Within the state of Colorado, there are hundreds of different taxing jurisdictions. For those concerned about potential tax collection problems should the U.S. Supreme Court overturn Quill Corp. v. North Dakota
, Colorado provides an example of why businesses should be worried.i
For sales and use tax purposes, there are two types of Colorado cities and counties. There are state-collected cities and counties (often called statutory), and there are home rule cities and counties. Statutory cities, counties, and special districts piggyback on the state sales tax system. For the most part, if the state imposes sales tax on a retail transaction, so does the state-administered local jurisdiction. And if the state provides for an exemption, so does the state-administered local jurisdiction. As for use tax, however, statutory cities and counties may impose use tax only on motor vehicles and building materials.
Home rule cities, on the other hand, are best viewed as individual states within Colorado. The state has no authority over the assessment, levy, or collection of home rule sales and use taxes, including definitions, exemptions, vendor fees, or audit examinations.
The state has 209 state-collected cities, counties, and special districts and 96 home rule cities. Seventy-one of the home rule cities have their own nexus standard, sales tax registration, licensing, tax rates, statutory definitions, auditors, and tax base. There are 60 separate tax rates among the jurisdictions, ranging from 0.01 to 7.25 percent. Consequently, a taxpayer doing business throughout the state can face up to 756 combinations of sales and use tax. For example, within Jefferson County, there are 12 cities, seven of which are home rule, four of which are state collected, and one with no tax. There are also five special taxing districts with differing rates within the county. The city of Lakewood in Jefferson County has six different taxes: state, city, county, and three special districts.ii
Differing rates just scratch the surface of confusion. Cities do not have uniform sales tax definitions, and when they do, interpretations vary. For example, there is no consistency in interpreting terms such as “durable medical equipment,” and the distinction between canned and custom software remains a perennial problem. Denver taxes all software; Boulder exempts software as custom only if its modification costs exceed 25 percent of its unmodified price; Fort Collins uses an archaic over a decade ago; and looking for specific guidance on software as a service or digital goods is a fruitless task. And did I mention that Colorado is growing? Last year there were 129 annexations to keep city limit sign makers and sales tax software folks busy.
That’s not all. The home rule cities not only differ in what they tax and exempt but also in whether a business must file. In some cities, making more than one delivery once a year will trigger a sales tax return filing obligation, but for many cities, there is little direction other than stating that a taxpayer must file if they are “doing business” or “engaged in business” in the city. Unfortunately, the ambiguity over doing business among the home rule cities has now spread to state-collected cities in Colorado.
It wasn’t always so. The Colorado rule for whether a taxpayer had a collection responsibility used to be pretty clear. If a business had an office, warehouse, salesroom, or other place of business in the city, it collected; if not, it didn’t. Thus, absent a permanent business location, sending folks into town to solicit sales or to make deliveries of those sales in their own trucks did not trigger a filing obligation.
The basis for the state’s long-held position was supported by statute, regulation, and case law.iii
Whether a taxpayer must collect sales tax for a state-administered local taxing jurisdiction is governed by Colo. Rev. Stat. section 29-2- 105(1)(b). The statute first provides that all retail sales of tangible personal property are deemed to take place at the retailer’s place of business unless the property is delivered by the retailer outside the limits of the local jurisdiction. The statute further states that if the “retailer has no permanent place of business in the local taxing jurisdiction,” then the place for determining where the sale is consummated “shall be determined by the provisions of article 26 of title 39, CRS [Colo. Rev. Stat.], and by the rules and regulations promulgated by the department of revenue.”
Unfortunately, there is no statute or regulation under title 39, article 26, that specifically addresses where sales are consummated for state administered local taxing jurisdictions. However, section 39-26-102(3) does define when an out-of-state taxpayer is “doing business in this state” and accordingly has a collection and filing obligation.
The statute establishes two ways an out-of-state taxpayer can be doing business in Colorado. First, a taxpayer is “doing business in this state” if it is “selling, leasing, or delivering in this state ...tangible personal property by a retail sale” and “maintaining within this state... an office, distributing house, salesroom or house, warehouse or other place of business.” Second, a taxpayer may be “doing business in this state” if it is “selling or leasing tangible personal property . . . for use or consumption in this state” and “soliciting . . . by use of any communication media, or by use of the newspaper, radio, or television advertising media, or by any other means whatsoever.”
The regulation provides that under Colo. Rev. Stat. section 39-26-102(3)(a), an out-of-state taxpayer that (1) sells, leases, or delivers tangible personal property in Colorado, and (2) maintains, directly or indirectly, an office, salesroom, or similar place of business in the state must obtain a Colorado sales tax license. However, the regulation provides that under section 39-26- 102(3)(b), an out-of-state taxpayer that does not have an “office, salesroom, warehouse, or similar place of business” and whose activities are limited to soliciting and selling, leasing, or delivering tangible personal property in the state should, not must, obtain a retailer’s use tax license or sales tax license.iv
In short, the DOR’s regulation 39-26-102.3(1) requires that a taxpayer doing business under the first definition must get a sales tax license, while an out-of-state taxpayer under the second definition merely should get either a use tax license or sales tax license. Thus, sales tax collection was only required where there was a permanent place of business. Absent a permanent place of business, a vendor was encouraged to collect use tax. However, since state-collected cities and counties can levy use tax only on building materials and motor vehicles, such voluntary compliance would be limited to those sales only.
Based in part on the preceding analysis, the state has until recently consistently ruled that a seller without a permanent place of business in a state-collected city or county did not have a sales or use tax return filing obligation for that city or county and has reiterated the position in numerous publications over the years. For example, in Policy Position 8-88 (May 1988), the state concluded that the “presence in the city of a vendor’s delivery trucks and personnel does not constitute doing business in a state-collected city.”
In Revenue Bulletin 89-10 (Feb. 1989), the DOR stated that the presence of a vendor’s delivery trucks and personnel in a state-administered local taxing jurisdiction did not constitute doing business in that jurisdiction.v
In fact, the bulletin specifically said that a vendor that “has no permanent place of business” in a state administered local taxing jurisdiction is not doing business in that jurisdiction and, accordingly, has no sales tax collection responsibility.vi
Despite that consistent interpretation for more than 30 years, the state may be changing its mind without changing the law. The first clue was in a 2011 private letter ruling (PLR) in which the state ruled that the “sustained presence of Company employees” created a filing obligation in a state collected jurisdiction. According to the PLR, the sustained presence could be as little as an employee on site for one day a month.vii
In 2013 the department deleted the following paragraph from FYI Sales 56:
In the case where city, county and special district taxes are collected by the state, local taxes are applicable only if the lessor has a form of business location in the same jurisdiction as the lessee. Any office, shop, warehouse, salesroom or the temporary but frequent presence of an employee for repair, sales or service purposes is a business location. If the lessor of tangible personal property does not have a business location in a city, county, or special district, no local tax is to be collected. In the case where there is no business location, no local tax should be collected even if the property is delivered within the boundaries of a local taxing entity.viii
More recently, the state has issued significant sales tax assessments on taxpayers whose only activity in state-collected jurisdictions has been deliveries in their own vehicles. Tax practitioners have pushed back hard against those assessments, and some have been canceled. In response perhaps to that resistance, the DOR held a “stakeholder meeting” on December 5 to discuss potential changes to existing rules for determining the location of a sale for sales tax purposes.
It appears that the requirement that a taxpayer have an office, sales room, or other permanent establishment in a state-collected city or county before it has a filling obligation may be changing. Given the already confusing state of sales tax compliance in Colorado, the abolition of its “permanent establishment” standard for intrastate nexus is only going to make it worse. In fact, it reminds one of the national debate over the physical presence test for sales tax nexus. If you want to see a microcosm of what tax compliance could look like without Quill
, come to Colorado.
This article was originally published on State Tax Notes
(login required) by Tax Analysts on December 18, 2017.
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i. 504 U.S. 298 (1992).
ii. See Colorado Department of Revenue, “Uniform Sales and Use Tax Base Throughout the State” (Dec. 2013). This study was mandated by the Colorado General Assembly in H.B. 13-1288.
iii. Associated Dry Goods Corporation, d/b/a/ the Denver Dry Goods Company v. City of Arvada, 593 P.2d 1375 (Colo. 1979).
iv. In 2010 the DOR gave out-of-state retailers with no nexus or place of business in Colorado the option under Colo. Rev. Stat. section 39-26- 102(3)(b) of getting either a retailer’s use tax license or a sales tax license. That change was prompted by the passage of H.B. 10-1193, which imposed a reporting requirement on out-of-state taxpayers with no physical presence in Colorado. Before the passage of the bill, the regulation provided for only a retailer’s use tax license for those doing business under section 39-26-102(3)(b). H.B. 10-1193 did not address state-administered local taxing jurisdictions.
v. According to the DOR, revenue bulletins are “official policy positions of the Department [and] are considered binding in nature, and therefore may be changed by the Department only on a prospective basis by superceding [sic] Bulletins, change in the statutes, or court cases.”
vi. See also the annual Colorado DOR, “Publication 0099 Colorado Sales and Use Tax: General Information and Reference Guide” (Nov. 6, 2017); Colorado DOR, “FYI Sales 62: Guidelines for Determining When to Collect State-Collected Local Sales Tax” (July 2014); and Colorado DOR, “FYI Sales 56: Sales Tax on Leases of Motor Vehicles and Other Tangible Personal Property” (Apr. 2013).
vii. Colo. PLR-11-006 (Dec. 20, 2011).
viii. FYI Sales 56, supra note 6.