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Reed Smith attorney Jeremy Abrams meets regularly with heads of state revenue departments to bring Bloomberg Tax readers candid and timely observations from the country’s top state tax decision-makers. In this column, Colorado Department of Revenue, Taxation Division, Senior Director Matthew Scott, discusses - among other things - market-based sourcing, use tax reporting after DMA, and doing business in the Centennial State.
Matthew Scott, Interview by Jeremy Abrams
Matthew Scott is Senior Director, Taxation Division, of the Colorado Department of Taxation. Jeremy Abrams is an attorney with Reed Smith LLP and can be reached at firstname.lastname@example.org.
Interview by Jeremy Abrams
Editor’s Note: This interview between Scott and Reed Smith’s Jeremy Abrams originally took place in October 2017 but has been supplemented since then. Some updates appear in brackets.
Jeremy Abrams: It’s great to see you again, Matthew. Tell our readers a little bit about your career in the private sector and how you ended up at the Department of Revenue.
Scott: I spent over 20 years with Qwest Communications. I originally started on the long distance side of that house, a very small private company. We took that public and became LCI International – that’s when I was living in Ballston. [Ed. Note: Ballston is a neighborhood in Arlington, VA.] At that same time Phil Anschutz, who’s our local billionaire in Colorado, owned Southern Pacific Railroad and decided to bury fiber optic cable along all of his railways since he owned the right of way. Once he got that built he wanted to put customers on it so he bought LCI International to build out his network. That’s when I moved to Denver. Continued on there we purchased US West, so we were both local and long distance at that point. I left that company in 2010 when Century Link purchased that organization. I did some consulting for a few years after that. Found out that small entrepreneurial consulting was not my cup of tea so I went back into corporate. I spent some time with Curian Capital, which was the investment management firm of Jackson National Life Insurance. Shortly after joining, Jackson decided to get out of the investment management business so we spent the next year shutting down that business. That’s when I found the opportunity with the State of Colorado, spoke with Barb Brohl, and ultimately transitioned to government service.
Abrams: Let’s talk corporate income tax. I understand Colorado is the latest state to consider adopting a market-based sourcing regime. Where does that process stand?
Scott: We do expect a bill this legislative session to move Colorado to market-based sourcing for intangibles and services. The legislation will probably be proposed by our Office of Economic Development and International Trade. DOR is not sponsoring the legislation but we are supportive of that effort. We’ve had a few early stakeholder meetings –chamber of commerce and economic development groups in Colorado. And we’re continuing that process – we’ve had 3 or 4 meetings so far. Very small but we’re getting some larger organizations involved in that process. We expect that to continue to proceed. We haven’t heard of any significant objections. Most people and organizations are very supportive of the proposal. The legislation that the OEDIT is proposing is the MTC model statute, so very few and very minor Colorado specific changes to that.
[Update: HB18-1185 passed unanimously in the House Committee on Business Affairs and Labor on February 15, 2018 and is now pending in the House Committee on Finance.]
Abrams: What other corporate income tax developments should taxpayers know about?
Scott: Market-based sourcing is by far the biggest development. There’s a lot of interest in that. The key there is you don’t want to be the last state to move to that process. There are issues now that if you have market in one state and COP in another it’s possible for double taxation to occur. We see some of that. We understand those concerns from a taxpayer perspective. We think the right thing for us to do now is to move to market. We anticipate this change to be revenue neutral from Colorado’s perspective. This is just a more current way of taxing.
Abrams: Or some may say a transfer of the tax burden from in-state to out-of-state taxpayers.
Abrams: What is your reaction to federal tax reform and how will it affect Colorado taxpayers? [Ed. Note: Public Law 115-97 - originally introduced in Congress as The Tax Cuts and Jobs Act of 2017 - was signed into law by President Trump on December 22, 2017.]
Scott: We have looked at the impact of the federal tax reform efforts on Colorado taxpayers and estimate that it will have a slightly positive impact on Colorado revenues of approximately one percent over the next 10 years. We are not aware of any plans to alter Colorado’s statutes or rates or any other efforts to de-conform or react to the federal changes.
Abrams: Moving to sales and use tax, has Colorado begun implementing the use tax notification and reporting regime at issue in DMA?
Scott: The original legislation for that was back in 2011. [Ed. Note: Colo. Rev. Stat. §§ 39-21-112(3.5)(c), (d)] The court case finally ended last February and we agreed to a settlement with DMA that would postpone enforcement until July 1, 2017. [Ed. Note: Direct Mktg. Ass’n v. Brohl, 814 F.3d 1129, 2016 ILRC 1317, 40 ILR 532 (10th Cir. 2016) ] That allowed us to hold some stakeholder meetings to make sure that those now 6 year old regulations were updated and still valid. We made some minor tweaks after those meetings and we rereleased those as an emergency regulation just because a permanent regulation takes about 9 months to get into place. [Ed. Note: See Rule 39-21-112(3.5)] So that is in effect and there is a requirement now that if you are not collecting SUT that you provide a notice to customers that use tax is due, and then after the end of the year the vendor has an obligation to provide reporting back to the purchaser and to the state on the dollar amount. The difference there is the purchaser will get notification on the types of purchases they made and the dollar amount associated with those purchases. All that the state will get is who the purchaser was, billing and shipping address, and total dollar amount of purchases – for privacy reasons, we specifically do not want to know what they are purchasing.
Abrams: Have you seen a spike in use tax reporting and collections among residents?
Scott: Not yet. That enactment just went in to effect July 1, 2017 and first reporting won’t be in until early 2018 but we are kicking up our taxpayer education. Right now I think there’s a big misunderstanding from the casual purchaser. They believe that if they purchase from these internet providers out there and their invoice shows no tax, that there is no tax due. That’s just not the case. There is tax due but it has not been collected by their vendor. So we have an education process to go through here. The vendor is required to tell their purchaser that there is tax due on this purchase. That’s in the legislation. That’s the first part of this education. And now it’s up to the state to beef up our education to notify residents they will get notices from their vendors, if they didn’t pay tax when they purchased the items they’ll have a use tax due on taxable items when you receive that notice, and here’s how you can go about filing and paying those taxes.
[Update: Some taxpayers have received their Annual Purchase Summary from vendors. The Annual Customer Information Reports to the Department are due on March 1, 2018.]
Abrams: COST is set to publish its new sales tax scorecard grading states on their sales tax systems. Tell us about Colorado’s recent simplification efforts.
Scott: Last year’s legislation enacted a Sales Tax Simplification task force. We have a seat on that task force. One of my deputies sits on it. It’s comprised of three or four legislators and a lot of local governments and vendors – businesses throughout the state. One of the unique things – they were charged with simplifying taxes but they could not make a recommendation that would require a constitutional change. We’ve had some challenges in Colorado with some of our constitutional issues – TABOR –the rights of local government home rule cities specifically to be able to determine their own taxation – because we can’t change those things, the focus has really changed from tax structure simplification to tax compliance simplification. So we’re looking at whether there is a way to have a single entity that can collect sales tax for all the multiple jurisdictions – perhaps a single form for that. That will be challenging to do but the task force is going to be recommending that we do a request for information (RFI) to see if that’s a possibility to get a single entity to come in and help make compliance easier within the state of Colorado.
[Update: HB18-1022 passed and is awaiting the Governor’s signature. This will establish the RFI process look into simplification.]
Abrams: Are there any interesting tax cases making their way through the Colorado courts?
Scott: We’ve got several cases out there. The ones that I have on my list are Target Brands; Agilent Technologies; and Oracle. [Ed. Note: The citations to these cases are: 1) Target Brands, Inc. v. Dept. of Rev., 2015CV33831 (Colo. Dist. Ct. Jan. 27, 2017) (Department was justified in invoking alternative apportionment but the formula chosen was unreasonable; IP holding company was not a shell company and was entitled to factor representation); 2) Agilent Technologies, Inc. v. Dep’t of Revenue of Colorado, No. 16CA849 (Colo. App. Nov. 2, 2017) (under Colorado’s 80/20 test, corporate parent doing business in Colorado was not required to include in its Colorado unitary combined corporate income tax report a subsidiary holding company with no property or payroll in Colorado or elsewhere); 3) Oracle Corporation v. Dep’t of Revenue of Colorado, No. 16CA1316 (Colo. App. Nov. 30, 2017) (pursuant to Colorado’s 80/20 test, the Colorado Department of Revenue could not require a C corporation to include in its consolidated return income from a wholly owned domestic holding company that had no payroll or property in Colorado)]
Abrams: Has there been any discussion of an independent tax tribunal in Colorado?
Scott: Not to my knowledge; I’ve been here a little over a year now. Cases go through the normal audit process. We have a tax conferee section that hears any request to review audit findings. It’s an informal hearing process but its separate from our audit function - they’ll take an independent look at that. Once it goes through that process if there are still issues, the case goes to our formal hearing process. That is within our DOR but its run by our DMV which is where the hearing division is, and it ultimately goes to the Executive Director for a ruling. [Ed. Note. Michael Hartman is the Executive Director at the Colorado Department of Revenue.] At that point if there is still controversy it heads to the court system.
Abrams: Is the Department accessible to taxpayers who are experiencing difficult audit issues to discuss dispute resolution?
Scott: Absolutely. I’ll of course qualify some of that. We are absolutely open to meeting with any constituency group that is out there that is interested in talking with us. We do have some formal progressive hearing stages to go through and we will caution folks not to bypass their rights by going directly to the top of the heap. If you’re formally protesting, there’s a way to work through the process there but we are very open to meeting with any constituency groups that are out there. In fact, we have regularly scheduled meetings with groups like the Colorado society of CPAs, Colorado counties –which are most of the county taxation groups – so we encourage those meetings. We’d rather get issues on the table quickly before they become problems, so we can talk through them.
Abrams: Why should companies consider doing business or expanding in Colorado?
Scott: Colorado is a great place to be. We’ve got great people, a great environment, lots of sunshine, skiing, etc. There are lots of reasons to be here. We think we’re very attractive. But at the same time if you’re looking for incentives – we don’t offer a tremendous amount of financial incentives to bring people here. We’ve got a great work force, highly educated. It’s an attractive place for companies to move into.
Colorado did submit a proposal to Amazon to be home for its new HQ2. My understanding is it’s not heavy on incentives. I read that New Jersey was offering billions. We are certainly not doing that. At the same time, there are a lot of good reasons why a company like Amazon could be happy in Colorado.
[Ed. Note: Denver made Amazon’s top 20 finalists for HQ2]
Abrams: What is your number one goal as Tax Director?
Scott: We’re doing our best to have consistency so people don’t need to guess what’s going on. We’re looking at our practices, how we’re treating these cases that do get through our processes, whether it’s through the conferee or our regular audit processes, making sure we’re clear on what we’re looking for, that there is logic to what we see happening there. So really we view our role as not so much setting tax policy but to administer that policy. It’s the legislature’s job to determine policy. It’s our job to do administration and make sure people are aware of what the issues are and make sure we are doing a fair and honest assessment of things going on.
Abrams: Thanks for your time, Matthew.
Scott: My pleasure, Jeremy. It was nice chatting with you.
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