SALES TAX SLICE: HOME RULE HEADACHES

Colorado

As state legislative sessions wind down across the country, Colorado is ramping up efforts to institute order among its 69 home rule cities. Last week, its general assembly passed HB 17-1216, creating a simplification task force to streamline the administration of local sales and use taxes imposed under home rule jurisdictions.

Home rule cities in Colorado exercise uniquely powerful taxing authority. In addition to setting their own rates, they also administer their own collection, conduct their own audits, and can even determine their own tax base. While that autonomy enables cities to balance their budgets, it can result in sales tax policies that directly conflict with that of the state. Exemptions issued at the state level are not guaranteed to apply in these cities, and vice versa. This requires consumers and retailers alike to keep track of the dizzying differences across products and services throughout the state. For example, the city of Westminster specifically taxes several transactions that are exempted by the state, including energy used for industrial and manufacturing purposes, and sales of food for off-premises consumption.

While not all of Colorado’s cities have home rule status, most major metropolitan cities like Denver, Boulder, and Colorado Springs, do. And since sales and use taxes are considered the “primary revenue sources” for Colorado municipalities—accounting for up to 80 percent of local jurisdictions’ revenue—the complexity of the current system may deter business investment, invite noncompliance, and compound enforcement challenges. At 2.9 percent, Colorado has the lowest state rate in the country. By spearheading this simplification effort, state legislators are aiming to secure sales tax revenue at all levels.

The new task force has been instructed to consider the feasibility of several simplification ideas, including uniform audits, a single sales and use tax return, and use of certified software for administering and collecting local sales tax. In its quest to unify administration and collection, Colorado may look to Arizona, a home rule state that transitioned its self-administered cities onto a centralized portal in January of this year. Arizona’s journey was also a difficult one, taking about four years to implement.

This won’t be the first time Colorado has attempted to revamp its local tax system. In 2013, the state passed a bill to explore a statewide sales and use tax base. Though unsuccessful, that effort collected a lot of information about local tax practices, and even proposed certain uniform definitions. Reform enthusiasts are hoping the new task force will pick up where the last one left off (and get done what they weren’t able to).

The task force will be made up of 15 members, representing a cross section of participants from all levels of government, as well as business leaders. Although Colorado is not currently a member of the Streamlined Sales Tax (SST), legislators are also interested in enlisting the help its executive director, who is a proposed member of the committee. Perhaps the addition of this expertise to its task force will be of help to Colorado this time around in solving the uniformity and simplification challenges presented by its current local sales and use tax regime.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the Colorado task force will be able to achieve its sales tax simplification objectives? Are there are any downsides to moving to a more centralized taxing system?

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