DENVER SALES and USE TAX AUDITS

Denver is a home-rule city and county combined that administers its own tax code and conducts its own sales and use tax audits. Taxpayers are often surprised by their assessment and by what Denver taxes. Denver’s tax code and exemptions differ from Colorado State’s code.

It’s best to be proactive and to identify and resolve issues before an auditor contacts you. Voluntary Disclosure Agreements are no longer available once you’ve been contacted.

UPDATE: Denver adopted the CML Model Ordinance for Economic Nexus and Marketplace Facilitators effective February 1, 2021.  See the CML page for a list of the other Colorado Home-rule jurisdictions that have adopted Economic Nexus and/or Marketplace Facilitator ordinances

What Should You Expect If You’re Audited?

The audit will cover sales and use tax and may include personal property tax, Denver’s Occupation Privilege taxes, lodger’s tax, FDA, Telecom TBT and others depending upon business type and location. Taxpayers that are audited are normally contacted by phone to discuss the audit, the records needed based on the type of business, a date and time to start the audit, and an estimate of the time to complete the audit. Questions that the taxpayer has are also discussed. There may be a preliminary meeting to discuss the audit in more detail. These variables change depending on many factors.

Denver auditors will tell you about their Audit Statement of Understanding to help clarify mutual expectations during the audit process and to provide an understanding of the work to be done during the audit. The auditor will present you with an engagement letter. You may be asked to sign a “Consent Fixing Period of Limitation” to keep the audit period open through completion. Professional representation is advised.

The auditor will prepare and issue work papers showing their schedule of taxes due and the associated interest and penalties. You will have opportunity to provide documentation to challenge assessments.

The auditor will issue a Notice of Proposed Deficiency when they’ve completed their review. You may still disagree and work to resolve it with the auditor or their supervisor. If you still disagree, a Final Determination may be issued, but a settlement may still be reached prior to going to hearing. Penalties may be waived for first-time audits when taxpayers request abatement in writing and show good cause as required by the Denver Revised Municipal Code.

How can you prepare?

We worked with a Denver sales and use tax audit supervisor to identify compliance issues auditors find and issues taxpayers commonly don’t understand. Issues tend to arise from improper documentation and from taxability differences between CO State and Denver. Businesses need to document transactions in far more detail to provide for the local taxes.

Denver Sales Tax Audit Issues:

• Having incomplete sales invoices with no documentation to support pickup or delivery
• Not identifying the sales tax charged to a specific taxing jurisdiction
• Not breaking out installation labor clearly on sales invoices
• Not having written training materials regarding sales tax for personnel to use when preparing sales invoices or ringing up merchandise in a POS system
• Not keeping copies of valid resale certificates on file when customers provide them
• Not substantiating with documentation the reasons for exemption from sales tax (i.e.-resale certificate, letter of exemption, exemption certificate, etc.)
• Not understanding how their sales tax system works. For instance, collecting tax for jurisdictions but not being licensed and not remitting the tax collected
• Improper reporting of sales tax to various taxing jurisdictions
• Not reconciling their sales tax liability account each time they do reporting
• Not identifying all delivery locations and the proper sales tax for each on a sales invoice

Denver Use Tax Audit Issues:

• Not identifying all items on invoices that are subject to use tax accrual based on the taxing jurisdiction’s code(i.e. – items such as fuel surcharges)
• Not accruing Denver use tax on manufacturing equipment in enterprise zones
• Locking in on one vendor for use tax accrual and ignoring new vendors providing the same items
• If providing supplies from a central warehouse, not accruing use tax for those supplies if not previously taxed
• Depending on accounting systems to identify purchase invoices subject to use tax but not verifying the accuracy of the system
• Remitting use tax accrued to the wrong jurisdiction
• Making sure use tax accruals are done based on the taxing jurisdictions tax codes for what is taxable
• Not accruing use tax on withdrawals of inventory for their own use
• In Denver, not accruing use tax on all costs that are part of manufactured cost for items where a retail market exists
• Not accruing use tax on leases or rentals of equipment used in a taxing jurisdiction

Other Problematic Areas:

• Differences between Denver’s and CO State on taxation of:
  • Automotive Rentals
  • Food and Drinks
  • Freight, Delivery and Transportation
  • Data Processing / Software
  • Dental and Medical Exemptions
  • Information Services
  • Maintenance Agreements
  • Manufacturing and Fabrication
  • Telecommunications
• Collecting, but not remitting sales tax
• Coffee and related food products sold for office or commercial establishment use (Not for personal home consumption)
• Use Tax on Rate Differentials (When tax was charged at a rate lower than Denver’s rate)
• Florist’s sourcing of wire (FTD) and traditional sales with florist’s delivery
• Wrong jurisdiction/ address issues (Wrong Rates and Jurisdictions – Mailing addresses often don’t reflect actual city)

The good news is that remedies are often available when you’ve discovered obligations before auditors contact you. We can often help even if you’re already under audit.

To learn more about how we can help with these or the following issues, please Contact us today:

• Assistance with proactive minimization of prior period sales/use tax liabilities
• Help with nexus questions and issues
• Other sales and use tax related questions

What are your priority issues and when do you want them resolved?

Please click here for more Sales Tax Tips. For additional insight on common sales tax concerns, please see the Did You Know? section of our website.

* This tip is intended to provide general information only and is not to be considered as a substitute for professional advice.