Problematic Colorado Sales and Use Tax Issues – Industry specific and generally problematic issues

As noted in our blog Colorado’s Complex Sales and Use Tax System – An Overview, Colorado is arguably the most difficult state for handling sales and use tax.  Many businesses continue to face years of accumulated unknown liabilities until they get a costly audit bill (“tuition”).

While the prior blog covers some of the primary difficulties of dealing with sales and use tax in Colorado, today’s blog highlights some specific industry issues.

The Colorado Department of Revenue (“DOR”) collects for many smaller towns and cities, special districts and all but two of the counties that have a sales tax.  However, there are currently 70 self-collecting home-rule jurisdictions like Aurora, Denver, Colorado Springs, Fort Collins and Lakewood.  These home-rule jurisdictions administer their own sales and use tax collection and tax things differently than the State and each other. This includes separate licensing for each, different municipal codes and interpretations of the code and their own or contracted auditors.

So which industry tops my list?

#1: Construction

Why? 

• Different treatment between the home-rule cities themselves and from the State on what constitutes “construction” or a contract to improve real property vs. a retail sale with installation.
  • Flooring, cabinetry, replacement HVAC units are all problematic areas.
• Varied requirements regarding Equipment Declarations
  • Failure to properly comply voids proration of use tax due on construction equipment used in some cities.
• Different treatment of contractors working on a government, charitable or other nonprofit institution job.
  • The State may issue an exemption, but Cities often treat the Contractor as the end-user such that no exemption is applicable for some of the Cities.
  • Doing a job for the City and County of Denver itself? Pay city and county sales tax as the Contractor is not exempt even when performing construction for Denver itself.
• Building permits
  • Some cities and counties require a use tax deposit
  • Jurisdictions’ permits cover different things
  • Reconciliations are required by some jurisdictions
  • Sub-contractors may need to provide information on material costs and sales tax paid
  • Credit might not to be given for a city’s sales tax paid if a permit was issued with a use tax deposit, even if it’s sales tax paid for the same city’s that issued the permit. The permit should have been provided to the vendor so they didn’t charge city sales tax to the Contractor or subs.
  • Construction suppliers might not have charged or exempted tax properly

Some other problematic industries and highlights include:

• Caterers – all prepared food and drink and related services might be deemed as taxable
• Fabricators – fabrication labor is generally taxable
• Hospitality – Exempt transactions and use tax are big issues
  • Improper documentation for 30+ day or government exemptions.
  • Reservation system software or related charges for such when included in hotel chain “fees” can make the entire and often substantial charge taxable.
• Leasing – Improper assignment of tax when equipment is moved around by lessee.
• Manufacturers – what qualifies and missed or improper claims for exemption
  • The State and some local state-collected and home-rule jurisdictions offer a manufacturing machinery and tools exemption, but others like Denver do not.
• Mobile service/ repair businesses – sales of parts are taxable in the jurisdiction where the work for the customer is done. Address verification is needed and multiple home-rule city licenses may be required.
• Multifamily Housing/ Apartment complexes – Such businesses are an easy and Big target plus use tax is often a very costly issue.
  • Tax issues commonly occur with construction renovations and bulk appliance replacement.
  • Additionally, tax is due on Fixed assets and all tangible personal property included in the acquisition of the real estate.
  • Purchase agreements often fail to properly identify and value such for sales and use tax purposes. Cost-segregation studies or other values for income tax purposes can inadvertently be costly when addressing the sales or use tax due.
  • Advertising through Apartments.com or similar resources? Some home-rule cities can and do tax the entire charge due to the taxable “Software” component the advertising platforms provide.  A “mixed transaction” where charges for taxable and nontaxable products or services are combined can make the entire transaction taxable.
• Online Retailers – Economic nexus, marketplace facilitator laws, drop-shipment complications and the difficulty of correctly identifying the taxing jurisdictions, their current rates and the varying State and local taxability in Colorado make this a very difficult obstacle to doing business in Colorado.
  • The cost can be high for a software compliance company that’s actually capable of handling the varied requirements for Colorado State, the state-collected local jurisdictions and then the home-rule cities too.
  • Integration with your chosen online shopping cart is essential.
• Restaurants – Use tax issues for items “consumed” or “used” by restaurant in provision of services is complicated.
  • Items commonly thought to be included in the price of the meal, , can get excluded and taxed.
  • Condiments placed for general distribution vs. handed out with the meal
  • See the State’s publication Sales & Use Tax Topics: Dining Establishments
• Retailers that deliver – delivery can create an obligation to register with home-rule cities. Delivery charges are commonly taxed by home-rule cities, but not by the State (if separable and separately stated)
• Software and related services companies – Some home-rule jurisdictions tax all software regardless of the method of delivery. It can be difficult to properly determine and apply sales tax to software, maintenance agreements, and back-up, security and other services.  Just including the “right” to upgrades, even if none are ever made, will generally make the entire charge for the maintenance agreement taxable.  See the note about “mixed transactions” under the multifamily housing heading. Charges for any potential upgrades should be listed separately ad taxed if software is taxable in the jurisdiction.
• Wholesalers and other Suppliers– improper exemptions are commonly applied or the proper documentation is not received.
  • Get it wrong and you could be assessed the tax, interest and penalties!
  • It is advisable to obtain a copy of the purchaser’s State and any applicable home-rule city sales tax license plus the State’s DR5002 form and the Standard Municipal Home Rule Affidavit of Exempt Sale for each applicable home-rule city
  • For more on the specifics for the State’s requirements see Colorado Rule 39-26-105(3). Documenting Exempt Sales

NOTE:  Each industry above and many others not listed can have both common and unique issues facing them.  This blog only scratches the surface. Audits often produce to fists to the face, even when the company was trying to properly comply.  This is really bothersome to us and we work to provide education to prevent or minimize such.

Get Help if Needed – Handling Colorado sales and use tax properly is complicated.  We’re here to help.

Sales Tax Colorado, LLC
303-289-6100