How does Colorado stack up against other states when it comes to sales tax complexity? Not well, says representatives of the Council on State Taxation and the Tax Foundation in a report to the Sales Tax Task Force at the Colorado State Capital. The August 15 meeting was the second time the task force convened to study how sales tax can be simplified over the next three years.
Colorado differs from other states in many respects:
- Overlapping sales tax authorities
- Non-centralized collections
- Non-uniform bases
- Definitions are not standardized
These differences create conflicting rules and regulations from city to city and make doing business in Colorado needlessly complicated. The sheer number of jurisdictions and agencies involved in collection and remittance, databases that don?t speak to each other, varying rates and filing requirements, and an audit process that is hit or miss further add to the confusion.
Colorado is one of just six states that does not have a uniform tax base across the state, meaning an item taxed on the western slope might be tax-exempt in Denver. And with 64 counties, 271 cities, and 34 special districts opting in and out of state tax exemptions, business owners have over 756 different combinations of sales taxes to charge depending on where the goods are sold.
Source: Council on State Taxation and The Tax Foundation, 2017
Streamlining sales tax best practices
COST and The Tax Foundation have studied the sales tax regimes across the country, identifying some of the best practices. In their presentation to the sales tax task force, they shared a laundry list of elements that should be considered for sales tax reform, including:
- Uniform tax base definitions between the state and local taxing jurisdictions within that state, tailored to avoid imposition provisions that unnecessarily and inappropriately expand or contract the tax base.
- One tax base per state (including local taxes) applying to taxable transaction in the state
- Multistate registration and forms. A centralized, multistate vendor registration system; uniform exemption certificate; and uniform tax return and remittance forms.
- Uniform filing and payment dates timed to allow collection of all relevant information and reduce filings
- Adequate notice of changes in law (at least 90 days) for taxability, rates and jurisdictional boundary changes
- Uniform audit, appeal and refund procedures. Single statewide administration of all local taxes.
- Simple rate structure, preferably one rate per state
- Uniform sourcing rules for transactions, designed to prevent multiple taxation, and reliant on information available at the time of the transaction through regular business activities with the consumer
- Bad debt deduction/refund. Uniform rules allowing a bad debt deduction/refund to vendors, assignees, or other third parties
- Tax credits. Uniform rules for allowing credit for sales, use and similar transaction taxes paid to other states and localities.
- Uniform direct pay permits and registration requirements
- Technology implementation. Uniform and technology-neutral procedures for certification of vendor software. Functional databases maintained collectively by the states, providing vendors and purchasers a single point of access to information necessary to administer tax collection properly, including rate, base, taxability matrix, jurisdictional boundary, and exemption information.
- Hold Harmless. Elimination of vendor tax liability for collection errors resulting from reliance on state provided data, state-certified software, and customer exemption certificates as well as protection from civil suits alleging over- or under-collection of tax. Consumers should also not be subject to penalties and interest based on such errors.
- Vendor allowance. Reasonable compensation for expenses incurred by a vendor in administering, collecting, and remitting sales, use or similar transaction taxes (other than use taxes on goods and services purchased for the consumption of the vendor.)
- Funding. Adequate state funding of the technological and administrative functions.
- Oversight. Meaningful federal review of state adherence to the simplification features, state membership in the system, and conflicts of interpretation between participating states.
- Public input. Business much have a meaningful voice in any designated multistate governance process.
The task force also discussed how TABOR statutes complicate the creation of a single tax base in ways which are unique to Colorado, but may not be insurmountable. The task force next meets September 15.
Let’s talk simplifying tax