Where Sales Tax and Business Licenses Meet in Colorado

by | Feb 3, 2022 | State and Local, Tax News

Statutory and home rule tax policies conflict in Colorado, creating layers of auto-renewable licensing fees for unwary business taxpayers. It’s a problem the state legislature should take on as a matter of statewide concern.

By Judy Vorndran, as featured by the Colorado Bar Association Taxation Law Section, Winter 2022

The current system of business licensing in Colorado is messy, which makes fees in statutory and home rule cities of Colorado problematic for business taxpayers.

Problem #1. Wayfair reporting in Colorado created destination sales sourcing. This means Colorado applies a front door tax, or a tax at the destination of a transaction, subjecting companies selling into Colorado to the state’s licensing requirements at the statutory city level.

Problem #2. The state of Colorado is in the final push in implementing a statewide Sales and Use Tax System (SUTS). To use the system, taxpayers are required to get a sales tax license at the home rule level.

Because of these problems, sales into the state of Colorado may make a seller subject to two layers of licensing fees, both statutory business licensing and sales tax licensing in home rule jurisdictions. All licensing carries a fee ranging anywhere from $10 to $200 per year per jurisdiction.

When businesses were primarily brick and mortar, no one thought much about business licenses. Businesses were physically present in the communities and recognized the value of services provided by the local government. So, businesses were generally willing to pay the annual fee of, say, $20 to the city of Castlerock. In the end, it turned out to be a relatively nominal cost of doing business.

But now that the economy has moved to a remote sales environment, where sellers may not be physically present in a city or the state, remote sellers are required to file and pay for multiple layers of licenses per systems set up under the physical presence business model. It’s creating problems. Let’s dig into what those are.

Statutory licensing

Colorado used to have what was known as “location in common,” where if a seller had a store in Denver, Colorado, the taxpayer charged a tax for Denver, Colorado, and special district tax based on the location of the store where the sale occurred. The taxpayer did not care about licenses in other cities like Aspen or Mount Crested Butte because the taxpayer did not have to file anyplace other than Denver, Colorado, where the taxpayer’s store was physically present.

Post-Wayfair, Colorado instituted destination-based reporting. This effectively means “front door” reporting, which increases compliance obligations outside of Denver to potentially every city, county and special district within the state of Colorado.

Under destination sourcing, the tax jurisdictions where a taxpayer’s goods and services end up want a business and/or sales license to record and apply the tax to the correct account. This puts the onus on the taxpayer to potentially get licensed everywhere their products and services are shipped.

In Colorado, that’s a lot of licenses. Although numbers vary based on tax policy changes, Colorado currently has 272 active incorporated municipalities, comprising 197 towns, 73 cities, and two consolidated city and county governments. According to the Colorado Municipal League, statutory cities and towns are limited to exercising powers that are granted by the state and are subject to provisions and limitations imposed by the state.

However, the approximately 70 home rule cities in Colorado are not under similar restrictions. These cities are entitled to collect on business and/or sales tax licenses when goods and services enter their tax jurisdictions.

Statewide concern

Under Colorado’s municode, cities organized under a home-rule charter are free to collect fees on sales tax licenses, which the state cannot overrule unless the matter is of “statewide concern.”

The Colorado Supreme Court recognized three categories of regulatory matters: (1) matters of local concern; (2) matters of statewide concern; and (3) matters of mixed state and local concern (See Denver v. State, 788 P.2d 764 (Col. 1990). i. ii. iii. Iv). In purely local matters, home rule city ordinances supersede a conflicting state statute (See Voss v. Lundvall Brothers, Inc., 830 P.2d 1061 (Col. 1992)).

In matters of statewide concern, the General Assembly may adopt legislation and home rule municipalities are without power to act unless authorized by the constitution or state statute (Denver v. State, 788 P.2d 764 (Col. 1990)).

When matters concern both local and state issues, a home rule ordinance may coexist with a state statute if there is no conflict between the ordinance and the statute. In the event of a conflict, the state statute supersedes the conflicting provisions of the ordinance (Voss v. Lundvall Brothers, Inc., 830 P.2d 1061 (Col. 1992)). If the facts in a matter create the need for uniform, statewide regulation, the General Assembly may override home rule ordinances (U.S. West Communications, Inc. v. City of Longmont, 924 P.2d 1071 (Col. App. 1995), cert. granted, aff’d 948 P.2d 509).

Determining a “statewide concern”

In determining whether a particular matter is of local, state, or mixed concern is made case-by-case, taking into consideration the facts of each case and the following factors:  whether there is need for statewide uniformity of regulation, whether municipal regulation has extraterritorial impact, whether subject matter is one traditionally governed by state or local government, and whether the State Constitution specifically commits a particular matter to state or local regulation.

Using these parameters, sales tax licensing is arguably a matter of statewide concern because statutory cities are tax collectors. The state takes money in from the taxpayers, then reports and remits those taxes in all jurisdictions.

In this, the General Assembly should declare the existing multiple layers of licensing an issue of statewide concern and home rule cities should be shown the value of a single, uniform licensing system. It only makes sense that, having created a single, centralized collection site in SUTS, the next step is to centralize licensing at both the statutory and home rule level.

Statutory override 

Despite nearly all home rule cities agreeing to a centralized collection site in SUTS, these same home rule cities are not willing to give up their sales tax registration fees, leaving taxpayers paying for a second level of licensing in every home rule city where goods and services are sold. This amounts to an annual fee of $10 to as much as $200 per license, creating an expensive per year annual sales tax licensing fee. With over 70 home rule cities this could be as much as $700-$14,000 per year in licensing fees. Once paid, the taxpayer is on the hook to always pay, year-after-year, a license renewal fee.

Before SUTS, the home rules had separate filing systems so separate licensing was not a huge issue. But under SUTS, some home rule cities are reluctant to give up these fees. We’ve seen a few taxpayer notices from what I would call “rogue” cities explaining to taxpayers the need for an annual license, which after understanding the clients facts we have often encouraged them to ignore as many home rule cities don’t actually have the means to enforce these sales tax licenses, even if they want them, so this makes for a mix of information being disseminated to taxpayers.

Both the state legislature and the Simplify Colorado Sales Tax Coalition, of which I am a founding member, are looking hard at the issue of whether home rule cities should retain the right to issue business licenses and how, such as when a taxpayer has an actual permanent physical presence within a city. The issue will pivot on whether the General Assembly determines sales tax licensing to be a matter of statewide concern and exercises its rights to override home rule cities in favor of statewide uniformity and fairness.

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