Colorado Sales and Use Taxes in the Multistate Context
| Publication year | 1991 |
| Pages | 501 |
| Citation | Vol. 20 No. 3 Pg. 501 |
1991, March, Pg. 501. Colorado Sales and Use Taxes In the Multistate Context
In a climate of steadily shrinking federal aid, coupled with the increasing delegation of traditionally federal programs to the states, state governments are continually pressed for sources of revenue to fund their programs. As a natural consequence of this sometimes desperate scramble for funds, states have sought to levy sales or use taxes on an ever-widening range of out-of-state persons or transactions. Because of this fiscal pressure, states are constantly testing the limits on state taxing power imposed by the U.S. Constitution. This article discusses the interplay between the Constitution and the Colorado sales and use tax schemes in the context of multistate transactions.
There are several constitutional restraints on state taxing power. The first is found in the commerce clause of Article I of the Constitution, which provides that "[t]he Congress shall have the power . . . [t]o regulate commerce with foreign Nations, and among the several states, and with the Indian Tribes." When a state law conflicts with federal legislation enacted under the commerce clause, the federal statute controls pursuant to the supremacy clause of Article VI of the Constitution. However, the Constitution does not explicitly articulate the boundaries of a state's ability to infringe on interstate commerce in the absence of congressional action. Instead, this task falls to the U.S. Supreme Court.
In deciding the extent of permissible state infringement on interstate commerce, the Supreme Court attempts to interpret the meaning of congressional silence. In so doing, the Court invokes the "dormant powers" of the commerce clause (that is, powers that lie unused but that Congress could utilize at any time). Thus, Court interpretations of the dormant commerce power are inherently subject to subsequent congressional legislation.
When the Court measures a state tax against the dormant commerce power, it allows the state to extract from interstate commerce a fair share of the expenses of state government without unduly restricting the flow of interstate commerce. The Court focuses on the economic realities of the challenged tax. This focus is expressed by the test set forth in Complete Auto Transit, Inc. v. Brady.(fn1) In that case, the Court held that, to be valid under the commerce clause, a state or local tax must: (1) be applied to an activity with a substantial nexus with the taxing state; (2) be fairly apportioned; (3) not discriminate against interstate commerce; and (4) be fairly related to the services provided by the state.(fn2) In practical application, the four-prong Complete Auto Transit test poses two primary questions. The first question is whether the tax operates without imposing an undue burden on interstate commerce. The second question is whether the state has an economic reason to impose the tax (that is, whether the taxpayer is deriving some benefit from the state that should allow the state to exact a tax "toll charge"). A positive answer to both of these questions means that the state legitimately may impose the tax in question.
A tax that passes muster under the commerce clause also must be measured against the even more fundamental strictures of the due process clause of the Fourteenth Amendment. Due process requirements operate to limit the territorial reach of a state's taxing power. In order for a state tax to be valid under the due process clause, there must be some minimal economic contact between the person, thing or transaction taxed and the taxing state.(fn3) This simply means that a state cannot assess a sales tax on purchases made outside the boundaries of the state, although it may assess a use tax when the property is physically brought into the state.
The substantial nexus and fair apportionment inquiries of the Complete Auto Transit commerce clause test, discussed above, are factually similar to the due process test, except that the Complete Auto Transit test focuses on the burden
To be upheld as constitutional, state taxes also must satisfy the equal protection requirements of the Fourteenth Amendment. To meet these requirements, a state tax "must proceed upon a rational basis and not be palpably arbitrary."(fn5) For example, a state may not levy a tax only to promote in-state businesses and to discriminate against businesses from other states.(fn6)
In addition, the privileges and immunities clause of Article IV forbids state
Like those of virtually every other state, the Colorado sales and use tax schemes are complementary. Taken together, they impose a uniform tax on: (1) all retail purchases in Colorado of tangible personal property; (2) all taxable services rendered in Colorado; and (3) the storage, use or consumption of all tangible personal property located in Colorado.(fn9) The U.S. Supreme Court has upheld such complementary sales and use tax schemes on the ground that they do not infringe on interstate commerce, but rather put local retailers in jurisdictions that impose a sales tax on a competitive parity with out-of-state retailers whose sales are not subject to sales tax.(fn10)
A state clearly may impose sales tax on intrastate retail purchases without running afoul of any constitutional limitations. Accordingly, a retail purchase of tangible personal property in Colorado generally is...
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