Home Rule Use-tax Credits and Interstate Multi-jurisdictional Transactions

• Publication year: 2001
• Pages: 79
• Citation: Vol. 30 No. 5 Pg. 79

30 Colo.Law. 79 Colorado Lawyer 2001.

2001, May, Pg. 79. Home Rule Use-Tax Credits and Interstate Multi-Jurisdictional Transactions

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79

Vol. 30, No. 5, Pg. 79

The Colorado Lawyer
May 2001
Vol. 30, No. 5 [Page 79]

Specialty Law Columns
Tax Tips
Home Rule Use-Tax Credits and Interstate Multi-Jurisdictional Transactions
by Andrew W. Swain

When tangible personal property purchased or used in another state is brought into Colorado, particularly into one of Colorado's numerous autonomous home rule taxing jurisdictions, significant constitutional questions can arise regarding state and local use taxes. Multi-jurisdictional transactions can result in multiple sales or use taxation which has been held to violate the dormant (or negative) Commerce Clause of the U.S. Constitution.1 This article discusses how Colorado and its home rule jurisdictions treat interstate, multi-jurisdictional transactions for purposes of sales and use taxes and how two recent Colorado appellate decisions could impact a home rule entity's use-tax credit scheme

Colorado's Use-Tax Credit And the Commerce Clause

Suppose Company X buys a taxable item in another state paying that other state's sales tax. Two scenarios could bring the taxable item within the scope of Colorado's use tax. First, Company X could bring the item into Colorado and use it here, subjecting it to Colorado's use tax. Second, Company X could use the taxable item in another state - for example, the company could withdraw property from inventory - and pay that state's use tax. Company X then brings the item into Colorado and uses it here, subjecting it, as in the first scenario, to Colorado's use tax. In either situation, Company X is being taxed twice. Does the dormant Commerce Clause require that Colorado eliminate the double taxation by providing a credit against its use tax equal to the full amount of sales or use taxes paid to the other state?

The Commerce Clause provides that "Congress shall have Power to . . . regulate Commerce . . . among the several States. . . ."2 Over the years, the U.S. Supreme Court has interpreted the Commerce Clause in different ways before settling on the current dormant Commerce Clause doctrine: that the Commerce Clause, by its own force and in the absence of congressional legislation, prohibits taxes that impose an undue burden on interstate commerce.3 Multiple taxation resulting from the imposition of tax by numerous states, as discussed in the scenarios above, can constitute such an impermissible burden.4

The U.S. Supreme Court established a four-part test in Complete Auto Transit, Inc. v. Brady5 to determine state tax violations of the dormant Commerce Clause. Under this test, a state tax does not violate the dormant Commerce Clause if the tax (1) applies to an activity with a substantial nexus with the taxing state; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and (4) is fairly related to the services provided by the state.6 The second, fair-apportionment prong of the test depends on whether the tax is internally consistent and, if so, whether it is externally consistent.7 A tax is internally consistent if ". . . the imposition of a tax identical to the one in question by every other State would add no burden to interstate commerce that intrastate commerce also would not bear."8 A tax is externally consistent if the taxing jurisdiction can fairly attribute its tax to an economic activity within its jurisdiction.9

U.S. Supreme Court cases involving the dormant Commerce Clause have held that when a state gives credit to taxes paid to another state, it satisfies the fair-apportionment prong of the Brady test, effects the Clause's purpose, and eliminates multiple taxation.10 However, the Court has never definitively held that a state must grant a use-tax credit for sales or use taxes previously paid to another state.11 Moreover, while a tax credit helps to avoid violation of the dormant Commerce Clause, it is not required. For example, a state could apply an apportionment methodology that allocates its tax based on the percentage of time taxable property remains in each state. Despite this, virtually every state grants a credit that offsets or exempts the sales or use taxes paid to another taxing authority.12

Colorado follows this credit approach, both by statute and by virtue of its adoption of the Multistate Tax Compact13 ("Compact"). First, Colorado's use-tax statute exempts property if a taxpayer paid sales or use taxes to another state that were equal to or higher than Colorado's use tax.14 In addition, a taxpayer receives a full credit for sales or use taxes legally owed and paid to another state if those taxes were less than Colorado's use tax.15 Second, Colorado (along with twenty other states and the District of Columbia) has adopted the Compact, which mandates that a taxpayer receive a full credit for sales or use taxes paid to another state or its subdivisions.16

Home Rule Use-Tax Credits

The proper crediting for the sales or use taxes paid to another state becomes more complicated in Colorado because of home rule cities. By their terms, the crediting schemes of most home rule jurisdictions permit no more than a "lateral credit" - limiting the tax offset or credit to the taxes imposed by a corresponding and equivalent municipal or home rule entity - when they permit a credit at all. For example, the City and County of Denver ("Denver"), by the terms of its ordinances, grants a credit against its use tax only for sales or use taxes imposed by a municipal corporation or municipality with equivalent home rule status.17 It does not grant a credit for sales or use taxes imposed by another state or another state's local, non-home rule taxing authority. The constitutionality of this "lateral credit" approach was recently considered by the Colorado appellate courts in United Air Lines...