Local Government Sales and Use Taxes
| Publication year | 2011 |
| Pages | 61 |
2011, July, Pg. 61. Local Government Sales and Use Taxes
July 2011
Vol. 40, No. 7 [Page 61]
Government Counsel
Government Counsel articles provide information to attorneys dealing with state and federal administrative agencies, as well as attorneys representing public or private clients in the areas of municipal, county, and school or special district law.
Coordinating Editor
David D. Smith, Glenwood Springs, of Garfield and Hecht, P.C.-(970) 947-1936, dsmith@garfieldhecht.com
About the Authors
M. Patrick Wilson is a partner and Christopher Price is an associate at the Denver law firm Murray Dahl Kuechenmeister and Renaud, LLP. The firm specializes in the representation of municipalities, counties, and special districts, but also represents private clients.
This article describes the law concerning sales and use taxes imposedby local governments on goods and services, the procedures governing the collection of those taxes, and issues that have been litigatedby governments and taxpayers.
Sales and use taxes are a significant source of revenue for local governments. These taxes make up as much as three-quarters of annual general purpose revenue in municipal budgets and up to one-third of total revenue for county budgets.(fn1) They also represent a potentially significant expense to those who pay these taxes-the purchasers and consumers of the taxable products and services. For product vendors and service providers, sales and use taxes increase the total "cost" of their taxable goods and services. Because sales and use taxes affect local governments, businesses, and consumers, it is important to understand the relationship between sales and use taxes, the types of transactions to which these assessments apply, and the meansby which these taxes may be enforced and challenged.
This article focuses on sales and use taxes imposedby Colorado municipalities and counties. The state of Colorado also imposes its own sales and use taxes, and although there are many parallels between state and local taxes, the state's sales and use tax scheme is beyond the scope of this article.(fn2) This article addresses the nature and purposes of sales and use taxes, as well as the distinction and relationship between these two complementary taxes. The article also discusses the taxing jurisdictions that impose sales and use taxes and the types of transactions that often are subject to the tax, and provides an overview of how those taxes are assessed, collected, and enforced. Finally, the article addresses the procedural meansby which sales and use tax assessments may be challengedby taxpayers and some of the substantive issues raised in those protests.
Overview
In Colorado, individual consumers are largely accustomed to paying sales tax on many of their retail purchases and rarely question or dispute the collection of sales taxby the vendor. It simply is an expected and often unnoticed element of a retail transaction. Individual consumers are not often faced with paying a use tax directly, because their purchases are usually made from licensed vendors who collect a sales tax on the transaction. However, where a vendor does not collect a legally imposed sales tax for some reason, a use tax may be assessed against the consumer.
Even though it may be owed, a use tax on consumer transactions is not often enforced or collected from nonbusiness consumers. This is due to the difficulty in tracking and collecting a use tax on individual consumer purchases, limited enforcement resources, and the disproportionately high transaction costs on what often are relatively low-dollar-value purchases.
Businesses, on the other hand, tend to make purchases that have a higher taxable value than individual consumer purchases, they tend to maintain better records of purchases, and they sometimes can pass on the cost of a use tax to their customers. As a result, use taxes are more regularly collected from businesses. With limited audit and enforcement resources, local governments tend to focus their use tax collection efforts on business purchases, because they have the potential to provide more revenue and are more easily tracked and collected.
Sales and use taxes typically apply to retail transactions, as opposed to wholesale transactions. Wholesale transactions involve taxable products that are purchased for subsequent resale and often are specifically exempted from sales and use tax. Retail transactions, on the other hand, generally consist of goods and services that are not going to be resold; instead, they are consumed or usedby the purchaser. Retail vendors operating within a taxing jurisdiction are required to be licensedby the jurisdiction and to collect sales tax from their customers on retail transactions of taxable products and services. Failure to collect a required sales tax can result in enforcementby the local taxing authority against the vendor for a sales tax deficiency, or against the purchaser for use tax.
When businesses purchase items for their own consumption and use and the appropriate local sales tax is not collectedby the vendor, a use tax may be owing as a substitute for the sales tax. It is in this sense that the use tax is said to be a complement to the sales tax. For example, when a business located within a taxing jurisdiction purchases a taxable product or service from a vendor located outside the taxing jurisdiction, the vendor may not have collected the jurisdiction's sales tax. A vendor located outside the taxing jurisdiction may not be required to be licensed and to collect the sales tax imposedby the taxing jurisdiction. In lieu of the sales tax, a use tax may be imposed and collected from the user or end consumer of the taxable product or service once it is used within the taxing jurisdiction. In this manner, the use tax can be seen not as a separate or independent tax, but simply as a complement or alternative to the sales tax.(fn3) If a jurisdiction's sales tax has been paid and collected on a given transaction, the use tax will not be owing, and vice versa.
Collection of sales and use tax is largelyby voluntary compliance. Licensed vendors remit sales tax amounts collected from their customers on a periodic basis and businesses file periodic use tax returns for transactions on which sales taxes have not been paid or collected. Enforcement of sales and use taxes typically isby audit of business records. If a deficiency is identified and is not corrected, the local government usually issues a notice of deficiency, assessment, and demand for payment. In addition to demanding payment of the tax claimed to be owing, the local government also may assess penalties for nonpayment, as well as interest on the amount claimed to be owing. If a prompt resolution of the assessment discrepancy is achieved, many local governments have the authority to waive or reduce the penalty and/or interest payments.
Formal protests over whether a local sales or use tax is owing are almost always broughtby businesses-either as retail vendors on sales tax amounts, or as purchasers and consumers for use tax amounts. Purchasesby individual consumers often are not only too small to warrant a protest, but also the items and services typically purchasedby individual consumers tend to more clearly fall within or without an easily defined taxable category or exemption. Business transactions, on the other hand, may not as clearly fall within a taxable category, or may be subject to certain exemptions specifically targeted for certain industries.
To preserve the right to contest a final assessment, a formal written protest must be lodged promptly with the taxing jurisdiction, often as early as twenty days from the date of the notice of deficiency, assessment, and demand for payment. If the taxpayer and the local government cannot resolve the dispute informally, the local government typically provides an administrative hearing.(fn4) An appeal from that administrative hearing may be taken to either the Colorado Department of Revenue(fn5) or, if only one taxing jurisdiction is involved, directly to the district court.(fn6) Failure to comply with the protest procedures can result in the protest being dismissed.(fn7)
Sales and Use Taxes Generally
Sales and use taxes are a form of excise tax "imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege."(fn8) Sales tax is levied on the "sale of property with the amount of the tax based on a percentage of the purchase price paid or charged for the property exchanged in the sale."(fn9) Use tax, on the other hand, is levied on "the privilege of storing, using, or consuming ... property" within the taxing jurisdiction.(fn10) The use tax also is based on the stated purchase price or value of the product or service being taxed. Use tax is designed to complement the sales tax and to equalize the tax burden between in and out of jurisdiction purchasers.(fn11) Thus, with the use tax, "the burden on the taxpayer should be no greater than necessary to compensate for the sales tax originally avoided on the purchases."(fn12)
For this reason, a jurisdiction's sales tax rate is usually equal to its use tax rate. A party who purchases a taxable product or service in a jurisdiction without paying sales tax must pay use tax in the jurisdiction where the good is used or consumed.(fn13) The use tax thereby takes away the incentive to purchase products and services from vendors located outside the taxing jurisdiction.
Generally, a use tax should never be owing to the same taxing jurisdiction that has previously collected a sales tax on the same transaction. Similarly, most taxing jurisdictions recognize and provide a credit for local sales or...
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