Chapter 25 - § 25.2 • STATE AND LOCAL SALES AND USE TAXES
| Jurisdiction | Colorado |
§ 25.2.1-What Is Sales Tax?
Sales tax is an excise imposed by a taxing jurisdiction on the sale of tangible personal property and certain enumerated services that are considered to occur within the taxing jurisdiction. In Colorado, sales tax is imposed on the purchaser and can be collected by the taxing jurisdiction directly from the purchaser in cases where the purchaser pays tax to an unlicensed retailer that does not remit the tax, or where the retailer does not collect tax on the sale.1 Usually, however, if the seller is licensed to collect sales tax for the taxing jurisdiction, it collects the tax from the purchaser, and in this case the purchaser has no further liability regardless of whether the licensed seller remits the tax or not.2
The amount of the sales tax is ordinarily a percentage of the purchase price paid by the purchaser for the tangible personal property or for the taxable services. In Colorado, the taxable purchase price includes the amount of money plus the fair market value of any other consideration paid by the purchaser for the tangible personal property or for the taxable services.3 The purchase price excludes any direct tax imposed by the federal government and any sales tax.4 In the case of an exchange of property, the purchase price includes the fair market value of the property exchanged, unless the exchanged property is to be resold in the usual course of the seller's business or is a vehicle that is exchanged for another vehicle and both vehicles are subject to registration in the state.5
§ 25.2.2-What Is Use Tax?
Use tax is an excise that is complementary to the sales tax. It is generally imposed on the storage, use, or consumption within a taxing jurisdiction of tangible personal property purchased at retail, but upon which, for some reason, the same jurisdiction's sales tax was not imposed. The amount of the use tax is usually a percentage of the purchase price paid by the purchaser to acquire the tangible personal property. The use tax laws of most taxing jurisdictions provide an exemption for the use of property that is acquired in a transaction in which sales tax is paid to the same taxing jurisdiction, so that only one tax (either sales tax or use tax) is collected by the taxing jurisdiction with respect to a particular retail sale of tangible personal property.6 If a seller simply fails to collect sales tax on a taxable retail transaction, use tax must be paid directly to the taxing jurisdiction by the purchaser.7 Also, if the subject property was subject to sales or use tax in another jurisdiction, the amount of such tax potentially reduces (not below zero) the amount of use tax owed. In the classic example of a use tax, a purchaser buys a taxable product in State A and pays $10 of State A sales tax. The purchaser then moves the item to State B where he or she stores, uses, or consumes it. The storage, use, or consumption in State B results in a $9 State B use tax. The State B use tax can be reduced by the State A sales tax, but not below zero.
§ 25.2.3-Which Jurisdictions Impose Sales or Use Tax?
In Colorado, the jurisdictions that impose sales and use taxes can be divided into four categories.
State Sales and Use Tax
The first category is the state. The state imposes a sales tax at the rate of 2.9 percent on all retail sales in the state of tangible personal property and on certain taxable services, described below.8 The state also imposes a use tax at the rate of 2.9 percent on the storage, use, or consumption in the state of tangible personal property purchased at retail.9
Sales and Use Taxes of the Regional Transportation District and the Scientific and Cultural Facilities District
The second category of taxing jurisdictions consists of two special districts in the Denver metropolitan area, namely, the Regional Transportation District (RTD) and the Scientific and Cultural Facilities District (SCFD).10 These districts impose sales taxes of 1.0 percent (RTD) and 0.1 percent (SCFD) on all transactions that occur in the districts and that are subject to the state sales tax, with certain exceptions.11 The districts also impose use taxes at the same rates on all transactions that occur in the districts and that are subject to the state use tax, with certain exceptions.12
State-Administered Local Sales Taxes
The third category of taxing jurisdictions consists of local jurisdictions (including counties, "statutory" cities and towns, home rule cities that have elected to have the state collect their sales taxes, and certain other special districts) whose sales taxes are collected by the state Department of Revenue.13 These "state-administered" local sales taxes are imposed by a large number of jurisdictions, which are listed in Department of Revenue Form 1002, Colorado Sales/Use Tax Rates.14 Each state-administered local sales tax is imposed on all transactions that occur within the taxing jurisdiction and that are subject to the state sales tax, with certain exceptions.15 These exceptions are items that are exempt from the state sales tax, and for each of which each of these local jurisdictions can elect to follow the state exemption or not. Each local jurisdiction's sales tax treatment of each of these items is also shown in Form 1002. Counties and statutory cities and towns are permitted to impose use taxes, but only on motor vehicles and building and construction materials.16 The use taxes imposed by these local jurisdictions are collected by the local jurisdictions.17
Sales and Use Taxes of Home Rule Cities
The fourth, and most complicated, category of taxing jurisdictions consists of "home rule" cities that impose their own sales and use taxes. Under Colorado law, every home rule city is authorized to impose and administer its own sales and use tax, and as of the date of this writing, 71 home rule cities have chosen to do so.18 While the sales and use taxes of the home rule cities are generally similar to the state sales and use taxes, significant differences exist. In addition, significant differences exist between the sales and use taxes of different home rule cities. Also, there can be significant differences between the home rule cities and the state, and between the different home rule cities, in the compliance and administrative protest/hearing procedures.
§ 25.2.4-Which Sales Are Taxable?
The state sales tax is imposed on certain enumerated services and "sales and purchases of tangible personal property at retail."19 Nearly every word in that phrase has been the subject of interpretation.
Definition of "Sale"
A sale is any transfer of ownership or possession of tangible personal property or a taxable service for consideration.20 The term includes installment sales, credit sales, and conditional sales, as well as exchanges of tangible personal property.21 The term also includes leases of more than three years, and may include leases of three years or less if the lessor has made an election to treat short-term leases as sales.22
Certain transactions are excluded by statute from the definition of "sale." These excluded transactions include some (but not all) of the transactions involved in the formation, reorganization, and dissolution of corporations, partnerships, and limited liability companies, and some (but not all) transactions between affiliated entities.23 The repossession of personal property by a chattel mortgage holder and foreclosure by a lienholder are also excluded from the definition of "sale."24 While these transactions are excluded from the definition of "sale" for purposes of state sales and use taxes, they may not be excluded from the definition of "sale" imposed by a home rule city. Some of the home rule cities have adopted some, but not all, of these transactions defined as not constituting "sales" at the state level.
Definition of "Retail"
A retail sale is any sale other than a wholesale sale.25 A wholesale sale is any sale by a wholesaler to a retailer, jobber, dealer, or other wholesaler for resale.26
Certain purchases of ingredients or component parts are deemed to be wholesale purchases that are not subject to sales or use tax.27 This exclusion applies to purchases of tangible personal property "by a person engaged in the business of manufacturing, compounding for sale, profit, or use, any article, substance, or commodity, which tangible personal property enters into the processing of or becomes an ingredient or component part of the product or service which is manufactured, compounded, or furnished, and the container, label, or the furnished shipping case thereof."28 So-called manufacturing aids (such as machinery, tools, furniture, office equipment, and catalysts) do not qualify for this exclusion.29
If an item of tangible personal property is purchased tax-free in a wholesale transaction but is subsequently withdrawn from inventory for the use of the purchaser, the original purchase transaction is reclassified as a taxable retail sale and the purchaser owes use tax on its purchase price for the item.30 If a purchaser buys materials and manufactures the materials into a product that is then withdrawn from inventory, the original purchase of the materials is reclassified as a retail purchase and the purchaser owes use tax on its purchase price of the materials (not on the value or list price of the final product).31
In determining whether purchases of items that are ultimately re-sold are subject to sales tax, the Colorado Supreme Court applies a "primary purpose" test. If the primary purpose of a transaction is the acquisition of an item for resale in an unaltered condition and basically unused by the purchaser, the transaction is a wholesale purchase and is not subject to sales tax.32 Where a contractor purchased tangible personal property for its use in performing its contract with the federal government, the contractor's purchase was taxable, even though the contract provided that...
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