2016 TEI Colorado Update

2016 TEI Colorado Update Bruce M. Nelson EKS&H, LLLP 1321 Oakridge Drive Fort Collins, CO 80525 (970) 282-5446 Neil I. Pomerantz Silverstein & Pomerantz LLP 100 Fillmore Street, Suite 435 Denver, CO 80206 (303) 991-2501 1

Cases 1. Direct Marketing Association v. Brohl, 814 F.3d 1129 (10 th Cir. 2016). The Tenth Circuit Court of Appeals held that Colorado laws which imposed notification and reporting obligations on out-of-state retailers did not discriminate against nor unduly burden interstate commerce, and therefore did not violate the Commerce Clause of the U.S. Constitution. In 2010, the Colorado Legislature enacted various obligations on remote retailers who choose not to collect the Colorado sales tax and have gross annual sales in Colorado in excess of $100,000. Among these requirements, such retailers are obligated to send an annual report to each Colorado customer who purchased more than $500 of their goods in the prior year, identifying each purchase and advising the purchaser of his or her legal obligation to file a use tax report. Retailers are also required to file an annual report with the Colorado Department of Revenue, listing the name, address, and total purchase amount of each Colorado customer from the prior year. The Direct Marketing Association ( DMA ), a trade association that included many remote vendors, brought suit in Federal District Court. DMA challenged the notice and reporting requirements as discriminating against, and imposing undue burdens on, interstate commerce, in violation of the Commerce Clause. The procedural history of this suit is highly tortured. In 2012, the Federal District Court agreed with DMA s Commerce Clause claims, and granted an injunction against enforcement of the laws. In its first review of the dispute, conducted in 2013, the Tenth Circuit Court of Appeals did not reach the merits of DMA s Commerce Clause claims, but held that the District Court had lacked jurisdiction over the suit under the Tax Injunction Act ( TIA ), 28 U.S.C. 1341. The TIA provides that Federal District Courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State. 28 U.S.C. 1341. The Tenth Circuit thus ordered the District Court to dissolve its injunction. The U.S. Supreme Court then reversed on the jurisdictional question, holding that the TIA did not prohibit an injunction against enforcement of Colorado s laws because Colorado s notice and reporting requirements did not fall within the scope of the TIA s reference to the assessment, levy or collection of tax. Direct Marketing Association v. Brohl, U.S. Sup. Ct., No. 13-1032 (Mar. 3, 2015) (Thomas, J.). Rather, the Court held, the requirements were part of an information gathering phase that preceded any assessment, levy, or collection activities. While the Supreme Court defended the District Court s ruling on procedural grounds, it did not reach the substantive Commerce Clause issues. Instead, the Court remanded the case to the Tenth Circuit for a review of the merits of DMA s constitutional challenge. On remand, the Tenth Circuit ruled that the 2010 Colorado laws did not violate the Commerce Clause. The court began by discussing the physical presence requirement of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and held that it applies narrowly and does not apply beyond tax collection requirements. Proceeding to the merits of DMA s discrimination claims, the court held that Colorado s laws did not facially discriminate against out-of-state retailers. It noted that the laws did not specifically target out-of-state retailers, but rather, only distinguished between those retailers that collect Colorado sales tax and those that do not. Next, the court 2

concluded that the laws also were not discriminatory as applied. Id. at 1142. Specifically, the court held that the reporting obligations were designed to increase compliance with preexisting tax obligations, and applied only to retailers that are not otherwise required to comply with the greater burden of tax collection and reporting. The 2010 laws requirements, the court held, were not discriminatory when viewed against the backdrop of the collecting retailer s tax collection and reporting obligations. Id. at 1144. The court added that even though the out-ofstate retailer could not be required to collect tax, Quill did not establish that out-of-state retailers are free from any burdens. Having rejected DMA s discrimination claims, the court then considered whether the Colorado laws imposed an undue burden on interstate commerce. Based upon its earlier finding that Quill applies narrowly to laws that impose the duty to collect and remit taxes, the court held that Colorado s notice and reporting obligations do not place an unlawful burden on interstate commerce. DMA s deadline to file a Petition for Writ of Certiorari to the U.S. Supreme Court is June 30, 2016. 2. BP America Production Co. v. Colorado Dep t of Revenue, 2016 CO 23, 2016 WL 1639829 (Apr. 25, 2016). Reversing a Court of Appeals ruling against the taxpayer (BP), the Colorado Supreme Court held that cost of capital is a deductible cost for severance tax purposes. Colorado s severance tax is based on the gross income derived from the sale of an extracted natural resource. Under C.R.S. 39-29-102(3)(a), gross income is calculated based upon the gross lease revenues, less deductions for any transportation, manufacturing, and processing costs borne by the taxpayer. BP argued that any transportation, manufacturing, and processing costs included the cost of capital. On petition for certiorari, the Colorado Supreme Court first stated that tax deductions, like tax exemptions, are not allowed unless clearly provided for by statute. Nevertheless, the Court next held that the Legislature s reference to any of the costs enumerated in C.R.S. 39-29-102(3)(a) unambiguously allowed a tax deduction for all transportation, manufacturing, and processing costs, and that the cost of capital fell within this broad language. The Court explained: BP s predecessors incurred a cost in constructing transportation and processing facilities years before that cost was recoverable through depreciation deductions.... Because the predecessor companies invested in transportation and processing facilities, but the companies have not recovered the cost of capital associated with their investment, BP is now entitled to deduct that cost given that the statute permits a deduction for any transportation, manufacturing, and processing costs. 39 29 102(3)(a). In reaching its conclusion, the Supreme Court rejected the DOR s request for deference to its administrative interpretation. The Court explained that courts must independently review legal determinations; that the DOR s interpretation had not been uniform; and that courts are reluctant to defer to an agency determination that is not promulgated through a formal rulemaking process. 3

3. Colorado Union of Taxpayers Foundation v. City of Aspen, 2015 COA 162, 2015 WL 6746311 (Colo. App. Nov. 5, 2015), rehearing denied Apr. 14, 2016. In 2011, Aspen adopted an ordinance prohibiting grocers from providing customers with disposable plastic bags and imposing a waste reduction fee of $0.20 for each paper bag provided by a grocer to a customer. The ordinance required grocers to remit the fee with their ordinary Aspen sales tax payments. Aspen deposited the fees in a special Waste Reduction and Recycling Account and used the funds for various environmental measures, including providing reusable carry-out bags to Aspen residents and visitors. The Colorado Union of Taxpayers Foundation ( Foundation ), a non-profit tax and government spending watchdog group, challenged the waste reduction fee as a new tax enacted without voter approval in violation of TABOR. On cross-motions for summary judgment, the District Court had held that the ordinance created a fee, not a tax, and ruled for Aspen. Applying a three-part test used to distinguish between fees and taxes, the Court of Appeals agreed with the District Court that the ordinance created a fee, rather than a tax, because the primary use of the charge involved funding specific services and educational programs relating to the reduction of trash and waste, as opposed to defraying general City expenses. The Court of Appeals therefore held that the levy did not violate TABOR, as TABOR applied to new taxes, not to new fees. 4. Grand County Board of Commissioners v. Colorado Property Tax Administrator, 2016 WL 241466 (Colo. Ct. App. Jan. 14, 2016). The Colorado Court of Appeals rejected the argument by Grand and Larimer Counties that the YMCA was not entitled to a property tax exemption because it offered a variety of recreational activities to the public, including hiking, fishing, biking, horseback riding, cross-country skiing, tennis, roller skating. The counties argued that the properties were not used exclusively for religious purposes because they were open to the general public regardless of faith, marketed without reference to religion, and provided activities that were devoid of religious content. The court held that the proper test for exemption is not whether the activities themselves are religious in nature, but whether the uses of the property are in furtherance of an entity s religious mission and purposes. [T]he inquiry for exemption purposes is whether the property is used for activities that further the organization s religious purposes. If the answer is yes, the property is used for religious worship and is exempt from taxation. 5. Expedia, Inc., et al. v. City & County of Denver, 2014 COA 87 (July 3, 2014), decision pending from Colorado Supreme Court. In 2014, the Court of Appeals held that various online travel companies ( OTCs ) did not owe Denver s Lodger s Tax ( Tax ) on service fees and markup charges collected from customers. The OTCs maintained websites through which travelers made reservations for hotel accommodations. The OTCs negotiated discounted room rates with hotel operators. When an OTC customer made a reservation, the customer paid a price that included the discounted room rate, as well as the OTC s markup and a lump sum typically designated as taxes and fees. The latter charge included Tax calculated only the discounted room rate. The OTCs paid to the hotels both the discounted room rate and the Tax; the hotel 4

then remitted the Tax to Denver. Denver assessed additional Tax on the OTCs markup and service charges. Denver s municipal code ( DRMC ) imposes the Tax on the purchase price paid for lodging, but specifically excludes the price paid for any services other than those directly connected with the furnishing of rooms or accommodations. DRMC 53-171(b) & (c). The DRMC further requires payment of the tax by vendors, a term defined as persons engaged in the furnishing of lodging. DRMC 53-173(a)&(b); see also 53-170(4) (defining sale to mean the acquisition or furnishing for consideration by any person of lodging within the city ). The Court determined that the relevant DRMC provisions were ambiguous because they permitted more than one reasonable interpretation. It then affirmed the principle that all doubts concerning the intended reach of a taxing statute, other than an exemption statute, must be resolved in the taxpayer s favor. Turning to the interpretation of the subject DRMC provisions, the Court held that a reasonable construction of the DRMC supported the conclusion that the OTCs were not vendors because they did not furnish rooms to their customers; rather, the OTCs only facilitated the reservation of rooms that were furnished by another (i.e., the hotels) and received fees for that service. The Court similarly held that the fees at issue were not directly connected with the furnishing of rooms or accommodations. Accordingly, the Court ordered the cancellation of Denver s assessments. In 2015, the Colorado Supreme Court granted Denver s petition for certiorari to review the Court of Appeals decision, and on March 2, 2016 the Court held oral argument. A decision is expected within the next few months. 6. Comcast of Colorado IX, LLC v. City of Golden, Colorado, Colorado Court of Appeals Case No. 14CA1597 (unpublished decision issued Oct. 22, 2015). The Court of Appeals affirmed a 2014 decision of the Jefferson County District Court, which had held that the federal Internet Tax Freedom Act ( ITFA ) barred Golden from collecting sales tax on Comcast s sale of its cable high-speed Internet access ( CHSI ) service. The ITFA, enacted by Congress in 1998 for an initial three-year period, and extended on multiple occasions since, imposes a moratorium on state and local taxes on Internet access services. See Pub. L. No. 105-277 (1998) (codified at 47 U.S.C. 151, note). The moratorium is subject to an exception, a so-called Grandfather Clause, for taxes that were either publicly announced (the public proclamation exception) or generally collected (the generally collected exception) prior to October 1, 1998. On summary judgment, the District Court ruled that Golden did not satisfy the public proclamation exception, rejecting Golden s claim that its enactment of a tax on telecommunications service in the early 1990s should have made Internet service providers aware that the City taxed Internet access. After a trial, the District Court also found that Golden had not met its burden to show that it had generally collected sales tax on Internet access prior to October 1, 1998. Golden had offered only two instances in which it may have collected tax on Internet access charges, and in neither case could it state with certainty that the charges were in fact for Internet access. Accordingly, the District Court held that Golden did not fall within the ITFA s Grandfather Clause. While the ITFA ruling sufficed to require cancellation of the subject assessment, the District Court made two other significant rulings. First, it agreed with Comcast that Golden 5

owed interest on the disputed amount, which Comcast had deposited with the City to satisfy its pay-to-play obligation, at the state s rate of interest (currently 6% per year) as provided by C.R.S. 39-21-105(4)(b). In doing so, the District Court held unenforceable a municipal code provision Golden recently had enacted, which would have required the City to pay interest only at the nominal rate it earned on its short-term deposits. Second, the Court rejected Comcast s independent argument for cancellation of the assessment that Internet access did not fall within the scope of telecommunications service, as defined in Golden s municipal code. Golden appealed the public proclamation portion of the District Court s ITFA ruling, as well as the Court s interest ruling, to the Court of Appeals. Comcast filed a cross-appeal on the telecommunications issue. On October 22, 2015, the Court of Appeals issued an unpublished decision affirming the District Court s judgment for Comcast on the ITFA, holding that the City had not issued a public proclamation within the plain terms of the Grandfather Clause. The Court also affirmed the District Court s judgment for Comcast on the interest issue. It held that the state s interest rate statute superseded Golden s conflicting provision because the statute formed part of the appellate procedures for resolution of taxpayer disputes whose uniform application is a matter of statewide concern. Finally, the Court declined to reach Comcast s cross-appeal on the telecommunications issue as moot in light of its ruling affirming the ITFA issue. One final note of update: On February 24, 2016, President Obama signed the Trade Facilitation and Trade Enforcement Act of 2015, which made permanent the ITFA s ban on taxing Internet access charges. See H.R. 644, 114 th Cong., 922(a). The Act also removed the ITFA s Grandfather Clause, effective July 1, 2020 (id., 922(b)), meaning that even the few Colorado municipalities which claim to be grandfathered under the original ITFA must cease collecting any tax on Internet access no later than July 1, 2020. 7. City of Thornton v. Verizon Wireless, Case No. 2014CV34249 (Denver Dist. Ct. March 31, 2016). The taxpayer challenged Thornton s assessment of sales tax on two types of transactions: (1) sales of Internet access services; and (2) sales of Wireless Protection Plans ( WPP ) which cover theft, damage or loss of a customer s wireless device. After local proceedings, the matter was heard by the Department of Revenue. The DOR determined that the federal Internet Tax Freedom Act ( ITFA ) barred Thornton from collecting sales tax on Verizon s sales of Internet access and that the WPP was in the nature of insurance, and therefore not subject to Thornton s tax on warranty and maintenance services. Thornton appealed to the Denver District Court and cross-motions for summary judgment were filed. The District Court agreed with Verizon Wireless that the WPP was genuine insurance which fell outside the scope of Thornton s tax on warranty and maintenance services. The court supported its ruling by distinguishing the types of events covered by each type of arrangement. While warranty agreements typically cover manufacturing defects, and maintenance agreements typically cover repairs arising from normal wear and tear, insurance generally indemnifies the insured against specified events such as loss or theft of the subject property. Looking to the terms of the WPP agreement, the court found that its covered events were typical of insurance, not warranty or maintenance agreements. 6

On the taxability of Internet access, Verizon Wireless raised a number of independent challenges. The court rejected the taxpayer s argument that the State s moratorium on taxing Internet access (C.R.S. 29-1-1001) barred the City s tax. It declared the state moratorium unconstitutional based on a finding that taxing Internet access is purely a matter of local concern and therefore within the scope of home rule cities broad taxing powers. The court also agreed with Thornton that Internet access service fell within the definition of telecommunications services as found in Thornton s Code. Finally, the court turned to Verizon Wireless challenge that the federal ITFA barred the City s tax, focusing on whether Thornton satisfied the ITFA s Grandfather Clause. The Clause excludes from the scope of the ITFA s moratorium taxes that were either publicly announced (the public proclamation exception) or generally collected (the generally collected exception) prior to October 1, 1998. The court ruled that Thornton did not satisfy the public proclamation exception, rejecting the City s claim that its enactment of a tax on telecommunications service in the early 1990s should have made Internet service providers aware that the City taxed Internet access. The court declined to rule as a matter of law on the generally collected exception, finding at least some material facts in dispute. The parties are awaiting a trial setting on this issue. 8. Agilent Technologies, Inc. v. Department of Revenue, Case No. 2014CV393 (Denver Dist. Ct. Jan. 20, 2016). The Denver District Court concluded that a company created to hold foreign operating subsidiaries was an 80/20 company properly excluded from its parent s Colorado income tax return, and therefore canceled the Department s assessment. Agilent Technologies World Trade, Inc. ( World Trade ) neither owned nor rented any real or tangible personal property, and it paid no compensation to employees. Its only assets were approximately 20 subsidiaries, each conducting Agilent business within a distinct foreign country. Four of the foreign subsidiaries had made check-the-box elections to be treated as disregarded entities for federal income tax purposes. World Trade s income consisted of dividends received from its subsidiaries. World Trade s parent ( Parent ) had excluded World Trade from its Colorado income tax returns based upon C.R.S. 39-22-303(8) (which excludes from a combined report the income of any C corporation having 80% or more of its property and payroll outside the U.S.) and C.R.S. 39-22-303(12)(c) (which excludes from a combined report any entity that does not have more than 20% of its property and payroll inside the U.S.). The court agreed that neither World Trade nor its income lawfully could be included in Parent s Colorado income tax returns. It relied principally on Department Regulation 39-22-303.12(c), in effect since 1994, which stated: Since corporations that have no property or payroll factors of their own cannot have twenty percent or more of their factors assigned to locations in the United States, such corporations, by definition, cannot be included in a combined report. Because World trade had no property or payroll factors of its own, the court determined that it fell within the terms of the Department s valid regulation, and that the Department was obligated to respect its regulation. The court acknowledged legislative history revealing that both the General Assembly and its counsel, the Office of Legislative Legal Services, had rejected an earlier version of the regulation which would have required the inclusion in a combined report of any legal entity without property and payroll of its own but which functioned through the use of personnel services or property of an affiliate. 7

It is noteworthy that although the court s ruling operated to cancel the Department s assessment in full, the court refused two alternative arguments made by Agilent. First, Agilent had argued that because four of World Trade s subsidiaries had made check-the-box elections to be disregarded, their wholly foreign property and payroll should be treated as belonging to World Trade, rendering World Trade an 80/20 company under C.R.S. 39-22-303(8) and (12)(c). The court disagreed, concluding that State statutes only required the Department to respect federal classifications in determining whether an entity should be defined as a C corporation, and did not require honoring the foreign subsidiaries treatment as disregarded entities for purposes of determining whether World Trade was an 80/20 company. (The result of this conclusion was to treat World Trade as having no property or payroll at all, which led to the court s ruling in Agilent s favor under the Department s regulation, described above.) Second, Agilent had argued that World Trade and Parent did not satisfy the 3-of-6 test for combination provided by C.R.S. 39-22-303(11)(a). Here, the dispute concerned whether World Trade s use of the word Agilent in its corporate name amounted to a substantial use of common intellectual property, as required to satisfy Test IV of the six statutory tests. Agilent contended that use of a trademark required its application to goods or services (which had not occurred), and moreover, that if a use had taken place, it could not be termed substantial because World Trade s status as an internal holding company meant that it derived no value from its incorporation of Agilent into its legal name. The court disagreed on both fronts, adopting an arguably broad notion of substantial use of intellectual property. Relying upon dictionary definitions, the court held that use requires only the act or practice of employing something, and substantial meant only that the use was real and not imaginary or illusory. The Department is within its period to appeal the district court s ruling to the Court of Appeals. An appeal is expected. 9. Oracle Corporation and Subsidiaries v. Department of Revenue, Case No. 115CV31175 (Denver Dist. Ct. Feb. 26, 2016). In a case involving certain of the same issues addressed in the Agilent case, the Denver District Court held that an Oracle holding company could not be included in a combined Colorado income tax report with its Parent. Oracle Japan Holding, Inc. ( OJH ) neither owned nor rented any real or tangible personal property, and it paid no compensation to employees. Its only asset consisted of 100% of the stock of Oracle Corporation Japan ( Oracle Japan ), Oracle s Japanese operating subsidiary. In 2000, OJH sold approximately 10% of its stock in Oracle Japan, realizing a capital gain of $6.4 billion. At issue was whether the Department of Revenue acted lawfully on audit in including OJH and thereby, the capital gain in its Parent s combined income tax return. As in the Agilent decision, the District Court held that Department Regulation 39-22-303.12(c) clearly and directly required the exclusion of entities without property and payroll of their own from a combined return with affiliates. Significantly, the court also rejected the Department s claim under C.R.S. 39-22-303(6) that Oracle s corporate structure in effect, if not by design amounted to an abuse of Colorado s income tax laws allowing the Department to reallocate the capital gain to OJH s parent. The court recognized the absence of any evidence in the record indicating that Oracle had created OJH with an aim to avoid state income tax. 8

Also as in Agilent, the court rejected the taxpayer s alternative argument that OJH s use of Oracle in its legal name did not amount to a substantial use of an affiliate s intellectual property. The court further declined Oracle s argument that the board of directors test (found at C.R.S. 39-22-303(11)(a)(V)) had not been satisfied. It determined that one of OJH s three board members could be considered an officer of OJH s parent based upon his title and job responsibilities, notwithstanding that the individual had not been elected as an officer by the parent s board of directors. An appealable judgment should issue shortly from the District Court. An appeal by the Department to the Court of Appeals is expected. 10. ConAgra Foods Food Ingredients Company, Inc. v. City of Commerce City, Case No. 2014CV31057 (Adams County Dist. Ct. Mar. 16, 2015). The Adams County District Court held that Commerce City violated the TABOR amendment to the Colorado Constitution by modifying its Sales and Use Tax Code ( Code ), without voter approval, to tax transactions in which a service provider merely used tangible personal property to provide its service. The subject transactions involved payments ConAgra made to a hauling contractor, W.W. Transport, Inc. ( WWTI ), to transport milled flour from ConAgra s flour mill in the City to its customers nationwide. The City assessed ConAgra s payments under Section 20-4-7 of its Code, titled Rental or Use of Tangible Personal Property of Another. Prior to November 1, 2010, Section 20-4-7 imposed tax on charges for the furnishing of tangible personal property by a vendor to its customer. In Waste Management of Colorado, Inc. v. City of Commerce City, 250 P.3d 722 (Colo. App. 2010), the Colorado Court of Appeals held that Section 20-4-7 did not permit a tax on transportation or hauling services, concluding that furnishing, as used in the Code, required a transfer of property from the vendor to the customer akin to a sale or rental. The City immediately responded to the Waste Management decision by enacting Ordinance 1838. Effective November 1, 2010, the Ordinance substantially expanded Section 20-4-7 to tax charges for the performance of a contract, of a total value in excess of $100, that involves the use... of tangible personal property, including all haul contracts that require vehicles or equipment to collect, assemble or transport product or materials. The City did not obtain voter approval for the Code modifications enacted by Ordinance 1838. ConAgra challenged Ordinance 1838 under the Taxpayer Bill of Rights ( TABOR ) Amendment to Colorado Constitution. TABOR requires State and local governments to obtain voter approval before enacting any new tax. ConAgra argued that Ordinance 1838 unlawfully enacted a new tax on a broad range of services, including WWTI s transportation services. The City attempted to distinguish Waste Management on grounds that the earlier case involved the use of generic transportation equipment, while ConAgra required specialized trucks to transport its goods. In March 2015, the District Court granted ConAgra s motion for summary judgment; held Section 20-4-7 to be invalid, unenforceable and void under TABOR; and directed the City to remove the unlawful provisions from its Code. Following a Motion for Reconsideration by 9

the City, the District Court adjusted its summary judgment ruling to require the City to remove specific sentences from Section 20-4-7, rather than striking the entire provision. On November 25, 2015, the Court granted ConAgra s Motion for attorney fees and costs under TABOR. The District Court awarded ConAgra more than $220,000 in attorney fees and costs. The City did not appeal the District Court s TABOR ruling or its fee award. Private Letter Rulings & General Information Letters 1. Private Letter Ruling 15-005 (Colorado Dep t of Revenue January 30, 2015). In this PLR the Department reaffirms its position in PLR 11-002 that members of an affiliated group subject to different apportionment methodologies (e.g., a service industry and a financial institution), which otherwise satisfy the statutory tests for combination, should still file a single combined report. The methodology used to calculate such a combined group s Colorado tax is set forth in PLR 11-002. 2. Private Letter Ruling 15-006 (Colorado Dep t of Revenue June 8, 2015). A company whose business is the acquisition, management, and collection of charged-off accounts receivable should apportion its gross receipts based upon where the cost to perform the service is incurred. The Department first analyzed whether the taxpayer was a financial institution and found that it was not, as the company did not provide any financial services, but purchased charged-off financial services. Moreover, the taxpayer was not registered as a bank, savings association or thrift institution under any state or federal law. Having determined that the taxpayer was not a financial institution the Department concluded that the general sourcing rules apply, and that the applicable general rule was that which applies to revenue from services rendered in Colorado. C.R.S. 39-22-303.5(4)(c)(I). The Department further stated that such service revenue is sourced to the place where the service is rendered and directed the taxpayer to use a proportionate cost of performance measure to source such revenue. 3. Private Letter Ruling 15-007 (Colorado Dep t of Revenue November 16, 2015). The Department advised a taxpayer in the business of selling and installing custom-made closet organizers that the separately stated charge for installing the organizer was subject to tax. The Department concluded that the closet organizers were made to order for each customer and that the separate installation fee was primarily for assembly of the organizer, which the Department viewed as manufacturing labor. If the taxpayer were to separate the assembly and the installation charge, the installation charge would be exempt if the customer has a reasonable option to purchase only the finished product and not the installation service. 4. General Information Letter (GIL) 15-012 (Colorado Dep t of Revenue April 24, 2015). The Department held that a restaurant s delivery charges were subject to sales tax 10

because they were not identified to the customer as a separable charge until the customer received the bill. The restaurant offered meals in person at the restaurant and by delivery when ordered by phone or online. If delivered, the restaurant imposed a delivery charge, which was separately stated on the customer s bill. However, the customer was not given written or oral notification that the delivery charge could be avoided if the customer picked up the food at the restaurant. Because of this failure to notify the customer of the charge prior to delivery, the charge was deemed part of the tax base. 5. General Information Letter (GIL) 15-015 (Colorado Dep t of Revenue June 8, 2015). This GIL addressed whether a plumber who used both lump-sum and time-and-material contracts may pay sales tax on all tangible personal property used in each contract regardless of how the contract was billed. The Department answered no to the question, holding that the form of the contract dictates how the sales tax is paid. If the contract is billed lump-sum, the taxpayer should pay sales tax on all of its purchases of tangible personal property used in the fulfillment of that job. If the contract is billed time-and-material, the taxpayer should purchase its materials free of sales tax and charge sales tax on the materials charges to its customer. 6. General Information Letter (GIL) 15-016 (Colorado Dep t of Revenue June 8, 2015). The Department instructed that a company that sells and delivers spare parts into Colorado was doing business in Colorado for purposes of sales and use tax collection. The Department advised that the presence in Colorado of one employee was sufficient to establish nexus. 7. General Information Letter (GIL) 15-025 (Colorado Dep t of Revenue December 15, 2015). The Department advised that the sale of a digital photograph is subject to sales tax as tangible personal property, even when transferred electronically. The Department has traditionally viewed digital goods, such as digital music, movies, books, and photographs, as tangible personal property because they are not merely a concept or idea, but, rather, are part of the physical world. 11

2016 Colorado Legislative Tax Update The 2015 Colorado legislative session ends Wednesday May 11, 2016. During the 120 day session the legislators introduced 667 bills including several bills specifically addressing state and local taxes. The following is a select summary on what passed and what did not pass this year. What Passed (or Might): HB 16-1041 Repeal of Bonding Requirement for Marijuana Businesses Repeals the requirement that marijuana businesses must obtain or provide proof of surety bonds to guarantee the payment of sales and use tax. (This will help Bruce in his sideline startup business.) HB 16-1301 Business Income Tax Credit for Apprenticeships Provides a state income tax credit up to $2,500 (construction) or $5,000 (industry) for taxpayers employing workers qualifying as apprentices. The credit is nonrefundable and may be carried forward for five years. Individuals and corporations qualify for the credit if they meet the following requirements: has a qualifying residency program or an apprenticeship program; is aligned with a postsecondary education or employment opportunity; employs a sufficient number of residency or apprenticeship case managers to monitor student participation in the residencies or apprenticeships provides students with training or course work that is designed to prepare students for the residency or apprenticeship program; implement adequate safety and supervisor safeguards for the students participating the residency or apprenticeship program; and retain at least one resident or apprentice. For a construction industry business to qualify, they must have at least one employee: who has graduated from a construction industry pre-apprenticeship program and been accepted into a construction industry program; or is a registered apprentice enrolled in a construction industry apprenticeship. HB 16-1332 Alternative Fuel Motor Vehicle Income Tax Credits This bill changes how the calculation is done for two current refundable income tax credits: the innovative motor vehicle credit and the innovative truck credit. Beginning in 2017, the bill replaces the current formulas with fixed credit amounts for each type of vehicle and weight class. In addition, the bill limits the credits to new, not used, vehicles and allows taxpayers to elect to transfer the credit to a financing entity. 12

SB 16-036 Surety Requirement for Appealing Tax Bills Relieves a taxpayer of paying or posting a bond in appealing a decision from the Department of Revenue to the District Court. SB 16-050 Hold Harmless Bill for Retailers Assigned Incorrect Location Codes This bill relieves retailers from liability for uncollected local sales tax for state-collected jurisdictions because of errors by the Department of Revenue in assigning location codes. SB 16-124 Expansion of the Sales Tax Exemption for Machinery to Recycling This bill expands the state s current sales tax exemption for machinery used in manufacturing to include machinery used by recyclers and solid waste processors. SB 16-130 Collecting Use Tax This bill prohibits the Colorado Department of Revenue from auditing anyone reporting and remitting use tax on their individual income tax returns for 2015 and eliminates the inclusion of the use tax on the individual income tax forms for future tax years. What Failed: HB 16-1037 Income Tax Credit for Employers of Persons with Disabilities This bill would have created two income tax credits for taxpayers who hire persons with developmental disabilities. HB 16-1087 Increase Vendor Fee for Collecting Sales Tax This bill would have increased the vendor fee for businesses remitting less than $75,000 in state sales tax annually to 4.5% effective January 1, 2018. The current state vendor fee is 3.33%. HB 16-1275 Tax Haven Legislation This bill would have required corporations filing combined reports to include income from affiliated corporations incorporated in tax havens. The Colorado Department of Revenue, using factors specified in the legislation, would determine which jurisdictions are tax havens and if an affiliate was created there for legitimate business purposes. The legislation would have been subject to voter approval. Similar to HB 15-1346 introduced last year. HB 16-1372 Colorado Work Opportunity Income Tax Credit This bill would have created a state version of the federal Work Opportunity Tax Credit (WOTC). 13