Colorado Bar Association 2014 Annual Case Law Update Tax Law Update

Colorado Bar Association 2014 Annual Case Law Update Tax Law Update Tyler Murray 1 Sales and Use Tax Dep t of Revenue v. Public Service Co. of Colo., 330 P.3d 385, (Colo. 2014). Public Service Company of Colorado ( Public Service Co. ) is a producer of electricity, who provides electric services directly to consumers. In 2001, Department of Revenue ( DOR ) issued Director Determination ( DD ) 567 in an unrelated matter, and stated that electricity production was manufacturing a tangible personal property for sales and use tax purposes, and thus machinery used for such purposes is subject to exemptions in C.R.S. 39-26-709 [Sales and Use Tax Exemptions] & 39-30-106(1) [Urban and Enterprise Zone Exemptions]. The Enterprise Zone exemption statute was not at issue here. C.R.S. 39-26-709(1)(a)(II) provides for the exemption from sales and use tax for machinery used directly and predominantly in manufacturing tangible personal property. In response, Public Service Co. filed a claim for refund under DD 567 for years 1998 to 2002. The Department of Revenue issued partial refund and Public Service Co. filed protest for remainder. After a review, the DOR issued DD 598, denying refund in entirety, determining that electricity is not tangible personal property and that the production of electricity is not manufacturing since electricity is not comprised of the raw materials. On appeal to the Denver District Court, the Court ruled that electricity is tangible personal property, generating electricity is manufacturing, and that Public Service Co. was entitled to claim the machinery exemption, and thus receive a refund. The Court of Appeals affirmed the district court s ruling. The Supreme Court held that since electricity is taxed as a service pursuant to C.R.S. 39-26-104(1)(d.1), the General Assembly decided it was a service not a tangible 1 Tyler Murray, LL.M., Associate Attorney, Gantenbein Law Firm, tyler@gantenbeinlaw.com, 720-432- 5619 1

personal property. Thus furnishing electricity is a service for sales tax purposes, and the machinery used in connection with that service does not qualify under C.R.S. 39-26- 709 & 39-30-106(1). The Court noted that C.R.S. 39-26-104(1)(d.1) includes gas and electric service, and that natural gas is tangible personal property for sales and use tax purpose. Pioneer Natural Resources USA, Inc. v. Dep t of Revenue, Colo. Ct. App. No. 12CA1703, (August 14, 2014). Pioneer Natural Resources, USA, Inc. ( Pioneer ) operates natural gas wells and compressor sites in Colorado s South Central Enterprise Zone. Pioneer extracted, pressurized, and transported natural gas in the Raton Basin Enterprise Zone to processing stations before being distributed to consumers. For tax years 2003 and 2004, the Department of Revenue ( DOR ) determined that Pioneer s pipelines and fittings did not qualify under C.R.S. 39-26-709 & 39-30- 106 for exemption from sales and use tax as machinery used in the manufacturing of tangible personal property. The DOR determined that the pipelines and fittings did not fall under the definition of manufacturing. On administrative appeal within the DOR, a hearing officer agreed with the DOR. Pioneer sought judicial review of the DOR s determination to the district court. On cross-motions for summary judgment, the district court ruled in favor of Pioneer. Before making a determination, the Court recognized the principal that tax exemptions are the exception, and taxation is the rule, thus any ambiguity in the statute is construed against the taxpayer. Under that paradigm, the Court looked at definition of machinery and manufacturing in C.R.S. 39-26-709(1)(c)(II) & (III) & 39-30- 106(1)(a). The enterprise zone exemption statute expands on the definition of manufacturing under C.R.S. 39-26-709(1)(c)(III) to include refining, blasting, exploring, mining and mined land reclamation, quarrying for, processing and beneficiation, or otherwise extracting from the earth or from waste or stockpiles or from pits or banks any natural resource. C.R.S. 39-30-106(1)(b). Pioneer s pipelines and fitting move natural gas from one direct production step to another in a continuous flow. 2

The Court found that Pioneer s pipelines and fittings are exempt from sales tax as machinery used in manufacturing under the expanded definition of manufacturing in C.R.S. 39-30-106(1)(b), since the natural gas was extracted and processed by Pioneer. Pioneer is entitled to a refund for state sales tax paid on the machinery. Qwest Corp. v. City of Northglenn & City of Thornton, Colo Ct. App No. 13CA0285, (April 24, 2014) From 2002 to 2005, Qwest Corp, ( Qwest ), a telephone services provider, maintained a facility in Thornton, across the street from Northglenn. Qwest mistakenly paid Northglenn, instead of Thornton, the use tax due for the years at issue. There was evidence that Qwest knew of the mistake in 2002, but did not correct it. In 2005, Qwest corrected the mistake, and began paying its use tax due to Thornton. In 2008, Thornton audited Qwest, and discovered that they did not receive any use tax payments from 2002 to 2005. After agreements to extend the statute of limitations and the method of determining the tax owed, Thornton issued Qwest a use tax assessment of $65,862.19. In 2010 Qwest requested a hearing with the Department of Revenue ( DOR ) pursuant C.R.S. 29-2-106.1(3) to resolve use tax liability for years 2002 through 2005 to Thornton, and joined Northglenn as a party to the dispute for the first time. C.R.S. 29-2-106.1(6) provides that if a disputed tax paid to the wrong taxing authority, then the local government must forward the tax to the correct local government, and eliminates the taxpayer s liability, including penalties and interest, to the extent the erroneous payments satisfy the tax obligation that would have been due. The taxpayer is also entitled to a refund if too much tax was wrongfully paid. The taxpayer is treated as if they made the payments to the correct taxing authority on the date the taxes were paid. At the hearing, the DOR determined that Qwest was liable to Thornton for the use taxes due, and that Qwest is time-barred from recovering the erroneous taxes paid to Northglenn. Qwest appealed to the district court, who affirmed the DOR s decision on summary judgment. Colorado provides for a three year limitation to collect use taxes after the date the taxes are due. C.R.S. 39-26-210. Many local governments use the same period of limitation. Qwest knew of the three year limitation to collect taxes, and agreed to allow 3

Thornton to extend the same. Qwest never attempted to bring Northglenn into these negotiations. The Court held that the any action to collect language in C.R.S. 39-26- 210 applies to Qwest s attempts to force Northglenn to remit the use taxes received in error to Thornton. Thornton is also precluded by the three year limitation to collect the taxes from Northglenn. Since Qwest did not inform Northglenn of the mistake until 2010, eight years after the erroneous payments began, the three year limitation to collect from Northglenn ran, and they cannot require Northglenn to satisfy their obligation to Thornton for use taxes due. The Court found that C.R.S. 29-2-106.1 is a legal remedy, and not a defense. Judge Jones dissented, arguing that Qwest was not bringing an action to collect the use tax due to Thornton. According to the dissent, Qwest was using C.R.S. 29-2- 106.1 as a defense to the assessment issued by Thornton, contrary to the majority opinion s characterization of that statute as a legal remedy, and not a defense. The dissent also pointed out that only a taxing authority can issue a notice of deficiency, and that taxpayers cannot. Thus if no local government issues such a notice, any taxpayer who is mistakenly paying the wrong tax will have no remedy if they do not discover their mistake within three years. The burden is shifted from the government, to the taxpayer. The dissent also found the holding to be inequitable, since Thornton can only pursue the tax based on Qwest s agreeing to allow it, while denying their defense as time-barred. Daimler Chrysler Financial Svcs. Americas, LLC v. Dep t of Revenue, Colo. Ct. App. No. 12CA2559, (March 13, 2014) Daimler Chrysler Financial Services Americas, LLC ( Daimler ) purchased the assignments of vehicle installment contracts purchased from motor vehicle dealers at the time of purchase by the consumer, including the amounts due on the contracts, as well as the sales taxes. After the assignment, Daimler held the lien on the vehicles. The dealerships, which are independent entities, and not wholly owned affiliates or subsidiaries of Daimler, would remit the sales tax to the Department of Revenue ( DOR ). If a consumer then defaulted on the installment contract, Daimler would repossess the vehicle securing the obligation. If the contract was not satisfied by the sale of the collateral, Daimler would charge off the remaining balance as a bad debt for 4

federal income tax purposes. Here, Daimler sought a refund or bad tax credit from the DOR for bad debts that were charged off after the sales taxes were paid on the full amount of the contract. After the DOR denied Daimler s claim for refund, they appealed to the district court, who also held in favor of the DOR. C.R.S. 39-26-102(5) provides that taxes paid on gross sales, that later become worthless and charged off for income taxes, may be credited back to the taxpayer. A taxpayer is any individual, firm, LLC, partnership, corporation, trust or any group or combination acting as a unit. C.R.S. 39-1-102(6) & (17). Daimler contended that they are a group acting as a unit with the dealers, who actually paid the tax. However, they do not fall into the provisions of C.R.S. 39-1-113(6), which address tax refunds or credits for seller-financed motor vehicle sales. A seller-financed sale requires that the seller who provides the consideration retains the lien on the vehicle. Since Daimler was not the seller, but did retain the lien, they did not qualify for relief under this section. C.R.S. 39-1-113(6) was more relevant than C.R.S. 39-26-102(5) since it dealt directly with motor vehicle bad debts for installment sales. Since 39-26-102(5) did not apply, there was no need to address the claim that Daimler and the dealership were a group acting as a unit. The Court also held that the dealers do not qualify as seller-finances under C.R.S. 39-1-113(6), they cannot assign that right to Daimler. Under this interpretation of the law, no one can claim the credit or refund of sales taxes, since neither Daimler or the dealerships qualified under the statutes. Property Tax Village at Treehouse, Inc. v. Property Tax Administrator, Colo. Ct. App. No. 12CA0988, (Jan. 16, 2014) The Village at Treehouse, Inc. ( the Village ) purchased the development rights ( forever, all right, title, and interest ) for 19 condominium units from the Treehouse Condominium Association, Inc., ( the HOA ) for over one million dollars. Any units built by the Village would become part of the HOA, and four the nineteen units were developed. The HOA created the development rights in 2006, and conveyed them to the 5

Village in 2008. The sales assignment, entitled Warranty and Assignment of Supplemental Development Rights, ( the Assignment ) provided the Village with full rights to develop properties within the HOA, or sell the development rights. Additionally, the Assignment stated that the development rights constitute a real property interest. The Assignment was recorded with the Summit County clerk and recorder. As a result of the sale and recording, the Summit County Assessor created a separate tax schedule for the development rights, and assessed the Village. On request for abatement, the County Board rescinded the assessment. However, since the amount of tax at issue was greater than ten thousand dollars, the Property Tax Administrator ( Administrator ) was required to review the abatement and refund. C.R.S. 39-1-113 & 39-2-116. The Administrator subsequently denied the refund. On petition, the BAA upheld the Administrator s decision, ruling that the development rights were permanently and irrevocably severed and are taxable interests in real property for ad valorem purposes. The Village appealed the determination that the development rights were taxable arguing that the rights were not interests in real property, they were already included in the value of the HOA common elements, and that taxing them would be a violation of the unit assessment rule in C.R.S. 39-1-106. The Village denied that the development rights were severed from the HOA common elements, even though they admitted that only they, and not the HOA or anyone else, had the right to develop the units. The Village also contended the development rights were future, or contract, rights, and not subject to property tax. The Court of Appeals was not persuaded by the Village. They held that the development rights are an interest in real property. Since the rights are an interest in real property, they are subject to tax under C.R.S 39-1-102(14)(a) & (16). Also, there was no violation of the unit assessment rule (requiring that real estate is assessed as an entirety to the owner of the fee estate, including lesser estates) since the Village had the full rights to develop the units forever. The development rights are a separate interest in real property, and not a lesser estate. 6

Lodger s Tax Expedia Inc. v. City and County of Denver, Colo. Ct. App. No. 13CA0779, (July 3, 2014) Expedia, and other online travel companies ( OTCs ), offer hotel rental services to customers. The ones at issue here facilitate the furnishing of lodgings between customers and hotels using the Merchant Method. Under this method, the hotels provide the OTCs a price per room, and OTCs sell to consumers with a mark up. The OTCs did not guarantee a right to room to the customers. Rather, once receiving an order from a customer, they would confirm the availability of the reservation with the hotel before confirming the transaction. Then the OTCs would collect payment in full from the customer, and remit the hotel s share and lodger s tax to the hotels, who remit the tax as part of their normal lodger s tax filings. The OTCs would collect and remit the taxes based on amount charged by hotel, not including OTCs mark up. This was the OTCs only involvement with the customers. The hotel was responsible for providing the lodging are the same as if the customer purchased the room rental directly from the hotel. The City and County of Denver ( the City ) never required OTCs to obtain a lodgers license, but still determined they were furnishing lodgings for purposes of calculating the amount of lodger s tax due on the transaction. The City had been reviewing this issue since as early as 2003. However, no action was taken until 2010, when approximately forty million dollars in assessments, including penalties and interest, were assessed the OTCs. Each OTC who received and assessment protested the assessment and required a hearing. Despite a stipulation that if the OTCs owed anything, it was $4,652,522, the hearing officer awarded Denver $8,176,648. The OTCs sought review of the hearing officer s determination. The District Court affirmed the hearing officer s determination, but applied a three year limitation for tax assessments under the Municipal Code, and reduced the award to Denver to $3,564,791. The OTCs appealed the award, while Denver appealed the application of the three year limitation on assessments. The Court of Appeals recognized that ambiguities in tax provisions should be resolved in favor of the taxpayer, and against the government, and that they will not 7

extended beyond the clear meaning of the language used. Under that paradigm, the Court held that OTCs, using the Merchant Model, are not furnishing lodgings for purposes of the lodger s tax, and that they are not vendors, as required under the Municipal Code. Since the OTCs are not vendors, and are not furnishing lodgings, their fees and mark-ups are not subject the lodger s tax. The lodger s tax is due based on amount paid to the hotel for furnishings lodgings. The Denver Municipal Code requires vendors to collect the tax, and pay it to the City and County OTCs are not liable for tax. Employee Classification Industrial Claims Appeals Office v. Softrock Geological Svcs, Inc., Supreme Ct. No. 12SC501 (May 12, 2014). Waterman Ormsby ( Ormsby ) contracted with Softrock Geological Services, Inc. ( Softrock ) from 2007 to 2010. Ormsby was treated as an independent contractor, and not an employee of Softrock. Ormsby used his own vehicle, tools, equipment, business cards and liability insurance. However, Ormsby only contracted with Softrock at this time, as he was unaware of other opportunities. In 2011, the Division of Employment and Training issued Softrock a Notice of Liability concerning the failure to pay unemployment tax premiums for Ormsby. Softrock appealed the determination to the Industrial Claims Appeals Office ( ICAO ). An ICAO hearing officer concluded that Ormsby was a contractor, and not an employee, even though he solely contracted with Softrock. The hearing officer s conclusion was overturned by a subsequent ICAO hearing panel, since Ormsby only provided services to Softrock, thus he was an employee, using that as the only test. Softrock appealed, and the Court of Appeals determined that the ICAO panel incorrectly relied on a single factor (whether or not services were performed to more than one person or entity), and remanded the case back to the ICAO panel to apply the nine-factor test found in C.R.S. 8-70-115(1)(c). The Supreme Court ruled that the nine-factor statutory test is helpful, but not the only factors to consider in determining whether a contractor is an employee or not. The totality of the circumstances test that evaluates the dynamics of the relationship between 8

the putative employee and the employer is to be used. The nine factors are relevant, but other issues may be considered. The statutory factors are not an exhaustive list. The statutory factors from C.R.S. 8-70-115(c) are: (I) Require the individual to work exclusively for the person for whom services are performed; except that the individual may choose to work exclusively for the said person for a finite period of time specified in the document; (II) Establish a quality standard for the individual; except that such person can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed; (III) Pay a salary or hourly rate but rather a fixed or contract rate; (IV) Terminate the work during the contract period unless the individual violates the terms of the contract or fails to produce a result that meets the specifications of the contract; (V) Provide more than minimal training for the individual; (VI) Provide tools or benefits to the individual; except that materials and equipment may be supplied; (VII) Dictate the time of performance; except that a completion schedule and a range of mutually agreeable work hours may be established; (VIII) Pay the individual personally but rather makes checks payable to the trade or business name of the individual; and (IX) Combine his business operations in any way with the individual's business, but instead maintains such operations as separate and distinct. 9