May 18, 2019

Colorado Court of Appeals: City Improperly Imposed Use Tax on Purchases from Wholesalers that were Later Sold at Retail

The Colorado Court of Appeals issued its opinion in Big Sur Waterbeds, Inc. v. City of Lakewood on Thursday, October 4, 2018.

Sales and Use TaxDisplayed Furniture—Primary Purpose of Purchase.

The City of Lakewood (Lakewood) imposes use tax on tangible personal property purchased at retail and used in the city. The use tax does not apply to wholesale purchases (i.e., purchases for resale to others). Big Sur Waterbeds, Inc., Denver Mattress Co., LLC, and Sofa Mart, LLC (collectively, plaintiffs) purchase furniture tax-free from wholesalers worldwide and resell it in stores, including in Lakewood. At each Lakewood store, plaintiffs provide a showroom where they display furniture for customers to peruse and try out. Plaintiffs also maintain warehouses where they store the bulk of their inventory. Plaintiffs ultimately sell all the furniture, including the displayed furniture, and fill customer orders from either the warehouses or the showrooms. Plaintiffs’ customers pay Lakewood’s sales tax on each purchase.

Lakewood assessed use tax on plaintiffs’ purchases of displayed furniture from 2012 to 2015, on the theory that plaintiffs purchased the displayed furniture at retail for their own use in advertising their products. Plaintiffs challenged the assessments in the district court, which entered judgment in their favor.

On appeal, Lakewood contended that while plaintiffs’ inventory purchases were initially treated as exempt wholesale purchases, when a portion of this wholesale inventory was withdrawn for use as demonstration and promotion tools, the transactions were properly recharacterized as taxable retail transactions. Lakewood relied on its Initial Use Regulation and regulation 3.01.300(1)(b), pertaining to initial use of property, which focus on the primary purpose of the purchase. The court of appeals employed the “primary purpose” test from A.B. Hirschfeld Press, Inc. v. City and County of Denver, 806 P.2d 917, 918–26 (Colo. 1991), and determined that the totality of plaintiffs’ conduct indicates that they purchased the displayed furniture primarily for resale in an unaltered condition and basically unused. Because plaintiffs purchased the displayed furniture primarily for resale, not for their own use or consumption, the Initial Use Regulation does not apply. Similarly, regulation 3.01.300(1)(b), which pertains to tax-free purchases for resale that are later removed from inventory for the purchaser’s own use, does not apply because the displayed furniture was always available for resale and eventually sold. Therefore, Lakewood’s use tax does not apply to the retailers’ purchases and minor use of the furniture for display.

The judgment was affirmed.

Summary provided courtesy of Colorado Lawyer.

Colorado Court of Appeals: County Lacked Authority to Impose Special Tax on Recreational Marijuana

The Colorado Court of Appeals issued its opinion in City of Northglenn v. Board of County Commissioners on Thursday, December 15, 2016.

County Special Sales Tax—Retail Marijuana—Home Rule Cities—Standing.

In 2014, Adams County (County) voters approved a resolution authorizing the County to levy a countywide special sales tax on retail marijuana. Three home rule cities (Cities) in the County challenged the tax, claiming that it was unauthorized by Colorado law. The Cities sued the County, seeking an injunction and declaratory judgment against the tax, and the County moved to dismiss for lack of standing and for failure to state a claim upon which relief could be granted. The district court held that the Cities had standing and concluded that there was sufficient legislative authority to support the countywide special sales tax. The court converted the County’s motion for failure to state a claim upon which relief could be granted into a motion for summary judgment and granted summary judgment to the County.

On appeal, the County argued that the district court erred in determining that the Cities had standing to bring their claims. Here, the County’s special sales tax likely would harm the fiscal interests of the Cities by reducing their tax revenues. In addition, the fiscal integrity of a home rule city is a legally protected interest of the city, and the tax would harm the fiscal integrity of the Cities. Thus, the district court correctly held that the Cities had standing.

The Cities argued that the retail marijuana sales tax did not expressly grant the County authority to impose a special sales tax and, therefore, the tax was invalid. A county has no power to impose a tax unless the General Assembly or the Colorado Constitution directly authorizes it. Here, the County made no claim of authority under the Colorado Constitution, and the retail marijuana sales tax did not grant the County express authority to enact its special sales tax. Because the County did not have either constitutional or statutory authorization to impose a special sales tax on retail marijuana, the Adams County special sales tax is invalid.

The judgment was reversed.

Summary provided courtesy of The Colorado Lawyer.

HB 13-1036: Modifying Law Pertaining to Local Improvement Districts

On January 9, 2013, Rep. Jonathan Singer introduced HB 13-1036 – Concerning the Authority of a Local Improvement District.  This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The bill modifies certain provisions of the law governing county and city and county local improvement districts (districts) to make the provisions consistent with the law governing improvement districts. The bill allows a district in which a sales tax is levied to include noncontiguous areas.

The bill allows a district to use sales tax revenues for the organization, promotion, marketing, and management of public events. It further specifies procedures for a property owner to petition for inclusion in or exclusion from a district. On Jan. 23, the Local Government Committee amended the bill and sent it to the Appropriations Committee to deal with the fiscal impact to the state.

Tenth Circuit: Tribe Failed to State a Claim that Oklahoma Cigarette Sale and Tax Laws Violate Federal Law or Tribal Sovereignty

The Tenth Circuit Court of Appeals published its opinion in Muscogee (Creek) Nation v. Henry on Tuesday, February 28, 2012.

The Tenth Circuit affirmed the district court’s decision. Petitioner Tribe sued the Oklahoma Tax Commission seeking declaratory and injunctive relief based on numerous claims challenging three Oklahoma statutes that tax and regulate the sale of cigarettes and other tobacco products. “In Oklahoma, cigarette and other tobacco product sales to tribal members in Indian country are exempt from state taxes. To prevent non-tribal members from avoiding taxes on their purchases of such products in Indian country, Oklahoma adopted a tax-stamp scheme to ensure that taxes are collected for those sales. Oklahoma also requires tobacco product manufacturers either to enter into and make payments under a Master Settlement Agreement with the State or to pay a certain percentage of each sale into an escrow fund. Any brand of cigarette produced by a manufacturer that does not comply with these requirements is deemed contraband.” Petitioners object to these requirements as violative of federal law and tribal sovereignty, claiming that they are preempted by the Indian Trader Statutes and violate violate their right to tribal self-government. The district court dismissed the claims “based on the State’s Eleventh Amendment immunity or, alternatively, for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).”

The Court held that, based on Supreme Court precedent, the Tribe “has failed to state a plausible claim that the Excise Tax Statute is not valid and enforceable based either on preemption or on infringement of [their] right of tribal self-government.” The Tribe similarly failed to state a plausible claim that the Escrow Statute and the Complementary Act are invalid and unenforceable. While the district court erred in finding that immunity under the State’s Eleventh Amendment, it properly dismissed the claims for failure to state a claim.

Colorado Court of Appeals: Obtaining Medical Record Copies Is Obtaining Intangible Information Contained Within by Purchasing the Services Necessary to Retrieve and Copy Them

The Colorado Court of Appeals issued its opinion in Treece, Alfrey, Musat & Bosworth, PC v. Dep’t of Finance, City and County of Denver on November 23, 2011.

Tax Dispute—Use Tax on Costs of Obtaining Medical Records for Litigation.

The Department of Finance of the City and County of Denver (Department) appealed the district court’s judgment reversing a hearing officer’s determination that Treece, Alfrey, Musat & Bosworth, P.C. (law firm) owed use tax on the cost of obtaining copies of medical records from health-care providers for the law firm’s use in litigation. The judgment was affirmed.

The law firm represents clients in civil litigation. As part of its practice, it often must acquire photocopies of medical records. Generally, the law firm receives authorization to release records from the opposing party or its own client, provides the authorization to pertinent health-care providers, receives paper copies, and pays an invoice generated by the health-care provider. The law firm then receives reimbursement from an insurer of its client or directly from the client. The health-care provider does not charge sales tax when providing the records and the law firm does not pay sales tax, nor does it charge a sales tax to its client or the insurer. The records, kept in the law firm’s files, are owned by the law firm, the insurer, or the individual client.

The Department conducted a routine tax audit of the law firm from January 1, 2006 through December 31, 2008 and assessed use tax, penalties, and interest on the law firm’s costs paid to obtain medical records. The law firm contested the assessment and the hearing officer upheld it, concluding that the law firm “purchased tangible personal property for use in Denver in connection with its business and did not pay sales tax.”

The law firm appealed to the district court, which found an abuse of discretion and reversed the hearing officer’s judgment. The Department argued that the hearing officer’s decision was correct, and appealed. The Court of Appeals disagreed and affirmed the trial court’s judgment, albeit on different grounds.

The Court looked to the applicable tax provision, Denver Revised Municipal Code § 53-96, which essentially requires businesses that purchase tangible personal property in Denver for use and do not pay sales tax to pay use tax. The parties agreed that the physical documents obtained from health-care providers constituted tangible personal property. The parties disagreed on three points: (1) whether the copies were “sold” or “purchased at retail” because hospitals and doctors are not in the business of selling medical records at retail; (2) whether the photocopying of records for litigation purposes is a retail sale for consideration because they must be furnished without charge on presentation of authorization and they are not sold; and (3) whether the charge for photocopying reflects provision of a service versus a product.

The Court examined the nature of medical records. It found that a patient or authorized representative who seeks copies of a medical record receives, on payment of reasonable costs, both an item of tangible personal property (the documents) and the services or rights that are other than tangible (the labor involved in physical retrieval and copying, as well as the information in the record).

Neither statutory provisions nor the record allowed for a meaningful separation of the cost of providing the services and intangible property from the cost of providing the actual paper document. The Court therefore applied the “true object” test in which the Court analyzes the “totality of the circumstances” to determine whether the true object, dominant purpose, or essence of the transaction is the acquisition of tangible personal property or the acquisition of intangible services. The Court concluded the obtaining of medical record photocopies is not a transaction for the furnishing of tangible personal property, but that the true object is obtaining intangible information contained within the medical records by purchasing the services necessary to retrieve and copy them.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on November 23, 2011, can be found here.

Colorado Court of Appeals: The Purchase of Machinery to Generate Electricity for Sale is Exempt from Taxation because Electricity is Tangible Personal Property

The Colorado Court of Appeals issued its opinion in Public Service Co. of Colorado v. Colorado Dep’t of Revenue on September 15, 2011.

Sales and Use Tax—Electricity—Tangible Personal Property—Manufacturing.

Defendants, the Colorado Department of Revenue and M. Michael Cooke, in her official capacity as executive director of the department (collectively, Department), appealed from the judgment of the trial court reversing the Department’s final determination that plaintiff, Public Service Company of Colorado (taxpayer), was not entitled to a refund of sales and use taxes it paid on the purchase of machinery and machine tools used in the generation and distribution of electricity. The judgment was affirmed.

The Department argued that the district court erred in finding that electricity is tangible personal property and not subject to sales and use taxes. The parties stipulated that electricity is a commodity that is traded as a commodity on futures exchanges. Because electricity falls within one of the regulation’s clearly delineated categories of tangible personal property, the purchase of machinery and machine tools used in the manufacturing or generation of electricity, for sale or profit, is exempt from taxation under the machinery exemption and the enterprise zone machinery exemption.

The Department also argued that the generation of electricity is not manufacturing within the meaning of the sales and use tax statutes and regulations. However, the generation of electricity is manufacturing within the meaning of the sales and use tax statute and regulations, even though neither coal, gas, nor nuclear energy is physically incorporated into the finished product. Therefore, the production of electricity is manufacturing for purposes of the machinery and enterprise zone machinery exemptions.

The Department further contended that the step-up and step-down transformers must be excluded because they are used only for transmission and not for manufacturing, and that manufacturing is limited to a “contiguous plant site.” The manufacture of electricity, however, is not completed until the electricity is in a form usable by the retail customer, which occurs at the last step-down transformer prior to entering the consumer’s meter. Thus, the transformers are a necessary part of the generation or manufacture of electricity for use by the retail customers of the taxpayer for purposes of the machinery and enterprise zone machinery exemptions.

This summary is published here courtesy of The Colorado Lawyer. Other summaries for the Colorado Court of Appeals on September 15, 2011, can be found here.

HB 11-1318: Repealing HB 10-1193 Regarding the Collection of Sales and Use Taxes on Sales Made by Out-of-State Retailers

On May 2, 2011, Reps. Amy Stephens, R-Monument, and Sue Schafer, D-Wheat Ridge, and Sens. Nancy Spence, R-Centennial, and Greg Brophy, R-Wray, introduced HB 11-1318 – Concerning the policy of the state of Colorado regarding notification of use taxes due on sales made by out-of-state retailers, and making an appropriation therefor. This summary is published here courtesy of the Colorado Bar Association’s e-Legislative Report.

The bill repeals House Bill 10-1193 regarding the collection of sales and use taxes on sales made by out-of-state retailers enacted by the general assembly and signed into law on February 24, 2010, and repeals related rules promulgated by the department of revenue.

The bill also requires any retailer with gross annual sales totaling $500,000 or more that does not collect Colorado sales tax and that sells tangible personal property from a place of business outside this state for use in this state to notify the purchaser of Colorado purchases, either on its web site or by an email directed to the purchaser, that use tax may be imposed on the storage, use, or other consumption in this state of any items of tangible personal property purchased. The bill requires the notification to be readily visible. The bill also prohibits a retailer that does not collect Colorado sales tax and that sells tangible personal property from a place of business outside this state for use in this state from advertising that there is no tax due on purchases made from the retailer for use in this state. Introduced on Monday, the amended bill passed out of the Economic & Business Development and Appropriations Committees respectively on Wednesday, May 4. On 2nd Reading, the House amended the bill and passed it on Thursday; the bill cleared 3rd and final reading in the House on Friday.

Since this summary, the bill has been introduced in the Senate and assigned to the Senate State, Veterans & Military Affairs Committee, which postponed it indefinitely.

Summaries of other featured bills can be found here.

Update: Fruita Voters Impose State’s First Sales Tax on Medical Marijuana

The small Western Slope town of Fruita has become the first municipality in Colorado to charge a sales tax on medical marijuana.

Although Fruita does not yet have a single medical marijuana dispensary within its city limits, voters approved the measure in advance of the dispensary boon seen in other Colorado cities. Sales of medical marijuana will be taxed an additional 5 percent, on top of the current 3 percent sales tax in Fruita. The additional tax is expected to offset the administrative costs associated with operating dispensaries, such as criminal background checks and other law enforcement duties and land use considerations.

Listen to Colorado Public Radio’s Mike Lamp interview Fruita City Manager Clint Kinney to learn more about Fruita’s proactive taxing mechanism.

(image source: INeedCoffee / CoffeeHero)