The State of Colorado has been busy this legislative session with respect to its tax structure. Of particular note, and the subject of this article, are two of its bigger sales tax related law changes – (1) local business licenses (i.e., registrations) in the home rule cities, and (2) new civil penalties related to certain refund claims.
Home Rule Local Business Licenses
Whether it be from fear of defending itself against potential legal action (see the Halstead Bead lawsuit against Louisiana, another state where the local jurisdictions administer their own taxes) or simply to make life easier for remote sellers, Colorado is lessening the burden imposed by it’s 70 or so home-rule cities.
With the signing of Senate Bill 32 by Governor Polis on April 21, 2022, Colorado is taking steps to simplify its onerous sales tax compliance and administration for retailers. The changes apply to retailers without physical presence or with only incidental physical presence in local taxing jurisdictions in which they make retail sales. The Colorado Department of Revenue’s electronic tax administration infrastructure, including the electronic sales and use tax simplification system known as SUTS, can be used by local taxing jurisdictions to make the imposition, collection, and administration of local sales and use taxes collected by such retailers.
Within Senate Bill 32, the new law provides that beginning July 1, 2022, each local jurisdiction (i.e., home rule city) is required to grant a general business license1, free of charge, to such retailers who have a state standard retail license issued by the state, so long as the local jurisdiction has not previously revoked the retailer’s general business license due to noncompliance.
Additionally, starting July 1, 2023, a local taxing jurisdiction is prohibited from requiring a retailer with a state-issued standard retail license to apply separately to the local taxing jurisdiction for a general business license. If the local jurisdiction requires a general business license, it will automatically issue one at no charge using information provided by SUTS.
Finally, and perhaps more importantly, Senate Bill 32 directs the Colorado Department of Revenue (“Department”) to require and gather certain information from retailers that are applying for or renewing their standard retail license within SUTS or by other means and to make that information available to the home rule cities “to ensure that concerns of local taxing jurisdictions, including but not limited to concerns relating to administrative efficiency, retailer compliance, and collection of sales and use tax revenue are addressed.” Currently, many retailers choose not to register and/or collect tax in Colorado’s home rule cities. The complexity and administrative burden outweigh the risk of being caught or audited. With the enactment of Senate Bill 32, since the state and the home rule cities will be sharing information on state-registered remote retailers, we believe that remote retailers are going to have to register to collect tax in and file in all the home rule cities starting July 1, 2023. More information will be issued by the Department between now and July 1, 2023.
New Civil Penalties on Certain Sales Tax Refund Claims
Also on April 21, 2022, Governor Polis signed House Bill 1118, which creates new civil penalties if a purchaser files a claim for refund or tax paid that is incomplete, duplicative, or lacks a reasonable basis in law or fact. These changes apply to refund claims made by a purchaser for sales or use tax paid to a vendor on or after July 1, 2022, but before July 1, 2026, and to claims totaling $5,000 or more. The bill also reduces the time when interest applies on a valid refund claim, starting the interest calculation when the claim is filed instead of when the property is purchased.
The Executive Director of the Department shall assess and collect the civil penalty, in the same manner as a sales or use tax deficiency. The civil penalty shall be imposed on the purchaser filing the claim unless the claim for refund is prepared, in whole or in part, by a person other than the purchaser, in which case the penalty is imposed on that person. If a tax consultant files a refund claim on behalf of a client, the penalty could be imposed on the consultant. The Executive Director is required to give the person against whom the penalty is assessed written notice. Within 30 days after such notice is mailed, the person against whom the penalty was assessed may petition the Executive Director for a hearing and may appeal to the district court.
5% penalty for incomplete claim
A claim is incomplete if it does not include the Form DR 0137B and substantially all of the pertinent data, information and documentation required as laid out in the form instructions.
Prior to assessing the 5% penalty, the Executive Director must notify the purchaser or preparer of the claim that it appears to be incomplete. The notification must specify the pertinent data, information and documentation that appears to be missing and must state that failure to either correct the omission or withdraw the claim within 60 days (additional time allowed for reasonable cause) will result in the assessment and collection of the penalty.
10% penalty for duplicative claim or claim lacking a reasonable basis in law or fact
A claim may be considered duplicative if it contains transactions that were part of a previously filed claim, or if the claim itself in whole or in part was previously filed. The Executive Director may waive the civil penalty imposed if the person against whom the penalty is assessed:
- Establishes that a duplicate claim was not intentional and was either minimal or immaterial; or
- Demonstrates other good cause for waiver.
If an application for refund is identified at the time of filing as a “Protective Claim” filed in order to preserve the right to a refund prior to the expiration of the statute of limitations, the Executive Director will determine if the claim is subject to the civil penalties after the claim for refund is perfected.
Let Clarus Partners help you navigate these changes in Colorado and what they mean for your business.
By Greg Hayden and Brian Hollingsworth
1 “General business license” means a license issued by a local taxing jurisdiction that a retailer must obtain to legally make retail sales in the local taxing jurisdiction regardless of whether the license is called a business license, a sales and use tax license, or by another name. An occupational license or any other license required to engage in a business activity other than making retail sales of goods is not a general business license.