Colorado Ruling Addresses Whether State Tax Nexus Extends to Local Jurisdictions

In a “home rule” state like Colorado, a taxpayer with nexus in a specific locality is required to collect the appropriate state and local taxes in that locality, but not necessarily the local taxes in other localities in the state.

By Tina Chunn, SALT senior manager

Determining state tax nexus can often be confusing. But have you ever thought about local tax nexus? Generally, once a taxpayer has established nexus in a state, they are required to collect the appropriate tax in all localities administered by the state.

However, some states have allowed local tax jurisdictions to establish “home rule,” whereby the local jurisdictions are granted the authority by the legislature to enact their own sales tax rules and regulations and to administer those taxes separate from the state. In contrast, most other states only provide for local jurisdictions to enact rules and regulations within a defined scope (typically allowing variance in the rates), but actual administration of the tax occurs at the state level. By allowing local jurisdictions to enact their own rules and regulations, local jurisdictions in these states may make their own determination of nexus separate from the state nexus requirements. States that allow home rule sales tax administration are Alabama, Arizona, Colorado, Illinois and Louisiana. Alaska does not have a state sales tax, but many local jurisdictions enact and administer local sales tax.

This difference can be important in the determination of the required collection and remittance in local jurisdictions. In a home rule state, if the taxpayer establishes nexus based on the activities a business has with a specific locality, they are required to collect the appropriate state and local taxes in that locality but not necessarily the local taxes in other localities in the state.

Recently, Colorado released a private letter ruling addressing whether a company is obligated to collect state-administered local jurisdiction sales tax. In this ruling, it was determined that the company did not have a business presence in the state-administered cities and counties and thus was not obligated to collect city and county sales tax. [1]

The company sells prepress products and supplies to distributors, wholesalers, retailers and end-users. The company provided installation services on these products in home rule cities from 2012 to 2014. Additionally, the company sells service contracts for repair and maintenance service on these products. These repair and maintenance services are performed on the customer’s site by company employees, as the company does not have a service facility in Colorado. One of the service contracts in 2012 was with a customer located in a state-administered local tax jurisdiction.

The company does not have a physical location or property in the state. Goods are shipped to customers by common carrier from outside the state. Three employees are Colorado residents, including a sales representative working out of her home, a field service technician that rarely works in Colorado and a systems technical consultant that provides on-site software support but rarely works in a state-administered city or county.

Colorado ruled that although the company did have substantial nexus with Colorado as a result of the employees’ activities, the company did not have physical assets or employees in state-administered local jurisdictions. Thus, the company did not create a business presence in these state-administered local jurisdictions. Since the products are shipped from a destination outside where it is located, the company would not have an obligation to collect sales tax for the state-administered cities and counties. [2]

However, Colorado does have special districts that have a statutory authority to impose use tax which is also administered by the state. [3] Since the products are shipped from out of state, the company would be required to collect the retailer’s use tax on deliveries in the state and these special districts. The cities and counties do not have a use tax; therefore, the company would not have an obligation to collect a state-administered city and county use tax.

Although this ruling is limited to the state-administered city, county and special district sales and use taxes, it is noted that the Department does not collect these taxes for self-collected home rule cities and counties. The company was advised to consult directly with these local governments for a determination of the applicability of these taxes.

As a comparison to this ruling, states that do not have home rule for sales and use taxes, such as Georgia, would require the combined state and local sales and use taxes to be collected and remitted for all local jurisdictions once nexus has been established anywhere in the state. For example, if a taxpayer has a store only in Atlanta but ships goods sold to a customer located in Savannah (Chatham County), the taxpayer would be required to collect Georgia’s four percent state sales tax and Chatham County’s three percent sales tax even though the taxpayer does not actually have nexus in Chatham County.

It is important for a company to fully examine its nexus requirements in these home rule states, particularly as many of these states have a cumbersome local tax collection process where registration and filings are administered by each local jurisdiction instead of a combined filing at the state level.

The SALT Services Team at Aprio is experienced with sales and use tax nexus and the varying state and local requirements. We are here to assist you in reviewing your transactions to make determinations regarding these requirements for your sales transactions. We constantly strive to keep our clients advised of important issues and developments in state and local taxes in order to help them address their specific tax situations. We will continue to monitor these and other significant sales tax developments and include any updates in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn, SALT senior manager, at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2016 SALT Newsletter. To view the newsletter, click here.

[1] PLR 16-0010, Colorado Department of Revenue, April 18, 2015. The ruling was released to the public on June 24, 2016.

[2] Sec. 29-2-105, C.R.S.

[3] Sec. 43-4-605(1)(i), C.R.S.; Sec. 32-13-107(1)(a), C.R.S.; Howard electric v. State Department of Revenue, 748 P 2d 1321 (Colo. App. 1987).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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