Understanding Colorado Sales and Use Tax Challenges

Colorado Sales & Use Tax Presenter: Alan Smith Sales Tax Colorado, LLC

What Makes Colorado So Difficult? *Varied State vs. Local Laws and Rates *State and State-collected (statutory) cities, counties and special districts *Home-Rule Cities *Zip Code Issues *Mailing addresses don t reflect actual jurisdiction *Address verification needed to determine correct jurisdictions and rates 2 Sales Tax Colorado, LLC July 17, 2014

Why Does It Matter? *Increased Compliance Burden *Multiple Audits *Use Tax *Address example: 30 feet = $8656 vs. $16,159 Result: $7503 reduction in tax obligation! 3 Sales Tax Colorado, LLC July 17, 2014

Increased Compliance Burden *Multiple city registrations may be required. *Increased documentation requirements for local jurisdictions *Zero returns are often mandated. *Zip Code issues lead to errors in determining the correct city and rate. *Overpayment or undercharging can result and pose risk audit for both the vendor and the purchaser. 4 Sales Tax Colorado, LLC July 17, 2014

Multiple Audits *City & Contract Auditors *Some home-rule cities use their own auditors while others use contract auditors. *If you are picked for audit by a contract auditor city, other cities may be invited to participate in the audit! *The Auditor may notify the State or other cities. 5 Sales Tax Colorado, LLC July 17, 2014

Dont Forget About Use Tax *Use Tax applies to service businesses, medical practices and nearly every other business! *Don t believe the Myth! Reality: Internet purchases are not tax exempt. *Rate Differentials *Tax is due if the rate you paid is lower than your local home-rule city s rate. *Food for office/ commercial establishment use 6 Sales Tax Colorado, LLC July 17, 2014

Nexus *Wow! This is a tough area for businesses. *Definitions of Doing Business vary. *Deliveries in company vehicles and installations are usually triggers. *Door-step delivery alone in Denver isn t sufficient *One installation or more than one delivery can be considered sufficient. 7 Sales Tax Colorado, LLC July 17, 2014

Common Differences in Taxability *Construction *Delivery & Installation Charges *Information Services *Internet transactions *Manufacturing *Medical and Dental Supplies and Equipment *Software 8 Sales Tax Colorado, LLC July 17, 2014

Construction *Contractors are often considered the end-user so they are to pay the sales or use tax. *Purchaser s charitable/ not-for-profit exempt status may not pass through to contractor. *E.g. Denver taxes contractor s materials sold to Denver 9 Sales Tax Colorado, LLC July 17, 2014

Delivery & Installation Charges *Cities may consider more than one delivery per year in the company s own vehicle or just one installation as sufficient for nexus. *For the State, collect only for common jurisdictions if no business presence in other delivery locations*. *Non-physical location Branch Id s may be required by the State *CAUTION: One installation may be considered sufficient. 10 Sales Tax Colorado, LLC July 17, 2014

Information Services *Not a taxable service at the State level1 *Some cities such as Denver do tax information services regardless of format.2 *There may be exemptions for custom reports. * E.g. you hire a marketing company to conduct a specific survey for you. * Customized reports generated from existing information is not a custom report. *E.g. An Advertising Company s buy of rating information customized, but not custom. *CCH or similar tax research resources 11 Sales Tax Colorado, LLC July 17, 2014

Internet Transactions *If your state or local jurisdiction has an applicable use tax and would tax the sale at a brick and mortar store, use tax is due on the purchase. *Purchasers need to self-assess and remit use tax. *State-collected cities and counties use tax is limited to motor vehicles and building materials. *Home-rule cities usually do subject internet purchases to use tax. 12 Sales Tax Colorado, LLC July 17, 2014

Software & Maintenance Agreements *CO State doesn t currently tax electronically delivered software, but did from March 1, 2010 to June 30, 2012. *Cities such as Denver and Greenwood Village tax software regardless of format. *Mandatory Maintenance Agreements are generally taxable. *Optional Agreements with even the right to receive potential upgrades are generally taxable. 13 Sales Tax Colorado, LLC July 17, 2014

Multi-jurisdiction Filers *WHAT IS A MULTIPLE LOCATION FILER * A multiple location/jurisdiction filer is any entity filing sales or use taxes with the Colorado Department of Revenue with more than a single location, either physical or nonphysical. *WHAT IS REQUIRED OF MULTIPLE LOCATION FILERS * If your business will be selling, renting or leasing tangible personal property, you must get a sales tax license for each physical location. * Example: Account 12345678-0001 for Denver, CO * Account 12345678-0002 for Aurora, CO (Non-physical location Can be triggered by installation work) 14 Sales Tax Colorado, LLC July 17, 2014

CO State and Local Audits *CO State audits cover all DOR tax types *City audits It s about documentation. *Local issues focus more detail required *Invoicing * Ship To delivery address vs. Bill To address *Verification * Prove taxable purchased items were never in their city. * Prove how the delivery was made and where it went. *Occupation Privilege Tax and other tax types too 15 Sales Tax Colorado, LLC July 17, 2014

Sales Tax Audit Issues *Having incomplete sales invoices with no documentation to support pickup or delivery *Not identifying the sales tax charged to a specific taxing jurisdiction *Not breaking out installation labor clearly on sales invoices *Not having written training materials regarding sales tax for personnel to use when preparing sales invoices or ringing up merchandise in a POS system *Not keeping copies of valid resale certificates on file when customers provide them 16 Sales Tax Colorado, LLC July 17, 2014

Sales Tax Audit Issues cont *No documentation substantiating the reasons for exemption from sales tax (i.e.-resale certificate, letter of exemption, exemption certificate, etc.) *Not understanding how their sales tax system works. For instance, collecting tax for jurisdictions but not being licensed and not remitting the tax collected *Improper reporting of sales tax to various taxing jurisdictions *Not reconciling their sales tax liability account each time they do reporting *Not identifying all delivery locations and the proper sales tax for each on a sales invoice 17 Sales Tax Colorado, LLC July 17, 2014

Use Tax Audit Issues * Not identifying all items on invoices that are subject to use tax accrual based on the taxing jurisdiction s code(i.e. - items such as fuel surcharges) * Not accruing Denver use tax on manufacturing equipment in enterprise zones * Locking in on one vendor for use tax accrual and ignoring new vendors providing the same items * If providing supplies from a central warehouse, not accruing use tax for those supplies if not previously taxed * Depending on accounting systems to identify purchase invoices subject to use tax but not verifying the accuracy of the system 18 Sales Tax Colorado, LLC July 17, 2014

Use Tax Audit Issues cont *Remitting use tax accrued to the wrong jurisdiction *Making sure use tax accruals are done based on the taxing jurisdiction s tax code for what is taxable *Not accruing use tax on withdrawals of inventory for their own use *In Denver, not accruing use tax on all costs that are part of the manufactured cost for items where a retail market exists *Not accruing use tax on leases or rentals of equipment used in a taxing jurisdiction 19 Sales Tax Colorado, LLC July 17, 2014

Inter-city Credit Agreements *What if you paid the wrong city s tax? *Auditing city may seek the tax directly from the receiving city *Requires your written authorization *Credit only for tax legally due. *Paying tax to an unlicensed vendor is between you and the vendor. City will still want their tax! *Caution: Some Cities are limiting their refund period on intercity claims. 20 Sales Tax Colorado, LLC July 17, 2014

7. Real life examples, best practices and practical application *TIP: Evaluate and resolve past liabilities, register and file a return, limit the look-back period, and minimize your future liability. *TIP: Minimize use tax obligations by using your proper city name in your address and notify vendors of your true location and tax rates. *Are your products and services taxable? *Verify your Colorado customers true locations. *Are you prepared for an audit? 21 Sales Tax Colorado, LLC July 17 2014

8. Voluntary Disclosure Agreements *What do you do when you ve discovered significant prior obligations? *3rd party anonymous voluntary disclosure may be the right answer. *CO State and Home-Rule cities are generally willing to limit the look-back to three years and to waive penalties. *If tax wasn t collected, some are even willing to have you just register and comply going forward. 22 Sales Tax Colorado, LLC July 17, 2014

What Accountants Need To Know *Filing A Return Limits Look-Back. *Are your clients registered in every state and home- rule city where they re filing income tax returns, making deliveries or performing installations? *Are your client s products and services taxable? *What about Use Tax? It impacts nearly every business. *Are clients merging, buying or selling a business? *Help clients by letting them know about the CO State-certified address database. *How do your clients handle exemption certificates? 23 Sales Tax Colorado, LLC July 17, 2014

Questions? 24 Sales Tax Colorado, LLC July 17, 2014

Thank you! Alan Smith ISALES TAX COLORADO, LLC I 992 S. 4th Ave., STE 100-103 BRIGHTON, CO 80601 email: asmith@salestaxcolorado.com Phone: 303-289-6100 Web: www.SalesTaxColorado.com 25 Sales Tax Colorado, LLC July 17, 2014