A sales tax is a governmental tax paid on the sale or lease of certain goods and services. While there is no federal general sales tax, 45 states and the District of Columbia currently levy a statewide sales tax.
Sales Tax in Colorado
Colorado imposes a baseline sales tax of 2.9%, which would be the lowest sales tax rate in the country. However, Colorado is also one of 38 states that also allows for and collects local sales taxes at the city, county, and special district level. As a result, sales tax rates vary widely across the state. The average combined sales tax rate in Colorado for 2015 is 7.44%, the 15th highest in the United States.
Colorado is a “home rule” state. This means that certain municipalities, known as home rule cities or home rule municipalities, are granted power by the Colorado constitution to pass and enforce their own laws (so long as they do not conflict with the state or federal constitutions). As a result, many home rule cities and municipalities across the state impose their own sales tax at the local level.
The Colorado Department of Revenue (CDOR) collects the general state-level sales tax as well as local sales taxes for over 150 cities and over 50 counties. Over 70 home rule cities impose and collect their own sales taxes. The levying and collection of these home rule sales taxes operates outside of the CDOR. In addition to taxes based purely on city, the government may also require other special district sales taxes such as the Regional Transportation District (RTD) sales tax, which imposes an additional 1% tax on goods sold in areas covered by RTD services.
As an example, imagine that you operate a business in the Park Meadows Mall area of Lone Tree, Colorado. Lone Tree is a home-rule municipality located in Douglas County. First, your business would be required to pay the state sales tax rate of 2.9%. Second, you would be required pay a 1% Douglas County sales tax. Both of these taxes would be paid directly to the CDOR. Third, Lone Tree imposes a city sales tax rate of 1.8125%. Because Lone Tree is a home rule city, this tax is still collected at the point of sale but then must be paid directly to the city. Lastly, the Park Meadows Mall area of Lone Tree falls within the RTD sales tax district (additional 1%) and the Scientific and Cultural Facilities District (additional 0.1%).
As you can imagine, the wide array of sales tax rates and districts across the state can lead to complicated tax liabilities for businesses. As the Internet continues to develop as a key conduit for business sales, small businesses may be required to file and pay taxes in a variety of jurisdictions within a state or in other states. The knowledgeable tax attorneys at Robinson & Henry can help you navigate the confusing overlay of sales taxes across Colorado to determine the proper tax rates for your business.
Paying Sales Tax in Colorado
The following information relates to paying sales tax to the State of Colorado’s Department of Revenue. Any home-rule municipalities that impose and collect their own sales taxes should be contacted directly for further information.
Any business that sells, rents, or leases tangible personal property in Colorado must get a sales tax license with the CDOR. This license is for the state sales taxes as well as any local sales taxes that are collected by the state. In addition to obtaining this tax license, all businesses are also required to file sales tax returns.
Sales taxes are paid when your business files a sales tax return with the CDOR. The filing frequency is determined by the amount of sales collected monthly.
- $15 or less per month – sales tax returns may be filed annually
- Less than $300 per month – sales tax returns may be filed quarterly
- $300 or more per month – sales tax returns must be filed monthly
Even if no tax is due to the state, all businesses must file a sales tax return. Failure to do so results in “nonfiler” status for the business leading to nonfiler billing notices and an automatic closure of the business’s tax license.
The state allows businesses to establish an account with Revenue Online to manage their tax account and securely pay any state or state-collected sales taxes. More information on registering an account with Revenue Online can be found here.
Deductions and Exemptions in a Colorado Sales Tax Return
Like the federal income tax, Colorado’s sales tax regime allows for taxpayers to apply certain deductions and exemptions when completing their tax returns. Both deductions and exemptions reduce a business’s gross income subject to sales taxes.
Deductions generally cover “nontaxed” sales. That is, a business can deduct the income from certain types of sales so that the total amount of income subject to the income tax is reduced. The Colorado Sales Tax Return allows deductions for the following categories:
- Sales to other licensed retailers, for resale
- Service sales – Colorado’s sales tax generally applies only to tangible personal property
- Sales to governmental agencies, religious, or charitable organizations
- Sales of gasoline
- Sales of drugs by prescription and prosthetic devices
- Trade-ins for taxable resale
- Bad debts charged-off, returned goods, trade discounts, and allowances where tax was paid (cash discounts are not allowed)
- Cost of utilities, excluding tax – applies to restaurants only
- Sales of agricultural compounds and pesticides
- Other – deductions taken under this “Other” category must include an explanation
Exemptions operate similar to deductions in that they reduce a business’s net sales subject to sales tax. A business’s income from the sale of specified goods is exempt from sales tax for public policy or other governmental reason. Exemptions may apply at the state level or may only apply to a specific county, city, or special district. The Colorado Sales Tax Return allows exemptions from sales tax for the following categories:
- Food, including food sold through vending machines
- Farm equipment
- Sales of low-emitting vehicles
- School related sales
- Renewable energy components
- Space flight
- Other – exemptions taken under this “Other” category must include an explanation
It should be noted that these deductions and exemptions apply only to the Colorado general sales tax and statutory cities and counties covered by the Colorado Department of Revenue. They do not apply to sales tax that must be paid to a local home rule municipality.
Colorado’s sales tax system consists of an assortment of tax rates, exemptions, and deductions. To help your business navigate this legal maze, it is important that you seek help from a local tax attorney or tax professional. The experienced tax attorneys at Robinson & Henry have helped clients of all sizes from across the Front Range comply with local sales tax laws and can help determine a course of action for any tax related issues affecting your business.
Sales Tax Audits
Colorado’s home rule system leads to one of the more complicated sales tax regimes in the country. As described earlier, the CDOR collects the statewide 2.9% sales tax as well as local sales taxes from over 150 cities and over 50 counties. In addition, over 70 of the home rule municipalities in Colorado self-collect sales tax. The collection of sales taxes in Colorado is primarily accomplished by voluntary compliance. That is, businesses take affirmative steps to comply with local sales tax laws. Sales taxes are generally passed on to consumers at the point of sale and the vendor then transmits those taxes to the government by filing a sales tax return to the state department of revenue.
To ensure that the proper sales taxes are reported and collected, municipalities and counties conduct audits of businesses operating in their jurisdictions. During a sales tax audit, the local government will examine a business’s accounts and financial information to ensure that sales tax is accurately reported and transmitted.
Sales Tax Audit Procedures
An audit may occur for a variety of reasons, such as: the size or type of business, as a result of information from the audit of a supplier or customer of the business, a request for an audit from a local agent or government, or at random.
During an audit, an auditor will likely review a variety of documents related to your business, which can include: sales tax returns, general business ledgers, sales journals, federal income tax returns, or bills of lading. The primary goal of the auditor is to compare the sales tax that was actually transferred to the government with the sales tax that was, or should have been, collected.
If an audit reveals sales tax that has not been collected or remitted, the local government will issue a notice of deficiency and send it to the taxpayer by certified mail. This notice of deficiency will state the amount of sales taxes due and inform the taxpayer of its rights to protest the assessment and request an administrative hearing.
It is very important that a business respond to this notice of deficiency within the time proscribed by the local jurisdiction. Failure to do so will result in the taxpayer waiving its right to appeal the notice and the amounts owed will become due immediately. If your business has received a notice of deficiency from a local government or the CDOR, you should contact a tax attorney as soon as possible.
Appealing a Sales Tax Audit
After receiving a notice of deficiency, a business can protest the amount by submitting a request for an administrative hearing with the local government entity that issued the notice. After a business has submitted this request, Colorado law requires that the business “exhaust all local remedies” before appealing the decision of the local government to the CDOR or a Colorado court. To “exhaust all local remedies,” a taxpayer either receives a decision from the administrative hearing, the hearing could not be held within a specified period of time, or a final decision was not provided within a specified period of time.
A taxpayer that has exhausted its administrative remedies and wishes to appeal the decision of the local government can request a secondary administrative review before the CDOR. After a CDOR hearing, the taxpayer then has the right to appeal the decision to the district court.
The Tax Attorneys at Robinson & Henry Can Help
Given the wide variations in tax laws and procedures across the state as well as the possibly severe penalties that can result from improper or late responses to a notice of deficiency, it is strongly recommended that you seek professional representation from knowledgeable tax attorney when confronted with a sales tax audit. The tax attorneys at Robinson & Henry can provide the following services to help reduce the stress, time, and costs associated with a sales tax audit:
- Reviewing communications received from a local government or the CDOR
- Assessing and evaluating your business’s records to determine tax liabilities
- Prepare any necessary documents such as power of attorney forms or formal letters of protest
- Represent your company before an auditor or, if necessary, before an administrative hearing
- Take your company’s protest to district court if administrative hearings do not lead to satisfactory results
- Help to develop strategies to avoid future sales tax issues
If you have had the misfortune to receive a sales tax audit notice from a local government agency, rest assured that there is knowledgeable help available for you through your tax lawyer. If you have such a problem call the tax attorneys at Robinson & Henry for audit representation immediately. Call 303-688-0944 for a no-cost consultation today.