2016 Colorado Case Law Update

Transcription

1 FEATURED ARTICLES 2016 Colorado Case Law Update Tyler Murray, Esq. 1 The following contains a summary of the most significant tax cases decided by Colorado courts during 2016 organized by subject. I. Sales and Use Taxes 1. Direct Marketing Association v. Brohl, Executive Director, Colorado Department of Revenue, 814 F.3d 1129 (10 th Cir. 2016). In 2010, to combat the loss of sales tax revenue and fill the coffers with corresponding use tax revenue, Colorado enacted H.B (the Collection Act ). This law and its accompanying regulations require out-of-state retailers who make a minimum threshold of sales within Colorado to submit three reports (two to the customer, and one to the State) detailing purchases made by the Colorado customer. Retailers must send a transactional notice and annual summary to the customers and a customer information report to the Department of Revenue ( Department ). The reports are intended to assist the state in enforcing the use tax laws. Under Quill Corp v. North Dakota, 504 U.S. 298 (1992), a state cannot require an out of state retailer to collect and remit sales taxes unless it has a nexus with the taxing state, via an instate presence. Mere delivery into the state by common carrier does not create the required nexus. Colorado, through the Collection Act, attempted to circumvent Quill by having retailers provide reports to Colorado consumers and the Department detailing the use tax that would be owed, rather than collecting and remitting sales tax. Shortly after enactment, Direct Marketing Association ( DMA ), a trade group, sued on behalf of its members to strike down the Collection Act as unconstitutional. The district court initially ruled in DMA s favor causing the Department to appeal to the 10 th Circuit Court of Appeals. On appeal, the 10 th Circuit, sua sponte, determined that the court lacked jurisdiction to hear the case pursuant to the Tax Injunction Act ( TIA ). The TIA (28 U.S.C. 1341) bars federal courts from enjoining, suspending, or restraining the assessment, levy, or collection of a state tax law where a remedy exists in state court. The U.S. Supreme Court subsequently reversed and remanded the 10 th Circuit decision after finding that the case at issue did not invoke the TIA. It must be noted that Justice Kennedy, in his concurrence, advocated for re-examining the Quill decision. 1 Tyler Murray, Esq. is a Senior Associate at Gantenbein Law Firm. 2

2 On remand, the 10 th Circuit Court of Appeals analyzed the Collection Act under the Quill standard and found the precedent did not apply. The Court concluded that Quill applies narrowly to sales and use tax collection. The Quill decision turned on the first factor of a four factor test articulated in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). These four factors include: (1) the tax is applied to an activity with a substantial nexus with the state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce and (4) is fairly related to the services provided by the state. The Court found that the Collection Act does not discriminate against out-of-state retailers, even though it treats them differently from instate retailers. The Collection Act was not facially discriminatory since it imposes the regulatory burden on all non-collecting retailers, not just out-of-state retailers. In doing so, the Court largely ignored the fact that under Colorado state law, only out-of-state retailers are non-collecting retailers, since any retailer with a physical presence must collect sales tax. The requirement to collect sales tax is not an advantage to the instate retailers, a requirement for concluding that the statute has a discriminatory effect. The Court also dismissed DMA s argument that the Collection Act is an undue burden. Since Quill did not apply to the Collection Act, and the undue burden standard is borne from Quill, the court found this argument did not apply. As the U.S. Supreme Court stated in its opinion, the Collection Act was not the assessment, levy, or collection of the use tax, and Quill is expressly limited to such collection of sales and use taxes. The U.S. Supreme Court subsequently denied a writ of certiorari on December 12, II. Severance Tax 1. BP America Prod. Co. v. Colo. Dep t of Revenue, 369 P.3d 281 (Colo. 2016). In addition to the property taxes assessed against non-renewable natural resources, Colorado levies an additional tax on the income from the sale of oil and gas extracted from within the state. This is commonly known as the severance tax as it applies when natural resources are severed from the ground. For purposes of the severance tax, taxpayers are allowed to deduct any transportation, manufacturing, and processing costs when determining gross income. The severance tax is based on the value of the natural resource extracted, but since the resource is not sold until it has been transported, manufactured, and processed, these costs are deducted from gross income in determining the value of the oil and gas at the time of extraction. This is known as the netback approach, where a taxpayer determines the value of the resource after the resource has been processed and sold. In 2005, BP America ( BP ) filed amended severance tax returns for 2003 and 2004, seeking to deduct the cost of capital related to the transportation and processing facilities from revenue generated by the sale of natural gas. The cost of capital is the amount of money that an investor could have earned on a different investment of similar risk. It is not an actual expenditure of cash. The Department of Revenue ( Department ) denied the deduction, and BP brought a refund suit in District Court. The District Court ruled in favor of BP causing the Department to appeal. The Court of Appeals ruled in favor of the Department, and disallowed the claimed deduction. It agreed with the Department that BP could otherwise deduct the cost of capital once as a direct expense and again through the depreciation of the underlying assets. 3

3 The Colorado Supreme Court concluded that the term any when used in connection with cost meant all. Thus, the court permitted BP to deduct the cost of capital against the severance tax and awarded BP refunds of $629,186 for 2003 and $669,202 for III. Property Taxes 1. Grand County Board of Commissioners & Larimer County Board of Commissioners v. Colo. Prop. Tax Administrator, 14CA1767 (Colo. Ct. App. 2016). The YMCA, a nonprofit organization, owns and operates two campsites, one in Grand County and one in Larimer County. Both locations offer cabins, recreational activities and religious teachings. Guests are not required to attend any of the religious teachings. In 2003, the YMCA applied for property tax exemptions for both properties due to the religious and charitable use of the property. The state property tax administrator ( Administrator ) granted the property tax exemptions causing the two counties to appeal the decision to the Board of Assessment Appeals ( Board ). The Board found that the properties were not used exclusively for religious purposes, and reduced the exemption to solely cover the chapels and religious centers on the properties. The YMCA appealed, and the Court of Appeals reversed the Board s decisions, finding it had applied an incorrect standard of review. A religious declaration on an application for a property tax exemption may only be challenged on one of three grounds: (1) the religious mission and purposes are not sincerely held by the applicant; (2) the property being claimed as exempt is not used for the religious purposes detailed in the application; or (3) the property is being used for private gain. On remand, the Board determined that the YMCA s activities were religious, even though recreational activities are not overtly religious on their own. The YMCA does not believe in overt proselytizing. Consequently, the recreational activities still further the YMCA s mission. Ultimately the Board granted the property tax exemption. The counties appealed the remand decision, but the Court ruled that they are constitutionally barred from considering whether the acts of the YMCA are sufficiently religious enough for the exemption. IV. Conservation Easements 1. Medved v. Colo. Dep t of Revenue, 2016 COA 157 (Colo. Ct. App. 2016). The Medveds ( taxpayers ) purchased a conservation easement ( CE ) tax credit of $130,000 for $104,000 in 2006 from the Whites Corporation ( Whites Corp. ). The taxpayers late-filed their 2005 Colorado individual income tax return and claimed the CE tax credit. Whites Corp. also claimed the CE credit on their 2005 corporate income tax return, which it filed on October 30, On March 4, 2011, the Department of Revenue ( Department ) issued a notice of disallowance to the taxpayers and to Whites Corp., denying the CE credit in its entirety. More than 4

4 four years had passed since the taxpayer s had filed their tax return, but less than four years had passed since Whites Corp. filed its tax return. A conservation easement tax credit may be carried forward for twenty years, or transferred to another taxpayer. The donor of the CE credit is treated as the tax matters representative for all matters related to the credit, and a purchaser is subject to the same statute of limitations as the donor. The Department argued that the donor s statute of limitations controls, as provided for in the regulations, and thus their 2011 letter was within the time period allowed. The taxpayers argued that they are separate and distinct (a separate entity) and thus two statutes of limitations applied, one to the taxpayers and one to the donor, Whites Corp. The Court concluded that the donor and purchaser are one entity for purposes of the CE credit under the statute. They ultimately ruled, however, that the first return to be filed commences the statute of limitations, not the filing of the donor s return. The Department s disallowance of the CE credit was barred as untimely. V. Marijuana Taxes 1. City of Northglenn v. Board of County Commissioner s, Adams County, 2016 COA 181 (Colo. Ct. App. 2016). In 2012 Colorado voters approved Amendment 64, which legalized recreational marijuana. The following year voters approved Proposition AA, which levied a special states sales tax on recreational marijuana sales. Many localities throughout Colorado also voted in favor of retail marijuana taxes, including Adams County and the three cities in this dispute. All retail marijuana taxes are an addition to the other sales taxes that apply to the sale of retail marijuana. Voters in Adams County authorized a retail marijuana tax for the county in Three cities within Adams County (Aurora, Commerce City, and Northglenn) challenged the county tax, claiming that the county was not authorized to levy a special marijuana tax under Colorado law. Adams County argued that the cities did not have standing to challenge such tax. The district court found that the cities did have standing to challenge the county tax, but ruled in favor of Adams County, and allowed the tax to stand. On appeal, the Court agreed that the cities have standing because the county tax would reduce sales (and thus reduce sales taxes collected by the cities) and that sales tax revenue is a legally protected interest of a home-rule city. The Court found that since counties are political subdivisions, they need express authority to act from the Constitution or legislature to impose a tax. Here, Adams County relied on C.R.S to enact the special marijuana tax. That statute, however, only authorizes a general sales tax, not a special one. The cities did not challenge Adams County s ability to levy a general sales tax. Adams County also argued that the retail marijuana sales tax law, C.R.S (1)(a)(VI) grants the authority to levy a special sales tax. That statute does not prohibit a local government from enacting its own retail marijuana tax. It does not, however, go so far as to 5

5 expressly permit a county to impose a special tax as required. Ultimately the Court struck down the Adams County retail marijuana tax. 6