To: Honorable Mayor and Members of Town Council
From: Trish Muller, Finance Director, CPA
Title
Ordinance Repealing and Reenacting Article II of Chapter 3.04 of the Castle Rock Municipal Code Regarding Sales Tax and Amending Various Provisions of Article III of Chapter 3.04 of the Castle Rock Municipal Code Regarding Use Tax (Second Reading - Approved on October 17, 2023, by a vote 6-0) [Sale and Use Tax Code Simplification - Standard Definitions, and Economic Nexus and Marketplace Facilitators]
Body
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Executive Summary
Staff is recommending the adoption of the proposed ordinance to simplify the Town’s sales tax code by addressing: 1) standardized definitions - including exemptions - commonly used statewide to define taxable items and 2) updates to currently allowed practices of sales tax collection and remittance, including clarifying the authority given to taxing jurisdictions.
The Colorado Municipal League created the model ordinance for these items, which staff recommends adopting. The changes this ordinance creates are intended to be revenue neutral, meaning they would have little to no revenue impact for the Town. The purpose of this memo is to briefly explain more about this proposed ordinance.
Discussion
Colorado municipalities are heavily dependent on the sales tax, deriving on average 70% of their general-purpose tax revenues from this source. Unique among the states, Colorado allows home rule municipalities to require businesses to remit sales tax directly to a municipality (known as “self-collection”), decide their own tax base and audit businesses. This practice is so common that Colorado’s 70 “self-collecting” municipalities collect over 90% of the municipal sales tax paid in our state.
It has long been recognized, by government and business alike, that various home rule municipalities taxing items using the same terminology - but potentially with differing definitions - is a source of complexity for businesses that operate in multiple municipalities.
The Colorado Municipal League over the last decade has helped lead an effort to simplify the state’s sales tax system. The effort has been designed to preserve municipal interests by maintaining the integrity of our principal revenue-raising mechanism, including being revenue neutral.
Standard Definitions
Use of “standardized” definitions can help minimize complexity and provide clarity to those remitting sales tax to local governments in Colorado. During its 2014 session, the General Assembly adopted Senate Joint Resolution 38, asking CML to develop standardized sales tax definitions, reprising a successful effort CML led in 1992.
Under the direction of CML staff, a committee comprised of representatives from CML member jurisdictions developed the definitions in the proposed ordinance (Attachment A). The committee began with the 1992 definitions and supplemented those with definitions for additional terms that polling had revealed were used in three or more jurisdictions.
In addition to providing clarity, another goal in developing the definitions was to avoid triggering a TABOR election. This goal has been reached, as the definitions simply reflect current tax practices. No new tax is proposed, and no increase in tax revenue is expected.
The definitions in the proposed ordinance were reviewed by a committee of business tax experts and attorneys, as well as by a committee of municipal attorneys, as part of CML’s process. These constituencies were supportive of the definitions.
Since the standard definitions were released, 55 of the 70 self-collecting municipalities in Colorado have adopted them, according to CML, demonstrating their widespread acceptance. Use of the standard definitions is considered best practice for self-collecting municipalities like Castle Rock.
The General Assembly continues to show interest in the state’s sales tax system. Showing improvements in the system, including by adopting standardized definitions, helps maintain the greatest level of local oversight for this essential revenue source.
Updates to Current Practices
It’s best to begin the discussion regarding proposed updates to current practices by defining two terms: 1) Marketplace facilitators collect and remit sales tax on behalf of third-party sellers, and 2) when economic nexus exists, a seller must collect and remit sales tax in a jurisdiction. Widespread discussions regarding these concepts began five years ago, when the United States Supreme Court decided a case called South Dakota v. Wayfair, Inc.
The State of South Dakota had enacted a statute requiring internet sellers with no physical presence there to collect and remit the state’s sales tax, which was not allowed under prior Supreme Court rulings. The Supreme Court overturned its prior rulings and determined that an out-of-state seller's physical presence in a state is not necessary for the state to require the seller to collect and remit its sales tax.
South Dakota won the case by showing that its statute did not place a burden on interstate commerce - therefore, violating the Commerce Clause of the U.S. Constitution - by doing the following:
• enacting a threshold amount to not require small businesses to remit
• using a single state-level tax administration
• creating uniform definitions of products and services
• simplifying tax rate structures
• adopting other uniform rules
In Castle Rock and Colorado, the sales tax system is more complicated than in South Dakota. However, CML’s Sales Tax Simplification Committee has worked to make the process easier for businesses by providing them a single point of remittance, which the Town intends to join if Council adopts these two recommended ordinances.
The state’s Sales & Use Tax System (SUTS) allows businesses to go to one website and remit taxes to taxing jurisdictions that have signed on to use the portal. As of mid-July 2023, 59 municipalities have signed on to use the portal, according to CML.
The portal, according to current agreements, does not stop a municipality from auditing businesses or requiring business licenses, among other provisions. The portal is not limited to remote/online retailers, although it can capture revenue from those groups.
While the portal, marketplace facilitator and economic nexus were created to help clarify and administer tax collection, they are not the same thing. The ordinance is intended to define economic nexus and marketplace facilitators clearly and concisely. Additionally, the ordinance, drafted by a CML committee, clarifies administrative authority for home rule municipalities. The ordinance was drafted by a CML committee, reviewed by business tax experts and attorneys, as well as by municipal attorneys, as part of CML’s process. These parties supported the ordinance.
The objective of the ordinance is to clarify who can collect and remit taxes, along with clarifying the authority given to taxing jurisdictions under Wayfair. The ordinance updates current allowed practices of collection and remittance, which is not a tax policy change.
It is encouraged that municipalities that will be joining SUTS adopt the ordinance in its entirety. Having a uniform adoption will help with any potential challenge under the Commerce Clause (under Wayfair). The ordinance is intended to provide uniformity and simplicity, so that all municipalities in Colorado can collect sales tax from online or remote retailers.
Budget Impact
If additional revenues come into the Town as a result, those revenues are incidental to the purpose of the ordinance and are de minimis when measured in the context of the Town's overall sales tax revenues and annual budget.
Staff Recommendation
Staff recommends approving the ordinance as introduced by title.
Alternative Motions
“I move to approve the ordinance as introduced by title, with the following conditions: (list conditions).
“I move to continue this item to the Town Council meeting on _____ date to allow additional time to (list information needed).”
Attachments
Attachment A: Ordinance