One of the crowning achievements of the 2017 legislative session was the grand compromise that ensured that hospitals around the state would not be penalized by the now repealed requirement that counted the hospital provider fee against the state TABOR revenue limit. The fee program is now an enterprise, and hospitals are now receiving all of what they are due from the state and the federal match.
That was the main goal of the bill. However, bipartisan support for fully restoring the hospital provider fee was only achievable because of a complicated array of related agreements. State highways will get about 10 percent of what they actually need, albeit more than they were going to get barring SB 267. (Local roads were not included). Schools will get some support.
A critical part of the deal was an increase in marijuana taxes that will fund other portions of the deal, such as a business personal property tax credit. However, the decision to exempt marijuana from the state’s base sales tax and increase the special sales tax rate was made on the fly. The resulting fallout has become a cautionary tale for many in the state that blame local sales taxes for being complicated but fail to look at state policies that muddy the waters.
A “drafting error”?
While not the first to report on the issue, the Denver Post was the first take a stab at how the increase in the retail marijuana tax is hitting certain special districts that receive sales tax revenue right in the pocketbook. Understanding the problem requires understanding the short but complicated history of the state’s retail marijuana tax policy.
- With the legalized sale of retail marijuana starting in 2014, the state began collecting sales tax revenue from the state’s 2.9% base sales tax. The revenue is subject to TABOR and counts against the state’s revenue limit.
- The state also began to collect sales tax revenue from the state’s 10% special sales tax authorized by voters in 2013 (Proposition AA). The measure established the initial 10% rate, debruced the proceeds of the tax, and allows the legislature to increase the tax to a rate no higher than 15% without additional voter approval.
- Previous legislation would have reduced the special sales tax to 8% this past July 1, but proposals for increasing the tax and using the revenue for various non-marijuana related programs began last fall.
- As part of the SB 267 compromise, the legislature agreed to increase the special sales tax to the maximum 15% allowed and eliminate the state’s base sales tax on retail marijuana by exempting it. (This last piece is what started all the trouble). The net result was to increase the total state tax on retail marijuana from 12.9% to 15% – all exempted from TABOR.
As a general rule, changes in the state sales tax base automatically apply to statutory entities – statutory municipalities, counties, and special districts. With over 80 different state sale tax exemptions on the books and legislation every session that propose more, the Colorado Municipal League is perennially busy ensuring that the state’s decision to exempt something from its own base does not automatically exempt it in statutory municipalities. (Home rule municipalities are thankfully unaffected by state exemptions, and such decisions on exemptions are purely local)
The process was no different for SB 267. Prior to the compromise language being adopted, CML Legislative Counsel Dianne Criswell worked with the sponsors and drafter to make sure it didn’t impact statutory municipalities, and CML’s language also gave counties the same cover. Amazingly, no one thought of sales tax collecting special districts like RTD and the Scientific and Cultural Facilities District (SCFD), and the oversight was referred to as a “drafting error.” But was it a drafting error or rather an error anticipating consequences? Those districts have always followed the state’s tax base. In fact, the League is not aware of any special language exempting special districts in any prior sessions, but there likely was not as much revenue at stake as there is now.
A complex State of affairs
Retail marijuana is now exempted from the state’s base sales tax, while it will continue to be taxed at the local level in municipalities that approve sales. In the upcoming legislative session, it is guaranteed legislation will be introduced to eliminate the state base exemption for RTD and SCFD. Such legislation may even include reparations for the “error.”
Proposals at the statehouse for sales tax exemptions are often more about politics than fiscal policy, and state exemptions chip away at the state’s base. There may be value in the state examining the over 80 other sales tax exemptions it has given, which no doubt create numerous challenges to businesses trying to determine what is taxable and what is not. In fact, there were at least five bills in the 2017 session, in addition to SB 17-267, that would have created new exemptions. One of them was signed into law by Gov. Hickenlooper.
As the discussion unfolds, the League is hopeful state leaders pause and take notice of the state’s own contribution to sales tax complexity in Colorado – and it actually has a chance to do so. Over the interim this year, the Sales and Use Tax Simplification Task Force – created by 2017 legislation – is charged with studying simplification “between the state and local governments, including home rule municipalities, to identify opportunities and challenges within existing fiscal frameworks to adopt innovative revenue-neutral solutions that do not require constitutional amendments or voter approval.” CML has appreciated the opportunity to show legislators all of the hard work and progress at the local level, in cooperation with the business community, that is going into reducing complexity for the businesses that collect and remit sales and use tax.
Colorado’s 70 home rule municipalities that self-collect their local sales tax have been diligently working on a process to standardize definitions among all 70. The state was concerned enough about this to pass a resolution encouraging the standardization, and it was a key talking point in the legislation creating the interim task force. In addition to looking at the impacts of all the state’s sales tax exemptions, one key move the task force could make to demonstrate a commitment to simplification is to propose the State of Colorado go about adopting the standardized definitions package itself.
After all, what’s good for the goose…