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2020 Colorado Tax Legislation Update
2020 Colorado Tax Legislation Update
BY MARK KOZIK AND BRUCE M. NELSON
Let us be frank. This has been a crazy year for the state legislature. The pandemic not only interrupted the legislative calendar, but also it wreaked havoc on the goals of both the Democrats and the Republicans. Instead of meeting for the traditional 120 days, the Colorado General Assembly met for only 84 days, and even that was split into two periods separated by a couple of months. The first period, which began as normal on January 8, recessed on March 14 due to the pandemic. By the time the legislature reconvened on May 26, the economic landscape had changed dramatically, leaving legislators with the task of cutting over $3 billion out of a $30 billion budget before they adjourned on June 15.
Given the overall situation, some tax-related legislation that might have been introduced never was. Some that was introduced evolved significantly during the legislative process, and some that wasn’t on anyone’s radar at the beginning of the session ended up being enacted. The consequences to Colorado taxpayers are many, with, perhaps, the most significant being the decoupling of several state income tax provisions from the corresponding federal provisions enacted in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law, March 27, 2020. Before we address that nightmare, let’s begin with sales tax legislation.
SALES/USE TAX CHANGES House Bill (HB)20-1020 - State and State-Administered Local (maybe) Sales Tax
Exemption for Long-Term Lodging: Current law imposes Colorado state and state-administered local (state-collected city/town, county, and special district) sales tax on short-term stays (fewer than 30 consecutive days) of lodging at hotels, motels, guest ranches, auto camps, trailer courts, and the like. However, stays of 30 or more consecutive days by “any occupant who is a permanent resident” of the establishment are exempt from sales tax. This bill deletes the word “occupant” and replaces it with “natural person.” What difference does this make? None, in the case of an individual who prefers to live in a hotel rather than a house or apartment. But let’s say Jack and Jill Airlines permanently reserves 10 rooms at a local hotel for its pilots and flight attendants. The identity of the individual crew members who stay each evening varies, but arguably the rooms are “occupied” by the same occupant, Jack and Jill Airlines, that rents the rooms. The Colorado Department of Revenue (CDOR) traditionally has held that this type of arrangement is exempt from sales tax. However, the legislature determined that this treatment does not reflect the “presumed original purpose” of the legislation when it was enacted in the 1950’s. Further, the legislature stated that “it is the intent of the general assembly to simplify the collection and administration of taxes for the state of Colorado and to relieve taxpayers’ confusion and vendors’ administrative burdens by repealing tax expenditures that are not meeting their original purpose...” So, effective Jan. 1, 2021, to qualify for this exemption, the permanent resident must be a “natural person,” not an “occupant.” Jack and Jill Airlines is not a “natural person,” so unless a particular Jack and Jill employee enters into an agreement for a stay of 30 or more consecutive nights in a room, the exemption no longer applies. The room rental will be taxable.
Colorado law provides that state and state-administered local sales tax provisions shall generally be the same. [See Colorado Revised Statute (CRS) §29-2-105(1).] However, CRS §29-2-105(1)(d) provides several exceptions to this uniformity requirement, where state-administered local sales tax is imposed on items that are exempt at the state level unless the local jurisdiction affirmatively adopts the exemption.
Among the more common of these items are food sales, sales of electricity, and the sale of machinery and machine tools used in manufacturing. Prior to this amendment, the longterm lodging exemption applied at both the state and the state-administered local levels. It was not one of those state-level exemptions that applied at the local level only if the local jurisdiction affirmatively adopted it. Pursuant to this amendment, however, the exemption will apply at the state-administered local level unless such a jurisdiction affirmatively elects to tax it. Notice that (1) this is the opposite of the non-uniform exemptions described above, where the item exempt at the state level is taxable at the local level unless the local level affirmatively adopts the state-level exemption and (2) the long-term lodging exemption is not included in the CRS §29-2-105(1)(d) list with the others where the state-administered local level may or may not follow the state level treatment. Remember, the stated intent of the amendment was to relieve taxpayer confusion and vendor administrative burden. And don’t forget that none of this discussion applies to home rule cities. [See CRS §§39-26-102(11) and 39-26-704(3)(a) and (b). See also Department of Revenue Form DR 1002, which presumably will show whether a particular state-administered local jurisdiction does or does not impose its sales tax on long-term lodging.]
HB20-1022 - Sales and Use Tax Simpli
fication Task Force: This bill extends the Sales and Use Tax Simplification Task Force (created by HB17-1216) for another five years and modifies the scope of its duties by including, among other things, studying “‘feasible solutions,’ which are solutions that are practical, revenue-neutral, and do not require constitutional amendments or voter approval” for sales and use tax simplification between the state and local governments; considering possible streamlined licensing and medical device exemptions; and simplifying procedures for collecting tax on motor vehicles, issuing building permits, claiming and administering exemptions, and sales tax collection and compliance. The Task Force also will review the complexity of the state’s sales taxes in special districts; standardized definitions; options for eliminating branch reporting; the adoption of a sales tax exemption for the isolated sale of business assets; the new sales tax sourcing rules; the electronic filing project; and the change to the vendor fee by HB19- 1245. [See CRS §39-26-802 and, generally, §§39-26-801 through 804.]
HB20-1023 - Address Database System
for Sales and Use Tax: The Department of Revenue is implementing a new geographic information system database (GIS database) that will determine the sales/use tax jurisdictions and rates based on individual addresses. The database is to operate with a 95% accuracy rate, and taxpayers that use it to determine jurisdictions and tax rates will be held harmless for any “tax, charge, or fee liability to any taxing jurisdiction” that would otherwise result from errors in the database. The new Sales and Use Tax (SUTS) lookup system is now live, and rollout is underway. Once it is fully operational, the electronic database provisions of CRS §39-26-105.3, which provides for thirdparty jurisdiction and rate databases, will be repealed. [See new CRS §§39-26-105.2 and -105.3(8).]
HB20-1427 – Cigarette Tobacco and Nico
tine Products Tax refers a ballot measure to the voters in the November 2020 election that, if passed, would allow the state to impose additional taxes on cigarettes, vaping devices, and other tobacco products. A couple of items that were proposed in the 2020 session but did not pass are worth mentioning.
HB20-1025 – Sales Tax Exemption for
Energy Used in Industry would have restricted the sales tax exemption for industrial energy [CRS §39-26-102(21)(a)] to apply only when the energy is used by a metered machine. The bill failed.
SB20-099 – Sales Tax Collection Threshold
would have increased the current $100,000 threshold for sales tax economic nexus to $200,000. The bill failed.
INCOME TAX CHANGES HB20-1003 – Rural Jump-Start Zone Modi
fication: The Rural Jump-Start Zone Program started in 2016. It provides a variety of tax benefits to qualified businesses that locate in distressed counties. In addition to any local incentives, a qualified business may be eligible for a 100 percent Colorado income tax credit on income derived from activities in the zone for four consecutive years (with a possible extension for four additional years) and a potential Colorado state-administered sales and use tax refund on the purchase of tangible personal property acquired by the business and used exclusively in the zone. The sales/use tax refund is available for four consecutive years (with a possible extension for four additional years). In addition, new employees may be eligible for a 100 percent personal income tax credit on Colorado income tax attributable to their work in the zone for four consecutive years (with a possible extension for four additional years). [See CRS § 39-30.5-105.] Until Sept. 14, 2020, to qualify for Rural Jump-Start Zone benefits, the business must be new to the state; hire at least five employees; not directly compete with the core function of any business already in Colorado; add to the economic base; and export goods and services outside the county where it locates. Effective Sept. 14, 2020, the “anti-competition” zone is limited to the rural jump-start zone where the new business locates, along with a distressed county contiguous to the zone. [See CRS §39-30.5- 103(7) for details.] HB20-1003 also extends the term of the program to cover tax years beginning on or after Jan. 1, 2016, and before Jan. 1, 2026. [See CRS §§39-30.5-101 through 108.]
HB20-1024/HB20-1420 – Colorado Corpo
rate Net Operating Loss Deduction: CRS §39-22-504(1)(a) states that, “A net operating loss deduction shall be allowed in the same manner that it is allowed under the Internal Revenue Code except as otherwise provided in this section.”
For tax years beginning before Jan. 1, 2018, Colorado corporate net operating losses could/can be carried forward 20 years (the same as the federal period). [CRS §39-22- 504(3)(a).] For tax years beginning on or after Jan. 1, 2018, but before Jan. 1, 2021 (calendar years 2018, 2019, 2020), Colorado corporate NOLs could/can be carried forward indefinitely (to match up with the federal indefinite carryforward period enacted by the Tax Cuts and Jobs Act of 2017 (TCJA)). [CRS §39-22-504(3) (a).] For tax years beginning on or after Jan. 1, 2021, Colorado corporate NOLs can only be carried forward 20 years, which is decoupled from the continuing indefinite federal carryforward period. [CRS §39-22-504(3)(b).] Colorado corporate NOL carrybacks are not allowed for any year. [CRS §39-22-504(3).] HB20-1420, discussed later in this article, addresses the application of the 80 percent taxable-income limitation on federal NOLs to Colorado NOLs. [See CRS §§39-22-504(1) CONTINUED ON PAGE 28
CONTINUED FROM PAGE 27
(a) and (b).] [See CRS §39-22-504(2) regarding Colorado individual NOLs (briefly discussed below) and CRS §39-22-504(4) regarding Colorado NOL rules for financial institutions).]
HB20-1109 – Extension of Income Tax
Credit for §529 Plans: In 2018, the Colorado legislature created a state income tax credit for employers who contribute to an employee’s §529 plan (a plan to accumulate funds that can be applied toward tuition for certain higher education expenses). The credit is equal to 20 percent of the contribution, with a maximum credit of $500 for each employee per year. Under current law, the credit is available for tax years beginning on or after Jan. 1, 2019, but before Jan. 1, 2022. [See CRS §39-22-539.] This bill extends the credit availability to tax years beginning prior to Jan. 1, 2032. For federal income tax purposes, the TCJA expanded qualifying §529 distributions to include elementary and secondary tuition expenses for public, private, or religious schools. HB20-1034 proposed adjusting Colorado’s statute to cover payments for elementary and secondary tuition expenses as well, but the bill died in committee. [See CRS §39-22-104(4)(i)(III).] HB20-1420 - Tax Fairness Act (TFA) is the most significant change to Colorado income taxes since the state adopted single sales-factor apportionment in 2009. Although federal taxable income is still the starting point in computing Colorado taxable income, the TFA decouples the state from federal taxable income in several substantive ways. Specifically, the TFA adds back to federal taxable income several elements of federal relief included in the CARES Act. The effect of these changes is to negate certain increased federal income tax deductions that would otherwise operate to reduce Colorado taxable income. These add backs are provided for in CRS §39-22-104(3) (for individuals) and CRS §39-22-304(2) (for corporations). They include:
Corporate Net Operating Losses - For tax years beginning on or after Jan. 1, 2018, the TCJA removed the 20-year carryforward period that was otherwise generally applicable to federal NOLs, instead allowing an indefinite carryforward period. However, it also limited the deduction of these NOLs to 80 percent of federal taxable income in the year deducted.
The CARES Act suspended the 80 percent taxable-income limitation for federal NOL deductions that would otherwise apply in taxable years beginning on or after Jan. 1, 2018, but before Jan. 1, 2021 (calendar years 2018, 2019, 2020). Note that this federal relief is only available for federal NOL deductions taken in these three years. Absent Colorado legislation, the CRS §39-22-504(1)(a) wording that, “[a] net operating loss deduction shall be allowed in the same manner that it is allowed under the Internal Revenue Code except as otherwise provided in this section” would presumably limit the deduction of the Colorado NOL to 80 percent of Colorado taxable income before the Colorado NOL deduction. Likewise, the CARES Act relief from the 80 percent limitation for federal NOL deductions taken in 2018, 2019, and 2020 would presumably relax the deduction of the corresponding Colorado NOL to 100 percent of Colorado taxable income before the loss is deducted in those three years. However, the Colorado legislature decoupled from the CARES Act’s suspension of the 80 percent taxable-income limitation. In other words, it wanted to retain the 80 percent taxable-income limitation on the deduction of those NOLs in 2018, 2019, and 2020. It enacted CRS §39-22-504(1)(b), which provides that the 80 percent taxable-income limitation shall apply for Colorado purposes to NOLs incurred after Dec. 31, 2017 without regard to the CARES Act’s threeyear relief. In June 2020, the CDOR issued “CARES Act Tax Law Changes & Colorado Impact,” an 11-page memorandum which explains the Colorado NOL provisions and provides some helpful Frequently Asked Questions and charts. In addition, it states:
Although Colorado adopts the Internal
Revenue Code on a rolling basis, Colorado’s definition of “Internal Revenue
Code” does not incorporate federal statutory changes that are enacted after the last day of a tax year (and thus, neither do Colorado statutory references to
“federal taxable income”). Accordingly, federal statutory changes enacted after the end of a tax year do not impact a taxpayer’s Colorado tax liability for that tax year. On June 2, the CDOR issued emergency rules substantially saying the same thing. [See DOR Rule 39-22-103(5.3).] Although the federal suspension of the NOL deduction limitation applies for 2018, 2019, and 2020, the underlying federal legislation, itself, was enacted in 2020, so under the rules noted, Colorado does not pick up on the suspension for 2018 and 2019, and the 80 percent taxable-income limitation on the deduction of Colorado NOLs in 2018 and 2019 remains in place. The limitation applied for federal at the time of those deductions (2018 and 2019), and the CARES Act relief from the taxable income limitation does not apply to Colorado for those years. And although the federal relief would otherwise apply to the Colorado NOL deducted in 2020, that relief is blocked by CRS §39-22-504(1)(b), enacted by the TFA. For 2021 and later, the federal 80 percent taxable-income limitation comes back, and it will likewise apply at the Colorado level under CRS §39-22-503(1)(b). Individual Net Operating Losses - The 80 percent taxable-income limitation on federal NOL deductions is generally implicit in an individual’s Colorado taxable income. [See CRS §§39-22-504(2) and 39-22-104.] CRS §39-22-104(l) blocks application of the CARES Act relief from the 80 percent limitation that would otherwise apply for taxable income for tax years beginning or ending on or after the enactment of the CARES Act but before Jan. 1, 2021 (calendar year 2020 and possibly two fiscal years, such as the fiscal year ending June 30, 2020, and the fiscal year beginning July 1, 2020). The timing of the CARES ACT enactment (March 2020) blocks Colorado relief from the 80 percent limitation that would otherwise apply for 2018 and 2019. Going forward for 2021 and later, the federal limitation will again be implicit in an individual’s Colorado taxable income. [See CRS §39-22-504 and the CDOR discussion, “CARES Act Tax Law Changes & Colorado Impact,” for additional information on individual NOLs.] Excess Business Losses - The TCJA provided for an excess business loss limitation (IRC §461(I)) for tax years beginning on or after Jan. 1, 2018, of $250,000 ($500,000 if MFJ). [The amounts are $255,000 and $510,000, respectively, for 2019, and $259,000 and $518,000 for 2020.] The CARES Act suspends that limitation for tax years beginning on or
after Jan. 1, 2018, but before Jan. 1, 2021 (for calendar year taxpayers, 2018, 2019, and 2020). The difference must be added back in computing Colorado taxable income for tax years beginning or ending on or after the enactment of the CARES Act but before Jan. 1, 2021 (calendar year 2020 and possibly two fiscal years, such as the fiscal year ending June 30, 2020, and the fiscal year beginning July 1, 2020). [See CRS §39-22-104(3)(m).] The CARES Act suspension of the limitation for federal purposes for 2018 and 2019 is blocked for Colorado purposes under the rules, as described above, that federal changes do not apply for Colorado purposes in years before the federal change is enacted. The TCJA imposed a 30 percent limitation (based on “adjusted taxable income,” as defined) on business interest deductions for tax years beginning on or after Jan. 1, 2018. The CARES Act increased the TCJA limitation to 50 percent for tax years beginning on or after Jan. 1, 2019, but before Jan. 1, 2021. HB20-1420 blocks the increased deduction available under the CARES Act for tax years beginning or ending on or after the enactment of the CARES Act but before Jan. 1, 2021 (calendar year 2020 and possibly two fiscal years, such as the fiscal year ending June 30, 2020, and the fiscal year beginning July 1, 2020). [See CRS §39-22-104(3) (n).] The CARES Act suspension of the limitation for federal purposes for 2019 is blocked for Colorado purposes under the rules, as described above, that federal changes do not apply for Colorado purposes in years before the federal change is enacted. A similar add-back applies to corporations for the same tax year(s). [See CRS §39-22-304(2)(i).] For tax years beginning on or after Jan. 1, 2021, but before Jan. 1, 2023, the federal §199A deduction for single taxpayers with an adjusted gross income exceeding $500,000 ($1,000,000 for MFJ) must be added back. Taxpayers filing a federal Schedule F (Profit or Loss from Farming) are excluded from this add back. [See CRS §39-22-104(3)(o).] For tax years beginning in 2021, the bill extends the Colorado Earned Income Tax Credit (EITC) to resident individuals who may not have valid social security numbers (for themselves, their spouses, and/or their dependents). For tax years beginning on or after Jan. 1, 2022, the EITC increases from the current rate of 10 percent to 15 percent of the federal EITC. [See CRS §39-22-123.5.]
Gov. Jared Polis signed HB20-1420 on July 11, 2020, but its impact is going to be felt for some time.
Mark Kozik is Of Counsel with Holland & Hart, LLP, Denver, Colorado. Bruce M. Nelson, CPA, is a frequent COCPA author/instructor with more than 35 years’ experience in state and local tax. He is the Editor-in-Chief of the Journal of State Taxation. This article does not necessarily represent the opinions of the authors’ employers, should not be considered the rendering of tax or legal advice, and is not intended to provide specific guidance or advice for any issue in any particular jurisdiction.
