I_TaxEval_2019A 07/24/2019 09:00:16 AM Committee Summary

Trey Standley, legislative audit manager at the Office of the State Auditor (OSA), and Michelle Colin, senior legislative audit manager at OSA, introduced themselves.

Mr. Standley explained the procedures that he and Ms. Colin planned to follow for the day's events. He explained that OSA would be presented policy considerations from both the 2018 report and the 2019 reports published to date through July 2019. He acknowledged team members from OSA who had participated in the evaluations and preparation of the reports.

In response to a question about the four categories into which OSA has segmented its policy considerations, Mr. Standley explained that these categories were chosen to segment the policy considerations, and that individual expenditures may have policy considerations that spread across multiple categories.

Committee discussion ensued regarding the committee's bill sponsorship procedure.

Mr. Standley began with discussion of the Crop Hail Insurance Premium Tax Exemption. He explained that insurance policies qualifying under this expenditure must be underwritten by firms that underwrite only crop hail insurance, and not other insurance types. He said that OSA has found that there are no insurers in the state that meet these criteria. Further, OSA has found that 67 percent of cropland is covered under the federal crop insurance program. Therefore, OSA has found that no taxpayers are currently taking the exemption or benefitting from it.

Mr. Standley proceeded to discuss the Occasional Sale of Liquor by Public Action Exemption. This expenditure exempts liquor sales from the liquor excise tax if the sale occurs at a public auction under limited circumstances, such as if part of an estate auction or as seized collateral on a loan in default. OSA believes that the exemption was most likely enacted to eliminate compliance requirements for the excise tax for one-time taxpayers who would otherwise be unfamiliar with the tax.

Mr. Standley continued with the sales and use tax exemption for sales of residents to bordering states. This exemption, from 1963, is written to apply to non-tourist residents of bordering states that do not impose a sales tax. However, since all bordering states now impose a sales tax, the exemption now appears to be obsolete.

Mr. Standley proceeded to discuss the pre-1987 net operating loss deduction for individuals, estates, and trusts. Net operating losses occur when deductible business expenses exceed their revenue, and businesses are permitted to carry forward these losses against revenues in future years.

Individuals, estates, and trusts were allowed this deduction before 1987 and could have carried the deduction forward for 15 years, through 2002. Therefore, this tax expenditure cannot be claimed by any taxpayers.

Mr. Standley proceeded to discuss the Previously Taxed Income or Gain Deduction for C-Corporations. This expenditure allows an income tax deduction for income that had been taxed before 1965, when the state began to apply its income tax based on federal taxable income. Since this deduction no longer applies for any taxpayers, OSA considers it to most likely be obsolete.

The committee took a brief recess.

The committee came back to order. Mr. Stanley discussed the farm close-out sales tax exemption. The farm close-out sales tax exemption was created in 1945 and concerns when a farm is closed out and the property is sold off. OSA discussed that there appears to be a discrepancy between the farm close-out exemption, which would include trucks and vehicles, and the sales tax exemption for agricultural inputs which does not include vehicles. The committee discussed the exemption trying to determine who benefits from the expenditure. OSA reached out to various groups and there is not good data available for vehicles sold at farm close-out sales so it was hard to quantify. There is some lack of clarity when vehicles are being registered they show an exemption certificate from the farm close-out sale.

Ms. Colin introduced the long-term lodging exemption which was collected in 1959 when the sales tax was extended to hotels and other short-term lodging. To receive the exemption, there must be a written agreement such as a receipt or lease agreement. One clarification is if the exemption applies to third-parties (such as an employer putting employees up in a hotel). The second clarification surrounds home sharing like VRBO and AirBNB. The exemption is being unevenly applied partly because the sales tax is not always being collected or is being collected unevenly.. Mr. Stanley responded to committee questions by stating that the DOR does not have formal policy on home-shares, but that they have allowed it on an informal basis. The committee continued to discuss the long-term lodging sales tax exemption.

Ms. Colin introduced the sales tax exemption for newspapers which was created in 1943. The OSA suggested clarification for the definition of "newspaper", which has a specific definition in statute. As the newspaper business has evolved there is a lack of clarity in if digital newspapers qualify for the sales tax exemption.

Ms. Colin introduced the biogas sales tax exemption which was created in 2014 and expired on July 1, 2019. The exemption is for equipment bought to convert biogas to energy for electricity or fuel. The policy consideration is if biogas used to power biogas facilities should be exempt for sales tax and there are other exemptions that may apply. The committee discussed the history of the exemption and if there was a bill introduced in the last legislative session. The committee also discussed what the sales tax exemption applies to for biogas.

Ms. Colin introduced the agricultural inputs sales tax exemption which covered 6 exemptions that are commonly purchased for agricultural production. The exemptions were put in place between 1949 and 1999 and OSA inferred that the exemptions were to insure that the sales tax only applied to the final sale of agricultural products. Policy considerations are that several similar agricultural inputs are not exempt. This includes fish for non-stocking purposes, embryos and fish eggs, and includes fertilizer, but a bill just recently passed to clarify that fertilizer is exempt. The committee discussed the purpose of the agricultural input sales tax exemption and how Colorado compares to other neighboring states. Committee members discussed the challenge in making the distinction between what is being used for agricultural and growing crops for market rather than for non-agricultural purposes.

The committee recessed.

The committee came back to order.  Ms. Colin proceeded to discuss the Employee Retirement Plan Insurance Premium Tax Deduction. This deduction is claimed by insurance providers, but OSA inferred that the tax expenditure was likely intended to improve access to retirement plans and reduce costs of participating for employees. OSA suggests that the legislature may want to clarify whether coverage purchased by pass-through entities qualifies for the deduction, as opposed to only insurance coverage purchased by C corporations. The exclusion of pass-through entities is consistent with administration of the tax expenditure by the Division of Insurance in the Department of Regulatory Agencies. OSA also suggests that the legislature may want to reevaluate whether life insurance connected to a defined contribution retirement plan qualifies for the deduction. Colorado's deduction currently does not apply in these cases, but every other state with a similar tax expenditure makes it available to for life insurance provided through defined contribution plans as well.

Committee discussion ensued regarding the Employee Retirement Plan Insurance Premium Tax Deduction, including whether the deduction as presently constituted is meeting the policy objectives that OSA has inferred.

Ms. Colin proceeded to discuss the Excise Tax Credit for Unsalable Alcoholic Beverages. The credit is allowed to distributors of alcoholic beverages in an amount equal to the tax paid on alcoholic beverages later became unsalable due to their damage or destruction. OSA suggested that the General Assembly may wish to clarify whether or not the credit applies for alcohol that has become unsalable due to spoilage.

Ms. Colin proceeded to discuss the Colorado Net Operating Loss (NOL) Deduction for C Corporations. The NOL deduction allows C corporations to carry forward their net operating loss to future tax years when computing taxable income. The federal NOL deduction now allows an indefinite carry forward of a net operating loss, replacing the earlier 20 year limitation. Since Colorado's deduction is tied to the federal deduction, this change likely applies in Colorado as well. Additionally, there had been no limitation on the amount of the loss that could be deducted, but federal tax law changes limit the deduction to 80 percent of taxable income.

OSA suggested that the state legislature may want to consider either retaining the indefinite federal carry forward or establishing its own carry forward limitation. OSA also suggested that the state legislature may want to consider whether the state NOL deduction is capped, as the 80 percent cap in federal law may now apply in Colorado depending on how the law is interpreted.

Mr. Standley introduced the Agricultural Lease Deduction. Discussion ensued regarding the expiration of the expenditure and whether it should be a deduction or credit.

Mr. Standley introduced the Huger Relief Income Tax Credit, as well as the Crop and Livestock Contribution Corporate Income Tax Credit, which were reviewed together, the first of which is expiring in January 2020 and neither of which are widely taken.

Ms. Colin explained the nature of the effectiveness category and Mr. Standley introduced the sacramental wine excise tax exemption, and the different treatment of different groups - supply store versus liquor store purchases.

Mr. Standley discussed the Fraternal Society Exemption and explained how the tax applies to the insurance policies they sell on a non-profit basis.

Mr. Standley introduced the Insurance Premium Tax Expenditures and the types of taxes it is subject to and not. A discussion ensued regarding the application of the expenditure, as well as how the revenue impact was derived from not paying income tax.

Mr. Standley discussed the Child Care Expense Credit and the Low Income Child Care Expense Credit , which were reviewed together and are tied to the same federal tax credits. A discussion regarding the fiscal impacts of restructuring the credit ensued, particularly on specific income brackets.

Mr. Pierce Lively, from the Office of Legislative Legal Services, was called to the table to discuss House Bill 19-1164.  During the discussion, Mr. Greg Sobetski, from LCS, came to the table to discuss HB 18-1208 and its fiscal impact..

Mr. Standley continued with a discussion of the On-Demand Aircraft Used Outside State Exemption. He explained that the exemption has already expired, but that it previously had exempted purchases of these aircraft from the state sales and use tax. OSA identified only two taxpayers who could have benefitted from this exemption, but neither taxpayer appears to have taken advantage of the exemption during the period for which it was in effect. He explained that other on-demand air carriers would not have qualified for the exemption because they operated only within the state. A bill to modify the credit, HB 18-1283, was passed by the General Assembly, but vetoed by Governor Hickenlooper following the 2018 session.

Mr. Standley introduced the Historic Property Preservation Credit, which is set to expire on January 1, 2020. This credit and the similar Preservation of Historic Structures Credit have different eligibility requirements, and OSA suggests that the General Assembly may consider harmonizing the requirements to allow taxpayers to qualify for both credits.

Mr. Standley proceeded to discuss the Deduction for Wages and Salaries Due to Internal Revenue Code Section 280C. Under that section, taxpayers who claim one of the federal credits listed in section 280C are required to add-back the share of the business income that they would have otherwise deducted. Colorado allows these taxpayers to access the federal deduction that they are not allowed to access at the federal revenue while also claiming the credits in section 280C. He suggested that the expenditure may be broadened to incorporate other business types than are currently included, or that the General Assembly may wish to broaden the deduction to incorporate the entire foregone federal deduction, not merely the portion related to wage and salary expenses.

Mr. Standley continued with a discussion of the State Income Tax Refund Deduction for Individuals, Estates, and Trusts. This allows state income taxpayers to deduct the amount of their state income tax refund from their federal taxable income when computing their Colorado taxable income. The deduction is limited to $10,000 for individuals, estates, and trusts, though no equivalent cap applies for corporations. OSA suggests that the General Assembly may want to revisit this limitation.

Mr. Standley introduced the Non-Profit Transit Agency Fuel Tax Exemption. This expenditure exempts liquefied petroleum gas and natural gas that is used by non-profit transit agencies. OSA suggests that the General Assembly may want to revisit the expenditure since there are very few vehicles to which the exemption applies. Currently, no non-profit transit agencies operate vehicles powered by liquefied petroleum gas, and transit vehicles using natural gas often use blended natural gas products, which do not qualify for the exemption. OSA suggests that the exemption could even be broadened to include all fuel types at a relatively low fiscal cost.

Committee members thanked representatives of the OSA for their work on the tax expenditure evaluations and for their presentations to the committee.