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I_TaxTask_2017A 09/15/2017 09:00 AM Committee Summary

Final

STAFF SUMMARY OF MEETING



SALES AND USE TAX SIMPLIFICATION TASK FORCE

Date: 09/15/2017
ATTENDANCE
Time: 09:02 AM to 03:29 PM
Jahn
X
Sias
X
Place: RM 271
Brendon Reese
X
Bruce Nelson
X
This Meeting was called to order by
Bryan Archer
X
Representative Kraft-Tharp
Dianne Criswell
X
Heather Pezzella
X
This Report was prepared by
Judith Birch Vorndran
*
Luisa Altmann
Kristin Baumgartner
X
Neil Pomerantz
X
Paul Archer
*
Steve Ellington
X
Tracy Hines
X
Neville T.
X
Kraft-Tharp
X
X = Present, E = Excused, A = Absent, * = Present after roll call, R = Remote Participation
Bills Addressed: Action Taken:
Presentation about Streamlined Sales Tax Governing Board, Inc.

Break

Presentation from Software Providers

Lunch break

Public Comment

Task Force Discussion
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-

-

-

-

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09:03 AM -- Task Force Discussion



Representative Kraft-Tharp and other task force members discussed the challenges that the task force is trying to address.



The task force discussed:

  • the complexity of the current sales tax system and the challenges this presents for voluntary compliance by businesses operating in multiple jurisdictions;
  • ways that the task force can help simplify the sales tax system to make it easier for both businesses and governments;
  • how to maintain home rule municipalities' autonomy over the administration of the sales tax system within their own jurisdiction;
  • how local taxing jurisdictions are potentially missing out on sales tax revenue because of the complexity of the system and businesses filing incorrectly;
  • how any solution the task force proposes will need to include both the state and statutory cities and home rule municipalities;
  • how solutions that have worked in other states may not work within Colorado's unique system;


  • issues related to the current address locator system, how the Department of Revenue is working with the certified service providers and home rule municipalities to improve the system, and potential issues with the 95 percent accuracy requirement currently in statute;
  • how complicated the current sales tax remittance process is, especially for small businesses;
  • the potential benefits of a centralized, easy-to-use registration system; and
  • the importance of sales tax revenue to municipalities.



    09:33 AM -- Presentation about Streamlined Sales Tax Governing Board, Inc.



    Mr. Craig Johnson, Streamlined Sales Tax Governing Board, Inc., and Mr. Pat Reynolds, Council on State Taxation (COST), introduced themselves.



    A copy of their presentation can be found in Attachment A.



    170915 AttachA.pdf170915 AttachA.pdf



    Mr. Johnson described the work of the Streamlined Sales Tax Governing Board, which is a voluntary organization of 23 full-member states that have enacted the requirements within the Streamlined Sales and Use Tax Agreement. Mr. Johnson discussed how state legislators, tax administrators, the local governmental units are all involved cooperatively in the organization. The Government Finance Officers Association, the National League of Cities, the National Association of Counties, and the business community are also involved in the organization.



    Mr. Reynolds discussed the role businesses play in the Streamlined organization, including the involvement of COST, other trade associations, individual businesses, accountants, and attorneys. Mr. Reynolds discussed the role that businesses play in acting as the collectors of sales taxes and their desire to properly collect for the benefit of the taxing authorities and their customers. Mr. Reynolds discussed the role of COST as a policy-driven organization and its alignment with the goals of the Streamlined organization.



    Mr. Johnson described how Colorado is the only state with a statewide sales tax that is not participating in the Streamlined organization. Mr. Johnson discussed Colorado's unique challenges due to TABOR and home rule constitutional issues.



    Mr. Johnson continued with the presentation by describing what the Streamlined organization does to assist states as they administer a simpler and more uniform sales and use tax system for all sellers and for all type of commerce. Mr. Johnson outlined the goals of the Streamlined organization to create a simpler system for administering the various state and local sales taxes; making systems uniform if they cannot be made simpler; balancing the interests of state and local sovereignty with the simplification and uniformity efforts; and using technology wherever possible to ease the collection and reporting requirements.



    Mr. Johnson and Mr. Reynolds discussed the impact of the U.S. Supreme Court 1992 decision in Quill v. North Dakota and physical presence requirements for sales tax collection. Mr. Reynolds responded to task force questions regarding a recent case in South Dakota challenging the Quill decision. Mr. Johnson spoke about the process the Streamlined organization initially went through to identify issues facing businesses across different states. Mr. Reynolds discussed aspects of Colorado's sales tax system that make it more complicated, including separate state and local tax administration, different state and local tax bases, non-uniform definitions between state and local jurisdictions, non-uniform returns, and requiring separate registrations in each jurisdiction.





    Mr. Johnson discussed the effort that went into the Streamlined Sales and Use Tax Agreement (SSUTA), which was first passed in 2002 and included state legislators, tax authorities, and the business community. The SSUTA became effective in 2005 when at least 10 states, representing at least 20 percent of the U.S. population, had passed conforming legislation through their state legislatures to join the Streamlined organization. Mr. Johnson explained that Tennessee is considered an associate member because they have passed the required legislation to conform, but the effective date is delayed.



    Mr. Johnson described the key features of the SSUTA, including the state level administration of local sales and use taxes, one-stop central registration, single uniform sales tax returns, common state and local tax bases, uniform definitions, the certified service provider model, rate and boundary databases, a taxability matrix that shows what is taxed in each jurisdiction, simplified exemption administration, uniform destination-based sourcing rules, and allowing states to continue to choose to use origin-sourcing for intrastate transactions.



    Mr. Johnson continued the presentation with a discussion of the certified service provider (CSP) model and how it works. Mr. Johnson described the services CSPs provide. Mr. Johnson described the various requirements for CSPs and the benefits of using CSPs from a state's perspective.



    Mr. Johnson and Mr. Reynolds responded to task force member questions regarding other states' experiences in needing additional staffing at their departments of revenue, the need for an additional up-front investment by the state, and the need for continued participation by state legislators in the Streamlined organization.



    Mr. Reynolds discussed the benefits of using CSPs from a seller's perspective. Mr. Johnson discussed how CSPs are compensated. Mr. Johnson discussed the voluntary registration of sellers with Streamlined to collect the member states' sales taxes.



    Mr. Johnson and Mr. Reynolds discussed several simplification efforts for Colorado to consider. These include:
    • the central administration of the sales tax system by a single entity, either by the state or by an independent third party, that would handle registration, the filing and processing of returns, accepting and distributing remittances, and the appeals process; and
    • a single entity that handles all audits for the state and local jurisdictions.



    Mr. Johnson and Mr. Reynolds responded to task force member questions related to how the audit effectiveness rate of states with a single state audit compare to those states with local audits, how effective the state would be in administering and auditing a sales tax system where there the local jurisdictions have such different tax bases.



    Mr. Reynolds discussed the ongoing litigation in South Dakota concerning the Quill decision and the components that the Supreme Court considered in that original decision, including the burden on interstate commerce that would be created by requiring sellers without a physical presence to comply with all of the taxing jurisdictions across the country.



    Mr. Johnson and Mr. Reynolds responded to task force member questions related to the potential for having centralized registration and remittance with a de-centralized audit system and issues related to Colorado's unique system. Mr. Johnson suggested talking to the representatives involved in the efforts to simplify Louisiana's sales tax system. Task force member questions continued related to compensation for CSPs, Colorado's vendor fee, ways to adapt the Streamlined model to Colorado's unique system while working to address local concerns, and the availability of each state's taxability matrix online.





    Mr. Johnson continued the presentation with additional simplification efforts for Colorado to consider, including:

    • a single location for sellers to register and update their registration;
    • having a uniform return; and
    • having uniform definitions among taxing jurisdictions.



    Mr. Johnson and Mr. Reynolds responded to task force member questions related to the status of Streamlined member states prior to joining the organization and the changes they had to make in order to join; what makes Colorado unique relative to those states that are involved in the Streamlined organization; and what makes a state an advisory, but non-conforming state.



    Mr. Johnson discussed previously-introduced and pending federal legislation concerning remote seller collection authority, including minimum simplification requirements under the Marketplace Fairness Act and the Remote Transactions Parity Act. Mr. Johnson and Mr. Reynolds responded to task force member questions related to the likelihood of these bills passing Congress.



    10:45 AM -- Break



    The task force took a break.



    10:51 AM -- Presentation from Software Providers



    Pawel Smolarkiewicz, Lexie Schaefer, and Chuck Maniace, Sovos, introduced themselves.



    A copy of their presentation can be found in Attachment B.



    170915 AttachB.pdf170915 AttachB.pdf



    Mr. Smolarkiewicz provided background information about Sovos, including its work to provide tax compliance services to companies of various sizes. Mr. Smolarkiewicz explained that Sovos is a certified service provider by the Streamlined organization. Mr. Smolarkiewicz discussed the history of Sovos in Colorado, including the use by the Department of Revenue Liquor Enforcement Division to provide the technology that allows for efficient registration and the tracking of new beverage alcohol products that are imported into the state by licensed distributors. Mr. Smolarkiewicz discussed how technology can help companies cope with the complexity of the sales tax system and the benefits of increased voluntary compliance.



    Ms. Schaefer described what makes tax compliance in Colorado so challenging for Sovos' clients. These include:

    • needing separate licenses and registrations for each location;
    • the differences in product taxability and definitions;
    • nexus locations and sales versus use tax;
    • the volume and complexity of forms a business needs to file; and
    • communication with providers about new regulations without appropriate lead times.



    Mr. Maniace continued the presentation with a discussion of the level of complexity that may be supported by technological automation. Mr. Maniace discussed Sovos' proposed solutions, including:








    • a simplified/streamlined taxpayer registration and filing process across all taxing jurisdictions;
    • active engagement with the business and service provider communities;
    • providing clarity concerning product taxability, including providing historical data concerning regulatory guidance;
    • providing appropriate lead times on rate and rule change notifications;
    • providing consistent rules on how public improvement fee (PIF) rules apply;
    • associating a tax reporting code with a locality; and
    • having a standard audit file available for automated state and local audits.



    The panel from Sovos responded to task force member questions related to how many Sovos clients have less than $5 million in sales and what level of detail is available in the data that would be sent to local municipalities from the Sovos software



    11:17 AM



    The task force was provided a handout from Avalara (Attachment C).



    170915 AttachC.pdf170915 AttachC.pdf



    Tony Burton, Pitney Bowes, spoke about the services Pitney Bowes provides through GeoTAX. Mr. Burton discussed how companies use GeoTAX to identify their location and applicable tax jurisdiction assignment for tax purposes. Pitney Bowes was first certified by the Department of Revenue in 2003.



    Mr. Burton responded to task force member questions related to the software's location accuracy and how the Department of Revenue tests address accuracy.



    Mr. Smolarkiewicz from Sovos responded to task force member questions related to how their software integrates with various accounting software used by municipalities throughout the state and what import files look like.



    11:27 AM



    David Deputy and Mandy Rush, Vertex, provided remarks related to the work Vertex does to provide tax compliance solutions. Mr. Deputy discussed the benefits of a low-rate and broad base tax system. Mr. Deputy discussed the benefits and potential drawbacks of a centralized tax administration system. He also discussed a newer model of co-administration where subsidiary jurisdictions retain full sovereignty but leverage parent jurisdiction capabilities for administration efficiency without losing their right to directly legislate or receive information and payments directly from taxpayers.



    Mr. Deputy continued his remarks with a discussion of new business models that are challenging current taxation principles around ownership and nexus. Mr. Deputy discussed new company to government models of cooperation involving tax policy design that are aimed at simplifying processes, increasing compliance, and removing fraud. Mr. Deputy discussed how emerging technology, such as machine learning and blockchain, can increase compliance, remove opportunities for fraud, and reduce administrative costs for both taxpayers and taxing authorities.





    Mr. Deputy discussed the potential for the utilization of certified software as a third party for sales and use tax administration and the collection of state and local sales and use taxes. He discussed the impact of remote sellers and the potential administrative savings that could result from having a third party administrator. Mr. Deputy outlined the key components of a simplified sales and use tax system for both state and local governments which revolve around the concept of designed compliance. The first component involves reducing taxpayer burden by designing for intermediary efficiency. The second component involves enhanced inter-jurisdictional coordination by designing for as broad a scope as possible. Mr. Deputy suggested several changes to Colorado's system, including:

    • creating a public portal for notices of change, including rate, rule, and boundary changes;
    • creating uniform definitions across definitions; and
    • creating benefits for local jurisdictions to participate in a centralized administration system.



    Mr. Deputy responded to task force member questions regarding Vertex's current use of blockchain, data security within the system, how many customers use Vertex, how Vertex's system works, and how vendors may be able to administer a centralized sales and use tax system in Colorado. Task force members discussed what data is available through sales tax integrated software.



    11:53 AM



    Mr. Smolarkiewicz and Mr. Burton joined Mr. Deputy and Ms. Rush at the table to respond to questions from the task force related to a standards-based approach for selecting providers to administer a centralized system.



    Mr. Smolarkiewicz discussed Sovos' current work with governments to administer various systems and the economy of scale that would have to be present in order for software vendors to want to participate in administering a centralized system. Mr. Burton discussed Pitney Bowes' current participation with other government entities.



    11:59 AM -- Lunch break



    The task force took a break for lunch.



    01:30 PM -- Public Comment



    01:31 PM --
    Laura Williams, Martin Marietta Materials, spoke to the task force about the experience related to sales tax licensing. Ms. Williams discussed the large number of sales tax licenses that her company, and their customers, must obtain and how these licenses must each be renewed in odd-numbered years. Her suggestion is to have the licenses valid for longer periods of time. Ms. Williams next discussed how Martin Marietta works with contractors who have projects with contractor exempt certificates, issues related to the timeliness for receiving these tax exempt certificates, and how this creates additional administrative work for Martin Marietta which has to later correct taxes initially invoiced through adjustments or refunds after an exemption certificate is issued. Her suggestion is to have the state exemption review focus on whether the customer is an exempt entity and whether the work fits the exemption requirements, and then have the exemption certificate be active for the life of the project. Additionally, Ms. Williams spoke about how the Department of Revenue's tax hotline is understaffed and how it is difficult to get answers to specific questions. Ms. Williams also suggested creating an online portal where contractors could complete their application for tax exemption online that would also include access to necessary documents. Ms. Williams next discussed issues related to the challenges her company's customers face in providing the documentation necessary to exempt sales tax, including the variety of forms and receipts used by cities and counties for building permits and the inability to print documents online. Ms. Williams suggested creating a separate form for use tax collection that would be standard across jurisdictions to make processing building permits more efficient. Finally, Ms. Williams discussed the challenges she has experienced with address locator databases, including the daily limits on address verification requests and new construction sites that have not been updated in the address locator system. Additionally, tracking down location information from each jurisdiction can be difficult. Her suggestion is to have several approved databases at the state level that are regularly reviewed and verified.







    Ms. Williams responded to task force questions related to being able to contact home rule cities and the accuracy of information received.



    01:43 PM --
    Mayor Jackie Millet, City of Lone Tree and the Metro Mayor's Caucus, discussed Lone Tree's reliance on sales taxes and talked about the city's relationship with the business community. Mayor Millet discussed the potential negative impacts of moving towards a centralized administration system. Mayor Millet responded to questions from task force members related to the number of businesses registered in Lone Tree, the impact of exemptions on Lone Tree's sales tax base, Lone Tree's efforts to adopt the standardized definitions ordinance, and efforts Lone Tree has undertaken to simplify the sales tax system.



    01:56 PM --
    Mayor Cathy Noon, City of Centennial and the Metro Mayor's Caucus, spoke about her experience with the sales tax system as a business owner, issues experienced with the Department of Revenue, the ability of home rule municipalities to quickly respond to business needs, and how Centennial uses sales tax revenue to provide services to its citizens and to incentivize economic development. Mayor Noon responded to questions from the task force related to her perspective on the complexity of the sales tax system and discussed her experience with her business, the difficulty in determining taxability between jurisdictions, determining how to address TABOR issues, the necessity to retain the ability to audit, the need to keep address databases up-to-date in real time.



    Task force members discussed the need for detailed information if collection is centralized.



    02:08 PM --
    Edward Rothschild, Alphagraphics franchisee, spoke about his experience dealing with the sales tax system and the current cost of compliance. Mr. Rothschild also discussed the fines and interest associated with not being able to easily comply and the difficulty in complying with all of the individual jurisdictions cumulatively. He discussed difficulties he's encountered due to audits, including inconsistency in the rules and the rulings, and the cost of training his staff that work across multiple taxing jurisdictions. Mr. Rothschild discussed his desire to have a centralized system that would include a standard form, one place to submit the form, one place for payment, but that would maintain the municipalities' ability to perform audits. Mr. Rothschild emphasized the role businesses play as tax collectors and asked for the system to be made easier for them to comply with.



    02:13 PM --
    Tommy Skul, Sport Clips franchisee, spoke about his experience as a franchisee dealing with the sales tax system. Mr. Skul spoke about the difficulty he's had in managing the sales tax system as a new small business owner and the time it takes him to navigate the system. Mr. Skul discussed the potential benefits that he would personally experience with a more simplified system.



    02:17 PM



    Mr. Rothschild and Mr. Skul responded to questions from the task force related to the experiences of other franchisees in other states with their sales tax systems.



    02:18 PM --
    Steven Steele, Keesen Landscape Management and Associated Landscape Contractors of Colorado, spoke about his experience with the current sales and use tax system. He spoke about the difficulty in navigating individual websites for each taxing jurisdiction and the time it takes his business to remain compliant. He discussed the difficulty in managing all of the different home rule municipalities' sales tax systems in particular and recommended having a single point of entry and uniform tax forms as a good start. Mr. Steele spoke about the monthly vendor allowance and how this allowance does not cover the time and effort it takes to collect and remit sales taxes. He spoke about how each home rule municipality looks for different information and the difficulty creates for his business.



    02:23 PM --
    Lynn Hollibaugh, Encore Electric, spoke about the time required to file correctly with each of the taxing jurisdictions. Ms. Hollibaugh spoke about their desire to do the right thing, but how challenging the system is to comply with and understand all of the different rule variations across multiple taxing jurisdictions. She spoke about her desire for uniform forms, standardized definitions, one place to submit taxes online, and creating thresholds for sales tax remittance.





    02:25 PM



    Mr. Steele and Ms. Hollibaugh responded to questions from the task force about manually updating rates and rules.



    A letter from 1st Electric Contractors was provided to the task force (Attachment D).



    170915 AttachD.pdf170915 AttachD.pdf



    02:26 PM --
    Jeff Hansen, City of Golden, offered several potential solutions based on suggestions that had been discussed throughout the meeting. This includes partnering with a third party that could provide address locator services, a taxability matrix, and a single point for remittance and licensing that businesses could choose to utilize. He suggested that a request for information (RFI) be issued to gather information related to what businesses exist, what they can provide, how they would charge for it, and who would pay for it. He also suggested that the Department of Revenue, the Colorado Municipal League, and a subset of home rule municipalities could convene a subcommittee that would gather this information and report back to the task force. Mr. Hansen spoke about how these areas would not impose on home rule authority, would make the system easier for businesses, and would make things more efficient for the cities as long as the information is vetted properly and remittance occurs in a timely fashion.



    Mr. Hansen responded to task force member questions related to who would oversee the issuance and specifications of the RFI and who would manage the on-going relationship. Mr. Hansen suggested a voluntary use of the centralized system by businesses. Mr. Hansen voiced a preference for having a third party vendor provide the centralized service instead of the Department of Revenue. Task force member discussion continued related to the potential for municipalities to collect additional revenue that could result from simplification of the administrative system. Mr. Hansen responded to task force questions with information that there are about 8,000 to 9,000 total businesses licensed in Golden, with approximately 3,000 to 3,500 of those being located in the city.



    02:33 PM --
    Alan Smith, Sales Tax Colorado, LLC., spoke about the work of his company in sales and use tax consulting. Mr. Smith spoke about the helpfulness of staff in home rule cities and his involvement with various taxpayer education efforts. He spoke about how difficult it is for the businesses he works with to fully comply with the current system, including understanding what is taxable and what is not in all of the various taxing jurisdictions. He spoke about the helpfulness of Westminster's website in outlining what is taxable and how helpful it would be to have a taxability matrix similar to what is produced by the Streamlined organization. He also spoke about the difficulty in determining when a business has to collect state-collected local taxes through the Department of Revenue. Mr. Smith recommended that the task force look at the model used by Alabama where one portal is used for state and local collection. The portal also includes the ability to remit a one-time return if a business does not have a sales tax license in a local jurisdiction. He also discussed the need for the Department of Revenue to increase awareness related to use tax.



    02:39 PM -- Task Force Discussion



    Representative Kraft-Tharp made remarks concerning next steps and the bill drafting process. She reminded the task force of the rule that only legislative members of the task force may vote to request that bill requests be drafted.









    02:42 PM -- Proposal #1



    Representative Sias proposed a bill or resolution idea to create a process for a pilot project that would include:

    • a standardized process for geolocation;
    • a single point of remittance;
    • a single place for licensure; and
    • a standardized tax form.



    This would allow home rule municipalities to retain control over:

    • the municipality's tax base;
    • the municipality's definitions;
    • the municipality's audit power; and
    • the municipality's access to aggregate raw data.



    Task force discussion ensued regarding including a tax matrix in the pilot; potentially working with one vendor for the pilot; potentially obtaining a request for information (RFI) or request for quote (RFQ) prior to undertaking a pilot project; who would issue the RFI; ensuring that the state, home rule and statutory cities, and businesses are all included in the pilot; which entity would fund the pilot; defining how the success of the pilot would be measured; and other aspects of the proposed pilot.

    BILL: Proposal Number 1
    TIME: 03:10:46 PM
    MOVED: Jahn
    MOTION: Draft proposal number 1 to create a pilot project that would include a standardized process for geolocation, a single point for remittance, a single place for licensure, and a standardized tax form. The motion passed on a vote of 4-0.
    SECONDED: Sias
    VOTE
    Jahn
    Yes
    Sias
    Yes
    Brendon Reese
    Bruce Nelson
    Bryan Archer
    Dianne Criswell
    Heather Pezzella
    Judith Birch Vorndran
    Kristin Baumgartner
    Neil Pomerantz
    Paul Archer
    Steve Ellington
    Tracy Hines
    Neville T.
    Yes
    Kraft-Tharp
    Yes
    Final YES: 4 NO: 0 EXC: 0 ABS: 0 REMOTE PARTICIPATION: 0 FINAL ACTION: PASS





    03:11 PM



    The task force discussed a potential solution related to the address locator issues that have been brought to the task force. The discussion focused on past attempts to have the Department of Revenue create their own address locator system.



    Representative Kraft-Tharp discussed future resolution meetings to address issues brought up by the task force that do not require legislation. In addition, the task force members discussed the work being done by the subcommittee that involves the Department of Revenue and municipalities to address some of these issues.





    03:23 PM -- Annual Report Contents



    The task force discussed contents of the annual report that is due to Legislative Council by November 1. In addition to including a summary of the task force's activities and any legislative recommendations approved by the task force, the report will include:

    • letters that the task force has received from municipalities and public comment letters;
    • the letter that the task force sent to municipalities concerning the adoption of the standardized definitions and a progress update on that project.



    Task force discussion continued related to the standardized definitions ordinance adoption, including the recent adoption by Dacono and the anticipated adoption by Aspen and Montrose in the near future.





    03:27 PM



    Representative Kraft-Tharp discussed the agenda for the November 1 meeting.





    03:29 PM



    The committee adjourned.