In this Capitol Report:
Robbing Peter of $71 million to Pay Paul: The Strange Saga of the Vendor Fee Allowance
In a legislative session that boiled with headline issues and partisan cage-fighting, one contradictory bill stands out because it:
- Increases costs for the state’s 1,400 largest retailers; but
- Decreases costs for all other, smaller retailers.
The cost in question is the “vendor-fee allowance,” the amount of state sales taxes collected by retailers that the State allows them to retain to offset their real costs for being, in effect, the sales tax collector-and-remitter for the State of Colorado. Think of it as a service fee that the State pays the retailers for their efforts.
HB-1245, which caps the amount of sales taxes that a retailer can keep at $1,000 per month, goes into effect January 1, 2020.
Issued on April 10th, the bill’s final Fiscal Note states that the increase in sales tax revenue to the State will be $23.1 million in the fiscal year beginning July 1st, 2019, and $47.9 million in the following fiscal year.
In other words, the State will take $71 million from the pockets of the largest retailers for two programs advanced by the legislature’s Democrat majority.
The Colorado Retail Council led the business coalition that opposed HB-1245. The Council stated that “Tax experts understand that Colorado now has the most complicated sales tax collection system in the country.” It noted that “Our members operate in nearly every jurisdiction in the state, so their tax collection and remittance process is MORE complicated than a small business, not less.”
A part of this coalition, the Colorado Chamber’s Governmental Affairs Council opposed the bill because it has historically resisted legislative attempts to increase costs on businesses, and it also has opposed efforts to unfairly target a one segment of the business community.
The Vendor’s Fee
As most business leaders know well, Colorado has the dubious distinction among the 50 states of possessing one of the most complicated state-and-local government sales-and-use tax systems. The administrative burden for businesses to comply with the administrative headaches of this tax system is real and onerous. It provides an incentive to retailers to promptly remit sales taxes to the State.
Past legislatures and governors recognized this fact. The vendor fee was adopted in 1935 and for 30 years it remained at 5 percent. It has varied from 3.33 percent in 1965, or lower, to 3.33 percent today. It even dropped to zero for two years–2009 to 2011–during the Great Recession when the legislature was starved for tax revenue
Last year, about 146,115 retailers kept $107 million in vendor fees. The sales-tax vendor-fee allowance is 3.33 percent.
The $1,000-per-month cap would apply to about 1,400 large retailers. Taxable sales for these 1,400 retailers last year averaged more than $10 million per business. This segment of large retailers retained $68.7 million.
The largest retailers, consequently, remitted 63.2 percent of the state’s sales tax to the Colorado Department of Revenue. The legislature and Governor Polis have chosen to increase their costs for remitting almost two out of three sales-tax dollars to the State.
The State defines a retailer who has multiple locations across Colorado to be defined as one retailer.
The Political Paradox: Helping Smaller Retailers
As mentioned, HB-1245 benefits other, smaller retailers, ever a popular political strategy.
The percentage of sales taxes that they can keep increases from 3.33 percent to 4.0 percent, provided their retained allowance does not exceed $1,000 monthly. This increase is 20 percent.
The Fiscal Note does not, however, estimate how much revenue the State will lose by increasing the allowance for smaller retailers. If the smaller retailers last year retained $38.3 million for their vendors’ fee, then a 20 percent increase would have been an additional $7.66 million if HB-1245 had been in effect for that year.
Where the Money Will Go: Affordable Housing and Reinsurance
The objective of HB-1245 was to produce more sales tax revenue for two objectives of the Democrat-controlled legislature: increase affordable housing and establish a health-care reinsurance program.
The increase in sales tax dollars originally was to be funneled to the Housing Development Grant Fund. At least one-third of the new money was to be allocated to affordable housing projects aimed at households with incomes equal to, or less than, 30 percent of the area median household income.
At the eleventh hour, however, the Democrats reworked their health-care reinsurance program, HB-1168, so that most of the new sales tax money will go to this program—provided it’s approved by the Federal Government. The reinsurance program will receive $15 million for the fiscal year beginning July 1, 2020, and $40 million the following fiscal year.
HB-1168 is intended, through a very complicated financing mechanism, to reduce the skyrocketing cost of health insurance in the individual marketplace. It will use a mixture of the HB-1245 sales-tax funds with hospital fees and increased insurance-premium fees to establish a pot of money that health insurers could tap to cover part of their most expensive claims while, in turn, reducing insurance premiums for individuals by 5 percent to 10 percent. There are about 165,000 individual health-insurance plans in Colorado, according to the advocates of HB-1168.
For HB-1168 to be implemented, however, a Federal Government OK is required. Ed Sealover, state-capitol reporter for The Denver Business Journal, wrote that seven states have already received Federal waivers for their reinsurance programs.
Colorado Chamber members with questions about HB-1245 should contact Loren Furman, Senior Vice President, State and Federal Policy, at 303.866.9642
News Media Coverage
For news media coverage of HB-1245, read:
“Polis signs 4 key affordable-housing bills into law,” by Ed Sealover, The Denver Business Journal, May 17th.
“Polis is taking credit for 2 tax cuts already—but some businesses stand to lose millions,” by Ed Sealover, The Denver Business Journal, May 10th.
“Colorado reinsurance program effort gets 3rd and most complicated financing system,” by Ed Sealover, The Denver Business Journal, April 26th.
100 Year-Old Colorado Company Chamber Member Since 1948
The Colorado Chamber visited with Jim Welte, territory manager for Summit Brick & Tile, a 100-year-old Colorado company with manufacturing facilities in Lakewood and Pueblo, as well as in Phoenix and Tucson, AZ. Jim’s great grandfather got his start in the brick business in 1902, and in 1919 established the company at its original Lakewood site, which is still in operation today. At the time of its founding, the brick factory was located in the countryside outside of Denver in a former floodplain where silty clay ideal for brickmaking settled after storms. Over time the city grew until neighborhoods surrounded the manufacturing facility. For this reason, being a conscientious and responsible good neighbor has been an important part of Summit Brick’s ethos. Jim is carrying on his family’s legacy of staying involved in the community and looks forward to engaging with the Colorado Chamber. The marketplace is competitive both for jobs and for the products that Summit Brick & Tile produces, and Jim and his family value the work the Chamber does to ensure that Colorado remains a friendly place to do business for the next 100 years.