The Colorado Supreme Court’s Landmark Ruling on Tax Expansion
The Colorado Supreme Court has recently handed down a rather significant ruling. It seems that Lakewood’s efforts to expand its tax on telephone service without consulting the electorate didn’t sit well with the state constitution. This decision might well complicate future legislative attempts to broaden state taxes, such as those on software sales.
Lakewood’s Tax Expansion: A Historical Overview
In a unanimous decision, the court upheld the lower court’s finding. The city’s move to extend the tax to cellular service providers was deemed a breach of the Taxpayer’s Bill of Rights (TABOR). Interestingly, this is likely the first time the high court has found such an expansion to violate the 1992 amendment.
The Origins of the Tax
Lakewood’s tax journey began in 1969. They initially taxed utility companies maintaining telephone exchanges within city limits. However, in 1996, City Council broadened it to include all providers, even non-utilities, that offered cellular services. Then again, in 2015, they expanded it further to encompass all cellular service providers, regardless of their role as primary telecommunications service.
The Legal Challenge
Following the 2015 expansion, Lakewood audited MetroPCS, a T-Mobile subsidiary, determining unpaid taxes exceeded $1.6 million. In response, MetroPCS initiated legal proceedings, arguing that these expansions required voter approval per TABOR.
Why Voter Approval Was Essential
The Colorado Supreme Court concluded that both ordinances effectively introduced new taxes. These expansions stretched the business and occupation tax beyond what was originally defined in 1969, covering previously untaxed services.
Key Points from Justice Richard Gabriel:
- Each ordinance added new tax liabilities for previously untaxed providers.
- They generated new revenue as new providers entered the market.
- Some providers became taxable when they weren’t before.
The ruling emphasised that even if new laws raised revenue minimally, they must comply with TABOR guidelines.
The Broader Implications
Impacting the “De Minimus” Debate
Lakewood’s argument was that their ordinances aimed for tax fairness, not revenue. Yet, the court demurred, pointing out that legislative changes can’t dodge TABOR by simply stating a different purpose. The ordinances clearly had the effect of increasing revenue.
The court noted, “Revenue generation was not merely incidental to their enactment.” As the ordinances caused more than incidental revenue increases, the argument about them being de minimus held no water.
The Software Tax Connection
Earlier in the year, a group of Democrats introduced House Bill 1296. It aimed to scrap the tax exemption on non-customised software. Estimates varied wildly on the revenue impact, from $18.7 million to as much as $100 million, as noted by Gov. Jared Polis. Ultimately, the bill’s sponsors removed the software tax provision, yet they promised a resurgence in 2026.
A “Landmark Case” for Tax Legislation
Those opposing the software tax change had threatened lawsuits, arguing the revenue size wasn’t de minimus. Now, they might clutch this Supreme Court decision as a talisman.
Loren Furman, Colorado Chamber of Commerce President, hailed the ruling as a “landmark case.” It sends a clear message to taxing authorities about voter consent, emphasising predictability in laws and tax policies.
This decision is bound to reverberate in legislative chambers, possibly rewriting the rulebook for future taxation efforts across the state.
