March 11, 2022
Colorado proposes law that would penalize "frivolous" claims for sales-and-use-tax refunds
A bill (Colorado H.B. 22-1118), introduced January 21, 2022, would require the Executive Director (Director) of the Colorado Department of Revenue (CO DOR) to impose penalties on "frivolous" claims for sales-and-use-tax refunds filed with the CO DOR on or after July 1, 2022 and before July 1, 2026 for taxes paid by a purchaser to a vendor (Buyer's Claims). In addition, interest would no longer be paid on any Buyer's Claims unless the CO DOR takes more than 180 days to review the claim, and then only back to claim date.
If the Buyer's Claim totals $5,000 or more, the bill would require the Director to assess and collect, in addition to other penalties provided by law, a civil penalty equal to 10% of any part of a refund claim that is duplicative or lacking a reasonable basis in law or fact. A 5% penalty would apply to the entire refund claim if it is for $5,000 or more and found to be materially incomplete. If the "frivolous" claim was prepared, in whole or in part, by a third party, the Director would be authorized to impose the penalty on the preparer. Persons receiving a notice from the Director assessing such penalties could appeal the determination within 30 days of receiving the notice.
The bill also would authorize the Director to promulgate rules specifying additional data, information and documentation that must be submitted with a claim for a sales-and-use-tax refund.
A refund claim would be considered "frivolous" if it is "materially incomplete," duplicative, or lacking a reasonable basis in law or fact. A claim would be considered "materially incomplete" if it does not include the correct form and lacks all the pertinent data, information, and documentation required by law and related regulations. Purchasers or preparers potentially subject to the penalty would be notified by the Director and given the opportunity to perfect or withdraw their claim before penalties were imposed.
If enacted, the bill would expire on July 1, 2030.
As written, the bill could potentially limit taxpayers from filing legitimate refunds for overpaid sales and use taxes by threatening severe penalties for "frivolous" claims. Even if a Buyer's Claim is thought to be properly filed and the majority of the claim is ultimately granted, a 5% penalty will be incurred on the entire claim if it is considered "materially incomplete" when filed.
According to the CO DOR, more than 70% of all current refund claims are denied on the grounds that the claim is incomplete or lacks a reasonable basis in law or fact. As the bill defines these grounds as "frivolous," its enactment would likely result in an automatic penalty on most denied claims.
Because a new Colorado law makes it a felony for a vendor not to collect tax for disputed transactions involving more than $2,000 in tax, incorrect or disputable Buyer's Claims are expected to increase; if H.B. 22-1118 were enacted, no interest would be paid on Buyer's Claims to compensate buyers for the time that the state has use of those funds.
The bill passed out of the House Finance Committee on March 3, 2022 and was referred to the Committee on Appropriations. The bill's sponsor has committed to continuing to work with the Director and interested parties to consider amendments to the bill.