May 10, 2022
New Colorado law penalizes unreasonable or incomplete sales-and-use-tax refund claims
H.B. 22-1118, signed by Colorado Governor Jared Polis on April 21, 2022, imposes significant new penalties on refund claims for sales and use taxes paid by a purchaser to a vendor (Buyer's Claims). The penalties apply to Buyer's Claims filed with the Colorado Department of Revenue (CO DOR) on or after July 1, 2022, and before July 1, 2026. In addition, interest will not be paid on any Buyer's Claims unless the CO DOR takes more than 180 days to review the claim. Interest will only be paid back to the claim date.
If a Buyer's Claim totals $5,000 or more, the new law requires the Director of the CO DOR to assess and collect, in addition to other penalties provided by law, a civil penalty equal to: (1) 10% of any part of a refund claim that is duplicative or lacking a reasonable basis in law or fact and (2) 5% of the entire refund claim if it is found to be incomplete. If a third party prepared the penalized refund claim, in whole or in part, the Director will impose the penalty on the preparer instead of the purchaser. Recipients of a penalty assessment can appeal the determination within 30 days of receiving the assessment notice.
A claim is considered "incomplete" if it does not include the correct form and lacks substantially all the pertinent data, information and documentation required by law and related regulations. The Director is authorized to issue regulations prescribing the additional data, information and documentation that must be submitted with a sales-and-use-tax refund claim.
The Director must notify purchasers or preparers of an "incomplete" claim before assessing a penalty, including specific items that appear to be missing. The recipient of the notice will then have 60 days (plus time added by the Director for reasonable cause) to perfect or withdraw the claim before penalties are imposed.
The Director may waive these penalties if the purchaser or preparer can establish a duplicate claim was unintentional and was either minimal or immaterial, or if they can demonstrate "other good cause for waiver of the civil penalty."
The new provisions are effective beginning July 1, 2022, but are repealed as of July 1, 2030.
The new law could inhibit taxpayers from filing legitimate refunds for overpaid sales and use taxes due to the threat of new severe penalties and administrative burdens for claims made in good faith. 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 in fact. Although the bill does not define what the CO DOR will consider as lacking a "reasonable basis in law or in fact," the new law could result in an automatic penalty on most denied claims, even where a good-faith argument can be made to support the claim or where an inadvertent omission is made, or where such omission relates only to a portion of a total claim.
Because another 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. Additionally, of H.B. 22-1118 precludes taxpayers from receiving interest on Buyer's Claims for the time that the state has use of those funds.